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07.12.2018 | 16:58
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Investors' coming to coal industry seems impossible

After the conflict in Donbass (Donetsk coal basin) has began in 2014, the situation in the state-owned coal mines looks like one long ordeal

Miner's strikes, rallies, hunger strikes in Ukraine are so commonplace that they hardly attract the attention of the mass media. Most of state-owned mines are unprofitable meanwhile coal is sold at international market prices and often at prices that are much higher than globally accepted ones. Miners are used to require the government to disburse additional subsidies to cover unpaid wages. Mineworkers block the roads, go on a “hunger boom”, some of them do not ascent from mines for almost a month. What is the reason for this?

After the conflict in the Donbass (Donetsk coal basin) has began in 2014, the situation in the state-owned coal mines looks like one long ordeal. 

The Ministry of Energy and Coal Industry manages 33 mines on the territories controlled by Ukraine, only one of them has been reconstructed over the past 20 years. At that, 15 of them have been in industrial use for 70 years. Only 7 enterprises could pay off the investments. Another 15 are considered conditionally promising. The rest must be shut down.

However, the real economic factors weren't the reason of the state-owned mines' unprofitability. It's reasoned by the banal corruption. Auctions to sell the orders are «fake» and carried out among close associates. 

Let's consider Selidovvugillya, SOE, example. The enterprise manages a number of mines in the Donetsk region. The procurement history of the enterprise is an anthology of corruption and inefficiency. SOE buys machinery and equipment at three times higher prices compared to the market ones!

Despite that fact, it's impossible to conduct an inspection and record the theft in Selidovvugillya. The Eastern Office of the State Audit Service of Ukraine in the Donetsk region refused to audit Selidovvugillya, SOE, because of miners' ongoing strike for unpaid salaries.

The problem of corruption is used to be solved easier. The state allocated huge subsidies for state-owned mined. In 2013, state support amounted to USD 1.9 billion. Despite the ovewhelming theft, the funds still reached the companies. It was the way the public sector contrived to survive.

"Tenders (the cost of goods and services – editor's note) were overestimated by 2-3 times. Mining machines, conveyers and other equipment. A combine cost, for example, one conditional unit but it was bought for four such units. This is the scheme how to “master” the subsidy," Head of Selidovvugillya's Union Serhii Pavlov said. 

As to him "the more subsidies were allocated, the more funds were stolen".

"Real competition at the auction of state-owned coal enterprises is completely ruled out", former Chief Technologist of Slavyanoserbska mine, ex-Deputy Chief Engineer of Slavyanoserbska Central Coal Enriching Works (Lugansk region) Oleg Tuzhikov accented. As to him to him, “earnings“ from the largest deals belonged to the leadership of state-owned mines and and major officials from Kyiv, while middle-level managers earned on smaller deals. The first category included the procurements and repair of equipment, the second category mainly related to consumables.

“For example, powered support: one unit costs about USD 30 thousand. Lava open up requires about 200 units. Add a combine, which will also cost about USD 400 thousand. Then the conveyer at USD 100 thousand. The total cost could be at about USD 1 million. The procurement “earning” will be about 10-15% from the deal”, Oleg Tuzhikov noted.

He says that deals on consumables purchase amount to USD 10-30 thousand. However, it is offset by huge number of such deals. Oleg Tuzhikov explained that money goes through the mines' management. The funds are recorded as the orders of direct contractors which need the equipment and “every person is trying to get rich from this“. 

"Mine's work requires a lot of "small items". For example, assembling of an arch support. It requires nuts, fastening brackets which are small metal elements. This is a consumable item that remains in the mine for ever: it's installed and die there. It is unprofitable to dismantle it. It's not expensive and should be bought in quantities on a regular basis. It stirs interest of everyone. It seems like a penny from outside perspective, the amount of a specific transaction is insgnificant, but the number of such transactions is huge. These items have always been profitable. Repair of equipment and the purchase of consumables, which dies in the mines is the continuous process because if you don’t do this, everything will stop at all, ”said Oleg Tuzhikov.

“Every action in the state-owned mines is based on the principle “everything is collective, everything is mine”. So they just plunder the enterprises. A person can become the enterprise's head only by agreement of “underbosses” and if agree to work according to corrupt schemes”, Mykhailo Volynets, Chairman of the Independent Trade Union of Miners of Ukraine (NPGU), said.

He also noted that even Prozorro, e-procurement system, doesn't help. There is always a way to buy low quality equipment at a price exceeding the market one. 

 “The equipment is bought from garages. In such a way pumps to recover two drowned levels were bought urgently from garages for Zolote mine (Pervomaiskvugillya). I guess it costed tens of millions which were just stolen. Surely, the levels weren't pumped out. If they steal less, more money would remain for salaries, for high-quality equipment”, Head of Union is convinced.

 “If you look at the state-owned mines procurements you will see the predetermined winners and no third parties are allowed. Even if the third party gets the auction it faces obstacles from the ordering party which puts up strange requirements. The “bad“ customers often just disrupt auctions if the winners are the third parties. This is a long-standing trend”, says Andrii Marusov, public procurement expert, Board Chairman in Transparency International Ukraine.

The thefts in amounts of 2013 are impossible now. Subsidies were brought down to a minimum. The government reallocates part of funds, which are intended to wind off or upgrade the enterprise, to pay out the miners' salaries and calm down the hunger strikes. The sums are relatively small, in particular, about USD 100 million per annum. The industry has switched to market relations, mines are paid the market price for coal. Therefore, the scale of corruption has decreased by times.

 “Government subsidiies existed until 2014. The thefts were enormous, no matter how much you give it's still insufficient. Since April 1, 2016, “Rotterdam +” was introduced. I call it API2, the state-owned mines received UAH 8.5 billion of additional funds. It was payment for products, not subsidies, support or anything else”, Mykhailo Volynets explains.

The miners say that transition to the formula or market prices has changed the entire reference coordinate of traditional state-owned enterprises' business. Mine's earnings became clear. It's understood how much it can spend. It's a kind of constraining factor for misuse of money earned by the mine to begin with. According to Volynets, in 2016 – 2017, it was the “Rotterdam +“ formula that let to reduce the crisis in the industry.

The leader of the trade unions is confident that the next step should be privatization of Ukrainian state-owned mines. The corruption problem will be solved as far as it goes.

 “The owner won’t rob himself. It has no sense for him. We need targeted financial investments, either public or private, to develop mines. We must hole through, load the open up lava and start mining. But there still no investment. Therefore, the mines are idle. In fact, today, state-owned mines in Ukraine have been halte”, Mykhailo Volynets said. 

Anyway the investor is not in a hurry to enter the Ukrainian mines. One of the reasons is the scandalous case of the National Anti-Corruption Bureau of Ukraine related to Rotterdam + formula. The bureau is trying to prove that the formula overprices coal for a local producer. The NABU is sure that it is necessary to pay for local coal lesser than for imported coal.

 “The coal prices in Ukraine are incredibly politicized and under such political pressure that investor's coming to the coal industry seems impossible,“ Andrii Marusov believes.

“A foreign investor understands that the Rotterdam + formula depends on political conditions. Other words, the investor will enter the Ukrainian market under the conditions that might be changed in a while. It's a big risk. The investor will assess it's gravity,” expert noted.

Currently the most appropriate scenario is the gradual closing down of unprofitable state-owned mines. The only consolation is that the introduction of the Rotterdam + formula made the process less costly for the state by reducing the level of corruption.

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