We have already mentioned how the sale of the second largest state asset – the United Mining and Chemical Company – is going to take place. We also told about triage as a system of distribution of state-owned companies.

This time, we are considering in detail the potential privatization of a 4-star hotel in the heart of Kyiv – ‘President Hotel’, 100% of the authorized capital of which belongs to the state. The building is one of the five biggest hotels in the central part of Kyiv in terms of number of rooms.

According to the information from the website of the State Property Fund, the total area of the complex is 1,913 hectares. It should be noted that after the Law of Ukraine ‘On State Regulation of Activities Concerning the Organization and Conduct of Gambling’ came into force, the 4-star status makes it possible to organize a slot machine hall in the premises of the hotel.

Last year, the SPF privatized the ‘Dnipro’ hotel in Kyiv center. At an electronic auction of small-scale privatization, it was sold for UAH 1.1 billion. However, with the ‘President Hotel’ everything is much more complicated.

First, it is 2.5 times larger. Second, unlike Dnipro, it is an object of large-scale privatization as its value exceeds UAH 250 million. Third, the whole complex is on long-term lease. This fact is likely to affect the willingness of investors to invest in it.

In 2009, when the State Administration managed the hotel, the whole complex and other assets were leased to ‘BC Kvadr’ LLC until 2034. Since then, the company has had control of the hotel.

By the way, ‘Kvadr’ is associated with Odesa businessmen Borys Kaufman and Oleksandr Granovsky (not to be confused with a person from Poroshenko’s inner circle). The company’s total revenue in 2019 was over UAH 38 million, in 2020, probably due to quarantine restrictions, the company suffered a loss of UAH 8.5 million.

The quarantine also affected the profits of PJSC ‘President Hotel’. Payments under lease agreements were reduced by 75% for the period of strict quarantine (from February to June 2020). Due to this, PJSC ‘President Hotel’ provided only partial payment of dividends. Lack of working capital had a negative impact on the financial situation. However, today the dividends for 2019 and 2020 have been paid in full.

Anyway, the ‘President Hotel’ has been profitable for the last 16 years and is almost sure to remain profitable in the future. According to the investment adviser – the company ‘Concord Capital’ – the cumulative cash flow under lease agreements from 2021 to the expiration of the agreement will be UAH 880 million. The profitability factor should have a positive effect on the formation of both the starting and final price of the object, as well as the number of future bidders.

Financial indicators of the ‘President Hotel’ for 2016-2020. Source: prozvit.com

 

As it is usually the case, virtually any state asset is ‘entangled’ in litigation. The ‘President Hotel’ is no exception.

According to ‘Concord Capital’ investment banker Ihor Mazepa, in order to maximize the value of the asset, PJSC ‘President Hotel’ should try to terminate the current lease agreement with ‘BC Kvadr’ LLC. Lawsuits in this regard are ongoing.

The State Property Fund and the hotel itself are actively working to terminate the lease agreement.In January 2021, PJSC ‘President Hotel’ filed a lawsuit to terminate the lease agreement due to violation of the terms of rent payment.From its part, ‘BC Kvadr’ LLC filed a counterclaim to reduce the value of the monthly rent.

Another lawsuit to terminate the lease agreement is currently in the preparatory stage.

Objectively, the hotel should have been privatized in 2009, not rented out. However, given how the ‘oligarchic’ privatization took place at that time, it may be a good thing that the hotel has remained state-owned to this day.

There is no reason to keep the hotel on the government balance today. The state should not be engaged in the hotel business, because there is a private sector for this, which, in fact, now manages the hotel. The state should receive taxes and be a regulator for business.

Therefore, the position of the State Property Fund in this case is clear: to find a new owner for the hotel in a transparent and competitive auction, raising funds to the state budget.

It is worth noting that the entire property complex of the hotel will undergo privatization. Thus, the new owner will own both the building and other assets, as well as the lease agreement, if it will not be terminated by the time of privatization. If the lease of the hotel continues, the new owner will be able to continue litigation, or choose a stable rental income, and later take full control of the hotel.

The privatization of the ‘President Hotel’ is not only a matter of increasing the efficiency of state assets, but also a factor in Ukraine’s macroeconomic stability.

According to the memorandum with the International Monetary Fund, the hotel was to be sold in the first half of 2019. However, the previous leadership of the State Property Fund, close to the former President Petro Poroshenko, who was preparing for the presidential race, was not up to it. Ignoring the requirements of the IMF may negatively affect the ability of our country to attract additional funds from international financial institutions in the future.

Now, this task is assigned to Dmytro Sennychenko’s new team in the State Property Fund. For some time, large-scale privatization was blocked by law due to the COVID-19 pandemic, but now there are no institutional obstacles to the privatization of the ‘President Hotel’. Therefore, the object is almost ready for auction. Clear and transparent privatization rules should create a proper basis for attracting a competent investor by the end of 2021.