Blitz-interview with European Commission Deputy Director-General for Neighbourhood Policy and Enlargement Negotiations Katarina Mathernova Question: The privatization of state owned enterprises (SOE) is now again one of the most discussed themes between authorities and Ukraine's international partners after its complete failure last year. What do you think about this issue? Can you tell us how and how quickly the privatization process can be completed? What do you think about the Romanian way of solving the situation – by transferring SOEs to some outsider manager, like they did with Franklin Templeton? Answer: Let me start from a historical prospective that in the last three years since the Maidan, despite what some people saying Ukraine has undertaken a huge number of reforms and despite the impatience of every young person a lot has actually happened in Ukraine. Namely starting from the impressive macro-stabilization, through the energy reform, through the banking sector reform, etc., and then through the asset declarations and the impressive start of the judiciary reform. So, a lot has happened and certainly much more than within the 20 years before that. But the one area, which is almost puzzling because so little has been done, is the area of privatization. I know that the prime minister and the minister of finance and other state officials strongly support movement on the privatization front, but so far we have had very little progress. I think it is critical to restart or kick start the process for a variety of reasons but of them three stick out. One is because it eliminates corruption. SOEs have been one of the factors for it and that is something that was true in all the other countries, Ukraine is not an exception. Secondly, is because the government is not a good owner of over 3,000 enterprises. Thirdly, because this is the fastest and the best way how to bring capital, technology, managerial know-how into the country. What a few good and transparently conducted privatizations could do is actually send the signal to the foreign investment community that it is okay to invest in Ukraine. It is curious that privatization, that potential, that privatization brings, has been completely untapped. I understand the explanation of vested interests, I understand issues, that it is hard to let it go, but a lot of it is simply getting rid of all small ones by auctioning them off and than concentrating on the tier that you want to sell. What I want to say, is that with all the incredibly difficult and crucially unpopular reforms that this government and the previous one has been able to make, it is curious how this area has so far been completely absent from the reforms zeal. Question: Do you have concrete proposals from your side that Ukraine should accede to? Answer: We are not in the position of setting deadlines or something like this. It is of Ukraine who needs to decide it. But there are some very obvious steps that can and need to be taken. Several years ago there was division of SOEs into several categories. So, the next conclusion of it should be to liquidate or fire sell them, or simply sell little ones that have no stand out business. Of course I understand how complex are some strategic sectors and you want to keep them in state hands. But there is a whole segment in between where you need just to pick out a number you can work with and hire reputable foreign advisors who will do due diligence, prepare these companies for the privatization, and will help to find investors. This is what all of our countries have done 20 years ago. I am from Slovakia and this is exactly what we have done and today we have very detail discussion with the EBRD that it is very much sort of the leader of the international support efforts to privatization. I hope very much that 2017 will be watershed moment for the privatization in Ukraine. I was very encouraged yesterday, when we had very clear message and very clear ideas expressed by Prime Minister Vladimir Groysman, who spoke at the Dragon Capital investment conference. We certainly hope that the government will address the identified obstacles and move this agenda forward. European Union is standing ready to support. We do and can even more with our partner international financial institutions (IFIs) that are here. You have EBRD and IFC that can come in and take ownership stake in a company, prepare it from inside for privatization and then help to introduce it to foreign investors. This is exactly what has happened in Poland, Slovakia, Czechia and later in Romania. So, we are in March now and we hope that if we sit together in the year from now we actually would have some successes. I want also to mention that I don’t see a fiscal boom from privatization because one would need to invest a lot in enterprises. But it will make a signaling effect. A foreign direct investment is like a herd reflex: you have to have a few leaders there and the whole herd goes. This is your most natural way to attract large reputable investors into this country. It makes so much sense that I very much hope that the rest of 2017 will really be the year of privatization. Question: Do you expect the process to start with privatization of big companies, like Odesa Port-Side Plant (OPSP), "Tsentrenergo", or with small companies? Answer: I think for the big signaling you need a handful of visible companies, that do need to have proper privatization advisers, where IFC of EBRD can come in, take a stake. It is important to take recognized names in large enough companies that will also attract visibility of the investor community. I am not saying that you shouldn’t privatize the smaller ones, but that is not going to be the same news around them as would be if you start from bigger ones. Besides, you mentioned OPSP where few attempts of privatization were aborted. So you don’t have to start it from neutral or from zero, you have already a negative two strikes. But in parallel, what needs to happen is simply cleaning up the segment of hundreds and hundreds of very small SOEs. They really needs to be taken from governmental books, because that only sucking energy and money. Question: There were some complications with the assigned nominating committee for the management of SOEs. It doesn’t perform as it was expected. Do you have any propositions how to enhance the committee efficiency? May be you will be suggesting changing its composition? Answer: Honestly, I cannot answer that question because I am not familiar with that issue. I don’t follow that to that level of detail. Question: Okay, then let's return to the suggestion, made at the beginning of our conversation, it is about alternative decision to transfer the management of SOEs to some outsider company, like it was in Romania. How would you evaluate the idea? Answer: At this stage, I really think that there are two processes that need to take place before one would contemplate something like that. What is necessary now is to have privatization and liquidation of the non-defunct SOEs and than those SOEs that are going to stay in the state hands for medium term, as railway for example, to have significant improvements in the corporate governance. The management and functioning of SOEs need to improve and that is a parallel, separate process from the need to be successful in the privatization, because obviously some companies will certainly not be slated for the privatization in the short term or in the medium term. So there it is really necessary to improve the corporate governance. Question: Is it possible that the privatization and SOEs' management reform will be a precondition for receiving macro-financial aid from EU. Answer: We are currently in the macro-financial program and since we are a predictable bureaucracy we like to set things ex-ante. So the conditions of the current macro-financial assistance have been set before and they are not going to change. As you know there was an announcement yesterday that the long waited second tranche of the macro-financial assistance was agreed upon so within a few weeks a EUR600 mln second tranche will arrive and there is still time to fulfill the conditions of the second tranche before the end of this year. There is quite a lot of work to do. Those conditions do not contain conditionality on privatization, but that doesn’t exclude the possibility that if we have a future program at the end of this one them to be put in there.