How state and municipal agencies sell property through transparent auctions with EU support

Buy a multicooker online from the State Service of Ukraine for Food Safety and Consumer Protection in Kharkiv oblast. Or special permission to extract amber in Zhytomyr oblast. It’s not a joke – public and communal property is sold  at the online auctions of small privatization. You can find anything – from home appliances or cars to real estate or the whole factory.

What is small privatization?

“Small privatization” is the sale of public or communal property items whose value does not exceed UAH 250 million. According to the law, sales can be effected exclusively through electronic auctions. The starting price is determined at the level of book value, then everything depends on the market, or, to be exact, the buyers who place bids on the auction.

ProZorro.Prodazhi is a state-owned enterprise that administers the electronic trading system and organizes these sales. It began its operation in June 2016 as a project of Transparency International (a non-governmental international anti-corruption organization), and in April 2018 it transformed into a state-owned enterprise that is accountable to the Ministry of Economic Development and Trade.

The system was developed by five Ukrainian IT specialists from Quintagroup. The project was funded by international donors. In particular, the European Union’s Anti-Corruption Initiative in Ukraine (EUACI) provided a grant totaling almost EUR 194,000 for the work of the project team and IT company.

The first communal property was sold by local community at the online auction ProZorro.Prodazhi in August 2018. Threshing-floor in Chernivtsi oblast was sold for UAH 209,643 to a privately owned corn growing company.

Since then, this state-owned enterprise, with its own budget of about UAH 40 million per year, and a team of 25 people has conducted more than 2,400 auctions for a total amount of more than UAH 870 million. Most often real estate items are sold, although there are sales of industrial equipment, vehicles, etc.

However, ProZorro.Prodezhi’s biggest achievement lies in the creation of transparent rules of the game in the field of privatization.

 

How does it work?

The basis of the system is a central database with information about all sale items. Many commercial online platforms are connected to it.

To date, there are 45 such platforms. Imagine lots of OLXs. There are also well-known companies like Prom.ua and many specialized platforms among them. For example, those engaged in scrap metal only, in real estate only or in financial assets only, – Oleksii Movchan, Project Manager at ProZorro.Prodazhi, explains.

Any government or local authority can sell property if it registers itself on one of the platforms. Information about the new lot automatically enters the central database and other platforms. In such a manner, these platforms become competitors to each other. Because they are interested in that it is they that the buyer came from. The platforms closely monitor each other’s work and the serviceability of the central database. Competition and attention ensure the transparency of sales.

 

What is sold and who buys?

From October 2016, ProZorro.Prodazhi sale property of about one hundred bankrupt banks, so that the Deposit Guarantee Fund could return money to depositors. The total value of these assets was about UAH 450 billion. “But the sale of property of large banks associated with oligarchs or politicians was often accompanied by political or even violent pressure. But we have created other, transparent conditions,” Oleksii Movchan explains. So, when the system showed results in working with the Deposit Guarantee Fund, the idea of ​​dealing with public property appeared.

For six months of small privatization system operation we managed to effect several high-profile sales. In early March, a record auction with 102 bidders was held. Kyiv City State Administration sold the premises of a former pharmacy at the Verkhovnoi Rady Boulevard for UAH 3.56 million. In small privatization, the average number of bidders is 2.8 per auction. Therefore, the organizers worried that hundred bidders simply crash the system. However, it has withstood the load. The state-owned enterprise says that now they are prepared even for up to 200 buyers.

This testifies to the fact that business buys public and communal property according to transparent rules of the game and at the market price. The latter sometimes breaks all records. For example, the commercial premises on the Market Square in the center of Lviv was sold by the city administration for USD 16,700 per square meter. This is the price range for property in Manhattan.

The fact that property in the city center is in considerable demand is rather expected. In villages, the situation is more complicated – low economic activity, poor condition of sale items, lack of buyers. But successful auctions occur frequently there too, simply with fewer bidders. “In Dnipropetrovsk oblast, the village council was selling 14 kilometers of water pipeline that was previously used for irrigation. The starting price was about UAH 4 million. For them, this is a very important sum – two annual budgets of the village. As a result, the company engaged in the collection of scrap metal has bought this item for almost 5 million”, Movchan says. In such a way, small privatization has an impact on regional economic development, Eka Tkeshelashvili, Head of the EU Anti-Corruption Initiative, concludes.

Sometimes, not only Ukrainian but also foreign investors take part in auctions. For example, in December 2018, Ardagh Group – a large global metal and glass packaging company with more than 100 plants in more than 22 countries – bought long-closed production facility in Chernivtsi oblast, which was reflected in the bank’s balance sheet. “Foreigners are less likely to buy Ukrainian assets, but they have such an opportunity. Some platform even have an English-language interface. I think that when we have more “clean”, trouble-free assets, the number of foreign investors will increase”, Movchan adds.

 

Why is it advantageous for business?

The ProZorro system creates conditions for equal competition.

If earlier the Ukrainians perceived privatization as something criminal and corrupt, now this perception is changing due to fair rules of the game,– Andrii Borovyk, Executive Director of Transparency International Ukraine, explains.

For example, recently the Kyiv city council decided to hold electronic auctions for sale of rights to placement of parking areas. This is one of the most opaque spheres of urban infrastructure. Despite the fact that current owners of parking areas, whose rights were “violated”, came to protest to the city council, the decision was still adopted. From now on, anyone can buy the rights to create parking areas in the capital. Soon, old owners will feel competition and start fighting for customers, as it should be in healthy market conditions.

Now business buys public and communal property more calmly than before, as there are no corrupt components and the business can trust the state and be its partner,– Oleksii Movchan summarizes.

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How does ProZorro.Prodazhi plan to develop further?

First, the state-owned enterprise is working on amendments to the Law on the Lease of Public and Communal Property. This will allow attracting a wider circle of participants with different capital. The fact is that the average cost of an item in a small privatization for today amounts to UAH 1.1 million. Not every entrepreneur can afford to buy such an item, renovate it and wait for the investment to pay off. Lease for such a business will become more affordable.

Second, ProZorro.Prodazhi plans to export their IT product. Many countries face the problems of selling assets of bankrupt banks and public property. For example, Greece and Cyprus relatively recently experienced their banking crises. And in the USA, each state and authority sells their property separately, so the Americans do not have any idea of ​​the amount of public property and the volumes of its sale. So, the Ukrainian IT product ProZorro.Prodazhi has every chance to get demand abroad. Prozorro GoGlobal – as the developers joke.

By Samira Abbasova

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