1. State Owned Enterprises Ukraine

2. Outline

• Ukraine

• A. Introduction to State Owned Enterprises

• B. Economic Performance

• C. The Way Forward- Policy Change

3. State Owned Enterprises Ukraine

• State-owned enterprises in Ukraine are defined as a commercial enterprise with the state share exceeding 50% of the authorized capital

• They are managed by the central & local government bodies

• The state can be classified into two groups:

• • Commercial partnership with the state share exceeding 50% of authorized capital. This includes enterprises in the process of privatization.

• • State Unitary (100% state owned) enterprises authorized to posses, use and dispose property as well as to conduct operational management.

4. Continued

• Ukrainian legislation allows the transformation of state-owned enterprises into fiscal according to the decision of the central government body if this enterprise is not liable for privatization.

• Article 37 of Ukraine law states that "state-owned enterprises may be transformed into fiscal one if

• • conduct activities which allowed only to state-owned enterprise

• • the state is the primary consumer of the output (more than 50%)

• • the enterprise is classified as a nature monopoly

• Non-corporate state enterprises do not belong to standard but are similar to state-owned Unitary enterprises.

5. SOE in Ukraine: Performance

6. Economic Performance

• Own 52.3% of the fixed assets held by all enterprises (2002)

• 53.5% of total profits in the economy (2002)

• But performance varies between sectors

• Monopolized by SOEs

• Companies receiving losses:

• • Ukrtelecom

• • Naftogaz

• • Ukrzaliznytsia

• Loans from the World Bank, the European Bank for Reconstruction & Development

Overview Energy & Utilities

7. Implications of Loss

• Financial burden on the State

• Poor service quality

• • 1 employee : 100 customers (Ukrtelecom)

• • Gas cut off (Naftogaz)

• • 40% of passenger cars are outdated (Ukrzaliznytsia)

• Below-market prices

• Corruption

• Mismanagement

• Profits to insiders, intermediaries & foreign shareholders

Reasons for loss: Implications: Current situation: slow privatisation

8. The Way Forward Policy Proposals for Ukraine

9. Finding the Optimal Balance between Entrepreneurial Autonomy and State Control

• Negotiations - Based Approach is the most efficient solution.

• Enterprise in question negotiates the allocation of profit with the respective branch ministry.

• Requires mandatory audit of state enterprises; assists in calculation of normative rates.

• Takes into account specifics of environment where the enterprises are operating.

• With agreement on profit distribution, enterprise gets clear perspective for planning commercial activities; state gets information for budget-financed investments.

• Limits state support to enterprises, avoids misallocation of budget resources.

• Allows enterprises to implement medium and long-run investment projects.

• Improves management by introducing public-private partnership schemes.

• To be efficient negotiations-based approach must include the following elements:

• 1) Transparent principles of profit distribution; prevent arbitrary decisions.

• 2) Guarantee against requisitioning of entire profit to the state budget.

• 3)Externally audited business plans of enterprises.

• 4) Flexibility in negotiating changes in normative rates of profit distribution on case basis.

• 5)Abandoning current practice of granting certain enterprises waiver of liabilities to the state, as it undermines the very basis of the state as property owner.

10. Establishing the Rules of Profit Distribution and Enterprise Investment

• In Ukraine only enterprises own profit and depreciation can be the source of investments (external funding budget funding, bank credits, etc. is practically unavailable). Attempts to extort the whole amount of profit will intensify the process of eating away fixed capital.

• Necessary Rules for Profit Distribution:

• 1. Any scheme of profit distribution must include provision of establishing investment fund.

• The amount of the fund must be determined by the administration of the enterprise together with the branch government body empowered to manage the enterprise.

• 2. The central governmental body must control decisions of all state unitary enterprises regarding capitalization of earnings for investments. Since the amount of the investment fund will determine the amount of net profit to be transferred to the budget, should make investment decisions of state unitary enterprises with Ministry of Finance.

• Efficiency of such an approach will depend on finding economically expedient ratios. Failure to do so will result either in underinvestment or overinvestment.

• For Ukraine, use the average industry indicators of profit distribution and investment activities (ratio of profit used for investment purposes) as a benchmark for calculating respective norm for the state enterprises.