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How SOEs Poison the Ukrainian Economy

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CASE Ukraine initiated a discussion on combating corruption in state-owned enterprises. Another topic is ways of privatization as one of the main instruments for preventing inefficient management of the property owned by Ukrainian taxpayers. Economists, government officials and journalists have taken part in the event.

Do state-owned enterprises (SOEs) ‘poison’ the economy?

In Ukraine, there is a large share of the public sector in the economy and high employment in the public sector (11% of full-time employees). In addition to that, within the total number of state enterprises 50% of these enterprises do not work. 70% of those working are unprofitable, CASE Ukraine economist Natalia Leshchenko said.

By results of 2016, these losses amounted to USD 82 billion. This is less than half the losses of loss-making enterprises. Many of them have a debt to the state budget. Only Ukrnafta has run into USD 12.8 billion (as of March 1, 2017) debt to the budget. It is about 1/5 of all arrears of taxes and charges to budgets of all levels. Among the 10 most profitable companies, 9 of them are monopolies which compete with no one.

SOEs are the source of fiscal and social risks: as of 01.10.2016, 38% of salary arrears are the salary of employees of state-owned firms. According to the IMF, the amount of direct and indirect subsidies and compensation of losses of state enterprises in 2014 reached almost 5% of GDP. Because of debts to partners, 23 enterprises experience UAH 34 billion capital with negative value.

SOEs are often caught in corruption scandals. ‘Among the 300 companies which National Anti-Corruption Bureau of Ukraine (NABU) investigates 49 are corruption-related.  40% of the total losses in UAH 85 billion, which are caused to the country, according to NABU, relate to the state-owned enterprises,’ Natalia Leshchenko said.

To reform or privatize?

The best way out of this situation is privatization. ‘The fact that we have so many assets that do not work for us is a sufficient basis for most of them to be privatized. Those who, in our opinion, should not be privatized must be effectively reformed in corporate governance. They should work not for politicians, but for us,’ – Center For Economic Strategy senior economist Dmytro Yablonovskii said.

Not only the fact of privatization plays a role, but also the manner in which it is carried out, member of the board of the ‘Price of the state’ project Andrij Herus said. ‘It is important to make it really competitive, so our market could welcome strategic high-tech companies. By the way, this is a natural way to monopolization and deoligarchization, as it happens in our air business,’ he said. In this case, it will positively affect the stability of the currency and improve competition in the market. In addition, the arrival of large foreign companies with large capital will strengthen Ukraine’s position in the international arena.

Experts noted that the situation with the ‘Rotterdam plus’ should not be considered as a consequence of privatization. Firstly, state-owned ‘Centrenergo’ is involved. A lot depends on the position of the regulator. In this case, ‘the one who should be regulated decides how regulation should be carried out’.

The enterprises that are not privatized should expect the reform of corporate governance. One must create conditions in which they can compete in the market and will consider advantageous to be profitable. ‘State enterprises do not emanate motivation in showing profits and work efficiently. If a large company shows a profit of over 50 million, its financial plan will have to be considered by the Cabinet of Ministers. So, it is better to ‘show’ 49 million,’ Ruslan Korzh clarified. Moreover, the state takes 75% of the company’s profit. For enterprise development, almost nothing is left.

Politicians and policy makers should stop to consider SOEs as ‘assets’ during political games. The purpose of the control and management should be laid on the supervisory boards` shoulders. Not on representatives of political forces. Now, experts say, they have a natural interest to preserve the status quo, despite supporting privatization orally.

An additional challenge is that there is no request for privatization in the society. It does not understand why the head of state enterprise must have a million salaries. Almost 50% of residents believe these companies should remain state-owned. Until this query on reforms is absent, it is more profitable for officials to postpone the privatization, CASE Ukraine CEO Dmytro Boyarchuk said.

May 17, 2017