Looting at state enterprises can be stopped only by privatization or corporate management reform – experts

Ukrainian state enterprises (SE) often become “heroes” of scandals related to corruption and are often regarded as a source of fiscal and social risks for the country. To change the situation for better, they must be privatized and/or management quality must be improved, said the experts at a discussion at Ukraine Crisis Media Center.

Key reasons to say that SE poison Ukrainian economy

Comparing to many other countries, Ukraine has a very big share of state sector in the economy; 11 per cent of all Ukrainian employees are employees of state enterprises. At the same time, 50 per cent of SE do not function at all, and 70 per cent of functioning enterprises are loss-making, says Natalia Leshchenko, economist of CASE Ukraine. In 2016, their total losses reached UAH 82 billion – the amount which constitutes almost a half of losses of all loss-making enterprises both in state sector and private sector. A lot of state enterprises owe money to the state budget. “Ukrnafta” (petrol extracting company) only owes UAH 12,8 billion to the state budget – almost 20 per cent of all tax debts to the state budget and local budgets. It is worth mentioning that nine of top-10 profit-making state enterprises are monopolies which have no competitors.

In this situation, state enterprises are a source of fiscal and social risks for the country. For instance, 38 per cent of all salary payable (as of October 1, 2016) was the salary of employees of state enterprises. According to IMF, the total of direct and indirect subsidies and compensations of losses for the state enterprises constituted almost 5 per cent of GDP. 23 enterprises have negative working capital of UAH 34 billion because of their liabilities.

In addition, state enterprises are often involved in corruption scandals. “The NABU (National Anti-Corruption Bureau of Ukraine) leads investigation on 300 enterprises, and 49 of them are corruption-related. And of total amount of losses of the state, UAH 85 billion, 40 per cent are losses of state enterprises,” said Natalia Leschenko.

Moreover, there is no appropriate control on the activities of state enterprises: the Ministry of Economic Development and Trade and the Fund of State Property have no complete information even about the number of state enterprises, which varies from nearly 4 thousands to over 6 thousands. According to the Accounting Chamber of Ukraine, in 2014, 40 per cent of SE did not submit for adoption their financial plans, in 2015, their number increased to 55 per cent. Only 25 of 46 biggest SE successfully passed audit of financial accountancy in 2015.

Solution: reform or privatization

Experts unanimously agree that privatization would be the best solution. “The fact that we have so many actives which do not make money is a sufficient reason for privatization. Those which, in our opinion, mustn’t be privatized, need an efficient reform of corporate management to make them work for our interests, not for those of political players,” stressed Dmytro Yablonovskyi, senior economist of the Center for Economic Strategy. “Unless we ensure Councils of directors with independent members, system of control and audits what and how must be done, state enterprises won’t become efficient,” added Ruslan Korzh, ex-Deputy Minister of Economic Development and Trade of Ukraine.

“We do have enterprises of strategic importance, and, of course, they should not be the first to be privatized – we need to consider pros and cons from the perspective of the social sector and national defense. However, we need to consider privatization, because we can see the results of their performance and it is clear that this sector must be reformed. The first thing we must do is to ask ourselves why the state needs this or that enterprise in its possession, and if the answer is not obvious, this enterprise should be privatized,” said Yaroslav Tashuta, deputy director of Department on Defense, Law Enforcement and State Security, Ministry of Finance of Ukraine.

Privatization is important, but even more important is its mechanism, noted Andriy Herus, member of the Board of the project “Tsina Derzhavy”. “It is important to have competition in order to encourage strategic high-tech companies to enter our market. By the way, this is a natural way to get rid of monopolies and tycoons – now we can see this process on our air transportation market,” he noted.  It would also have positive impact on the national currency and competition in the market.  Moreover, as soon as big foreign companies enter the Ukrainian market, the country will improve its positions on the international level and will become more important for other nations.

Successful and massive privatization is possible only in a set with other reforms aimed to improve business climate, emphasized Volodymyr Fedorin, co-founder of Bendukidze Free Market Center. “No one will buy assets on our market when there are capital restrictions, when the access to justice is not equal, when the Security Service, Police and Prosecutor’s Office officials see businesses as their ‘food reserve’, unless this business has links to political actors,” he stressed.  In his opinion, there will be no significant progress with privatization of SE in 2017. “I think that a normal privatization accompanied by certain losses of “political capital” can take place only in the next political cycle, after scheduled or early elections.  And before privatization we need serious preparations – consultations with advisors, launch of e-platforms to sale this assets and overall economic salvation,” Fedorin added.

The enterprises that will not be privatized need corporate management reform. In addition, it is necessary to create conditions under which they will be able to compete with other companies on the market and will have motivation to be profitable. “Now SE have no motivation to be efficient and show higher profits. If an enterprise reached a profit of more than UAH 50 million, it needs to submit its financial plan for adoption to the Cabinet of Ministers. So, it prefers to show UAH 49 million instead of UAH 50 million,” explained Ruslan Korzh. Moreover, 75 per cent of SE profit goes into the state budget, and they have no money left for development fund.

Secondly, politicians and officials should stop using SE as “assets” in their political games. Directors should be appointed and management control should be ensured by the Supervisory Council of the enterprise, not by political players. According to the experts, the latter are naturally interested to leave “status quo”, despite statements about the support of the reform.

Opinions in the society are an additional challenge. At present, almost 50 per cent of Ukrainians believe that SE should remain the state property. The majority do not understand why privatization is important and why directors of state enterprises must have a very high salary. As long as there is no public demand for this reform, political players are even more interested in delaying it, noted Dmytro Boiarchuk, executive director of CASE Ukraine. “We need to come to various regions and explain ordinary people how money is being stolen from state enterprises, and that the only possible solution is to sale them,” added Oleh Havrysh, editor of the economic program “Persha Shpalta” (TV channel “UA:PershyI”). According to Petro Bilian, editor of economic section of journals “Dilova Stlytsia” and “Vlast Deneg”, the demand for a profound reform is not likely to emerge without an “economic shock” which would motivate both the society and the Government, because the state would have no any other source of money.