Introduction

In Ukraine, cigarette production was rather high in the 1980s - over 80 billion pieces. Since 1989, the deteriorating condition of state tobacco factories has decreased production (to 58 billion cigarettes in 1992) and diminished profits, which encouraged their privatization. As for other industries, privatization was undertaken as a part of a broader structural adjustment or economic transformation program, which included many other structural reforms such as tax reform, price liberalization, financial sector reform, and trade liberalization. The consequence was that the government could disperse share ownership with inadequate legal and regulatory environments and with little consideration given to post-privatization enterprise governance. 

Since there was no domestic private capital at that time, two ways were considered for the privatization of tobacco factories: to make factory workers the factory owners or to attract foreign investors. Both ways were used in Ukraine: of the 11 tobacco factories existing at that time, the 6 biggest ones became joint ventures with transnational tobacco corporations (TTC) and the remaining 5 became partly state-owned and partly worker-owned. Later (after 1998), some new private tobacco factories with primarily domestic capital were established, but we do not discuss them in this chapter.

Any country with transition economics wishes to attract foreign investors, since its own resources are rather limited. However, one should keep in mind that the only interest of a foreign investor is profit - not improvement of the health and welfare of the citizens of the country of investment, which should be the government interests. Sometimes these interests can coincide, but usually some balance is needed. Keeping this balance is one of the government's responsibilities, and this is not easy given that foreign investors do everything in their power to change governmental policies in order to increase investment profitability. Corruption is a sensitive problem, and we do not discuss it in this research. We just try to consider the arguments investors use to influence governmental policy and their promises given at the beginning of the investment process. The chapter also compares the efficiency of cigarette enterprises with and without foreign investments. The paper then examines pre- and post-privatization production levels, market shares, sales, revenues, profits, prices, paid taxes trends, the changes of raw tobacco import by these factories, and the export of cigarettes introduced by investors. The paper finally summarizes the pros and cons of privatization in the form of foreign investments based on the evidence presented, and discusses policies to mitigate the adverse health impact of the privatization of state cigarette enterprises.