Ukraine has an incredible number of state-owned properties. They are poorly managed.
Conventional theory teaches us that the state cannot be an effective owner. We read about this in hundreds of economics books. Contrary to this, there are many countries in global practice—for example, China, Brazil, and Russia—where state capitalism not only exists, but has even gained momentum in recent decades. But while before the 2008-2009 crisis, the largest state-owned companies were growing exponentially, since then, especially over the past two or three years, all the dark sides of state capitalism and the shortcomings of the state as an owner have gradually come to light.
Brazil's massive money-laundering scandal in state-owned companies, Russia's use of state corporations to achieve geopolitical goals, the mothballing of excess capacity at China's largest state-owned enterprises, inefficiency, and party bribes—these are just a few examples that demonstrate why a state cannot effectively manage its assets, especially one with weak institutions.
Ukraine is no exception, and perhaps the most telling example. Although we have been pursuing a course of gradual denationalization since independence, central government bodies, as well as local communities, still own an incredible amount of property of varying denominations. While we can easily compete for the top spot in the world for the weakness of state institutions (certainly in terms of the depth of degradation relative to previously achieved levels), the manifestations of ineffective management of this property are striking in their diversity. They may surprise many not only by the scale of state inaction but also by the sheer ingenuity and enterprise deployed to profit from its assets.
Awl and soap
The state's best assets, its true pearls, are large companies and banks. Naftogaz, Ukrzaliznytsia, Oschadbank, and dozens of other corporations are now the talk of the town, frequently appearing in news reports and commanding particular public attention. According to the Ministry of Economic Development and Trade (MEDT), at the end of the third quarter of 2015, the assets of the 100 largest companies, excluding seven banks, amounted to UAH 926 billion. This represents almost a sixth of the assets of all Ukrainian enterprises, which at the beginning of that year amounted to almost UAH 6 trillion, and 90% of the balance sheets of all state-owned businesses.
In addition to the largest corporations, the state owns many other companies whose names will ring a bell. According to the Ministry of Economic Development and Trade, Ukraine owns 1829 active state-owned enterprises (SOEs) and controlling stakes in 272 companies (most of which were former SOEs but have undergone corporatization and partial privatization). Subtract the 100 largest from this, and you get approximately 2 business entities with total assets of approximately 100 billion hryvnias, or an average of 50 million hryvnias per enterprise—a very average sum that gives an idea of the scale of operations of these 2 firms.
Finally, an even larger group consists of defunct enterprises. According to the Ministry of Economic Development and Trade, more than 1,500 state-owned enterprises are inactive. They are undergoing liquidation, reorganization, rehabilitation, or bankruptcy. Their assets are largely the remains of what were once powerful production complexes, squandered during the years of independence due to inadequate management. They have some value, but are generally incapable of producing anything.
Ghost companies can be added to this list. According to the Unified State Register of Enterprises and Organizations of Ukraine (EDRPOU), at the beginning of last year, 5559 state-owned and 32 public enterprises were registered in our country, which is more than 2,2 more than the figures reported by the Ministry of Economic Development and Trade and the Register of Public Sector Business Entities (maintained by the State Property Fund of Ukraine). These are likely enterprises whose only remaining names and entries in the register, meaning they exist only on paper.
The state is not only the country's largest capitalist but also a huge owner of real estate. This is little talked about, but government agencies own a vast number of such properties: from the Cabinet of Ministers building with a usable area of 235,000 square meters to an unfinished store in Huliaipole. According to the State Property Fund of Ukraine, as of early June of this year, there were over 19,000 active lease agreements for state property in Ukraine, through which tenants leased 643 million square meters of real estate (that's more than three-quarters of the area of Kyiv, or three and a half of the city and Lviv). Another 5,700 properties are awaiting tenants. Social infrastructure facilities, such as dormitories and cultural centers owned by the state and local communities, are also noteworthy. Many of these were once on the balance sheets of enterprises, but after the corporatization and privatization of the latter, they became a burden on the government.
Don't forget about land. Experts estimate that the Ukrainian state owns approximately 10-12 million hectares of agricultural land, effectively a quarter of all such land. Since land is one of our country's greatest assets, this asset can be considered the crown jewel of state ownership, formally enriching the state budget, but in reality, it enriches the officials who, in accordance with their positions, manage these plots and decide who is granted access to them.
Let's also consider municipal property (enterprises, real estate, land). Municipal enterprises are a multitude of business entities owned by local communities. According to the Unified State Register of Enterprises and Organizations of Ukraine, there were 13,778 of them in Ukraine at the beginning of last year. It's difficult to say how many of them are active, but the magnitude of the figure is impressive. The problems that arise in the management of these enterprises also require a separate discussion.
This entire mosaic of property belongs to the state (communities) and is supposed to fill the budget, ultimately making us richer. But this is only possible with proper management. In reality, the public sector of the economy has suffered from exceptional mismanagement throughout the years of independence. Anyone and everyone has tried to profit from it. And there are thousands, if not tens or hundreds of thousands, of such people in Ukraine.
General management problems
Many difficulties related to state property have existed since the dawn of independence. As a character in a classic Soviet film rightly said, "there's chaos in our minds." The Soviet Union has long since vanished into oblivion, but it still plays a significant role in Ukraine's socioeconomic processes. Stealing from the state has become a social norm for our compatriots. The clear majority of workers have always been able to obtain some of the products, raw materials, and supplies from the enterprises where they worked. This was especially true for collective farms and the production of essential goods.
It might seem like nothing serious, but such theft on a national scale leads to us stealing from ourselves. And the second thing the Union taught Ukraine is to work as you're paid and not to show excessive initiative. These two mental nuances connect the processes that have been unfolding in the sphere of state property for years with the state of affairs there today.
Let's start with the defunct and ghost enterprises. Their number, as shown above, runs into the thousands. Where did they come from? It's the result of the systematic embezzlement of state property, when machine tools worth millions of dollars were exported abroad or, worse, cut up for scrap metal. A great many people did and continue to do this. Even oligarchs, now highly respected, were not above this kind of exploitation.
If Ukrainians hadn't been trained to steal from the state, or if the state were stronger, this phenomenon wouldn't have reached such proportions. In any case, how can we speak of the effectiveness of state ownership given the numerous examples of the utterly barbaric dispersal of property? Society debates whether to privatize one state-owned enterprise after another, but the thousands of enterprises completely plundered and effectively destroyed remain unnoticed. The result is a rather one-sided debate.
And the second aspect concerns phantom enterprises. Why does the state need them? After all, they don't contribute to the budget, but instead create a statistical tail that drifts across reports year after year, diverting resources for accounting and maintenance. The answer seems simple: no one in the civil service is willing to bother to resolve this issue by establishing an adequate bankruptcy procedure, adopting a strategy for dealing with dead enterprises, and so on. Moreover, the embezzlement processes are clearly ongoing, so it seems premature to cut off this tail once and for all, as it grows back over time, like a lizard's. In fact, this is an example of blatant inaction, which has become one of the main factors in the extremely ineffective management of state property.
Another problem is the organization of state property management, which is in a state of near-primordial chaos. Most of the legislation regulating the accounting, systematization, and inventory of state property is only 5-10 years old; the Unified Register of State Property has only been in active use for three years.
Of the more than 24 legal entities registered in the Unified State Register of Enterprises and Organizations (EGRPOU) as operating solely on the basis of state ownership, 4,8 are currently unregistered, meaning their status as governed by the relevant entity has not been confirmed. This means that nearly 5 legal entities have been lost along the path from the EGRPOU to the relevant state property management agency. And the government officially has no idea what these entities are, what property they own, or what is happening with it. How can we talk about effective governance if the state is unable to accurately determine its ownership?
Another aspect of chaos: today, according to the State Property Fund, there are 155 entities managing state property, 70 of which are central executive bodies. Many of them (for example, the Academy of Sciences, the State Administration, etc.) lack the human resources or the qualifications to develop the state property under their management. Why are there so many of them? Is it really so that as many officials as possible can enrich themselves at the expense of the state, and as many as possible take key positions in ministries and agencies solely to earn their fortunes this way?
Add to this the regional branches of the State Property Fund (and others), which manage state property, and the local government bodies responsible for municipal property—and you get an army, even a class (in the traditional Marxist sense) of officials who live comfortably off state property, are incapable of anything professional, but, most importantly, are interested in maintaining the status quo and cling tightly to their positions and the opportunity to convert them into money.
The world is gradually transitioning to a centralized system of state property management, whereby a single entity (ministry, sovereign wealth fund, holding company) manages all assets. At the same time, many countries maintain a dual-subordination model, whereby sectoral aspects are managed by a line ministry, while corporate governance and coordination of all state assets are handled by a separate ministry or agency. Ukraine should transition to one of these models, which are considered the most effective in the world. However, recognition of the need for such a transition at the national level only emerged after the Revolution of Dignity.
Perhaps the most widespread and well-known problem with state property management is that some profit greatly from the cash flows it generates. Oligarchs control managers of state-owned enterprises, whose positions they purchase from those at the helm of the state. These managers then funnel a portion of the cash flow to their patrons. Political forces, once in power, haggle over portfolios because they grant them the right to manage certain state assets (virtually every central government body is responsible for managing certain state assets).
(We must give credit to the NBU, which, on its own initiative, abandoned this function and began to get rid of the objects assigned to it), which can be converted into money).
Responsible officials in ministries and departments trade positions at state-owned and municipal enterprises, and those who buy them convert their purchases into a share of the cash flow. Officials sell leasehold rights to state-owned land or real estate, the market rates of which are significantly higher than what the state receives, and split the difference with the tenants. This entire system results in the budget receiving tens of times less than it could.
From the general to the specific
If we were to attempt to describe and analyze in detail all the specific issues related to the management of asset groups or specific state-owned entities in Ukraine, we could probably gather enough material for a dissertation, or even more. Therefore, this article focuses on the most common and widespread problems.
One of the main problems is the presence of leeches sucking cash flow from state-owned assets. It turns out they're not so easy to get rid of. The case of Ukrnafta, where the state, represented by Naftogaz, owns over 50% of the shares, is on everyone's lips, although Kolomoisky effectively controls the company. Ukraine is unable to collect not only its share of dividends for several years, but now also billions in back taxes.
The company simply doesn't have the money, which is regularly siphoned off through various schemes to benefit Kolomoisky's entities. Kolomoisky, meanwhile, is threatening the state with a lawsuit for billions of dollars and has every reason to win, citing the fact that he once used well-known methods to obtain the signature of a former official on a contract favorable to him.
The Ukrnafta case is not isolated. When it comes to preserving their profits, the leeches use every available method: bribery of the courts, threats, blocking government decisions with the help of bribed officials, paid rallies, and the like. Even if conscientious, patriotic politicians come to power in Ukraine, they will have to spend years getting rid of these leeches. Unfortunately, this is the reality of our lives and state institutions.
Meanwhile, companies like Ukrnafta are the focus of public attention. But how many small state- and municipal-owned enterprises do we have that are being siphoned off, and which are simply not addressed because responsible politicians lack the tenure to address the situation and clean out these Augean stables?
Another aspect of the losses is the behavior of state-owned enterprise managers. While they were paid meager salaries for managing companies with assets worth millions and billions of hryvnias, they were completely deprived of any motivation to preserve and grow state assets. Instead, they indulged in the company's profits (expensive food, cars, "business trips" to resorts, etc.) and concluded contracts on their behalf through intermediaries, overpaying them for goods and services in the amount they received from the contractor in kickbacks and pocketed for themselves.
Several months ago, the wage scale was significantly expanded, and the maximum salary at the largest enterprises can now reach 200 times the minimum salary of a primary-level employee at that enterprise. Managers were now motivated to work effectively, which, together with the introduction of competitive selection for senior positions at state-owned enterprises, immediately ensured an influx of top-notch managers into the public sector, including from abroad (as in the case of Ukrzaliznytsia and Ukrposhta). The latter value their reputation, so it can be expected that they will decisively abandon the previous practices inherent in their respective companies.
And the third aspect: the actions of officials. Numerous examples could be cited here. Take the list of Kyiv's public utilities: Kyivmiskbud, Genplan, Kyivavtodor, Kyivreklama, Zhitniy Market... There are dozens of them, and most have been implicated in corruption scandals at least once. It's no surprise that the Kyiv mayor, upon taking office, feels like a feudal lord, controlling a wide range of properties.
And they have a huge temptation to exploit this control for their own benefit. A similar situation exists in many cities. It's worth noting that, according to experts, some utility companies don't even have a business accounting system, meaning their finances are practically integrated into local budgets. This means the potential for theft is incredibly wide.
Another example is state-owned real estate. In over 19,000 lease agreements, the average rate is 72 UAH/m² per month (excluding entire property complexes and leases by state institutions). While this amount may be reasonable for small towns and villages, it's not guaranteed. And for large cities, it's a pittance.
Some properties in Kyiv are rented for 50 hryvnias, while in the commercial real estate market, the rate reaches hundreds, and sometimes thousands, of hryvnias per square meter. It probably goes without saying that those who make the relevant decisions receive substantial kickbacks for the right to rent a particular property. We're talking about hundreds, if not thousands, of officials who pay for their expensive cars, apartments, and flights to the Maldives at the state's expense—in effect, at ours.
The efficiency of government agencies' real estate utilization cannot be overlooked. According to media reports, the Presidential Administration building occupies over 22,000 square meters, yet only 428 people, including support staff, work there. The density of the occupancy is such that each employee has space equivalent to a good one-bedroom apartment (multiply this by the number of floors). In the real estate market, this building could generate hundreds of millions of hryvnias for the budget. Unfortunately, the government's leadership largely thinks in feudal terms, so it ignores such inefficiencies.
There are also numerous industry-specific and individual issues related to state ownership. For example, some companies own systemically important infrastructure assets. Ukrzaliznytsia owns railway lines, Naftogaz owns gas transmission systems, and the list of examples goes on. Ideally, these infrastructure assets should receive a certain fee for their use, a portion of which would go toward their maintenance. However, revenues from these assets often end up in a common pool, from which very little is allocated for infrastructure repairs. National infrastructure potential simply becomes stale…
The other side of the coin is the social functions that some state-owned enterprises are forced to perform. Ukrzaliznytsia, Kyivpastrans, and others provide free transportation for those with benefits; Naftogaz recently sold fuel at discounted prices; and many state-owned facilities bear the burden of supporting social infrastructure. All this prevents state-owned enterprise managers from focusing on achieving efficiency, which could quite possibly generate sufficient cash flow to finance all of the state's social obligations.
Many problems facing state-owned enterprises are individual. For example, profitable enterprises like Turboatom generate large profits but are not growing because they are underinvested. Coal mines are largely unprofitable and consume significant resources from the budget. This problem also has social and environmental aspects. Antonov produces virtually no products.
It takes highly professional and meticulous management to put it on a development trajectory, even in the long term. Many enterprises, especially natural monopolies, have severely depreciated assets, but they are forced to operate under these conditions because the state simply doesn't know how to invest—it has never done so, and when it has, it has always resulted in massive theft. Furthermore, natural monopolies require appropriate regulation, which is lacking in almost all sectors in Ukraine. Ports are extremely profitable, but their capacity is limited and they are unprepared to meet government-mandated targets, such as handling ultra-large vessels.
There are hundreds, if not thousands, of such problems in state property management. They all prove that the state cannot be an effective owner, especially one with weak institutions. The current situation in this area only perpetuates the backwardness of the economy and the country. This is evidenced by the level of salaries, mentality, and worldview of people working in the public sector.
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Lyubomir Shavaliuk, published in the publication Tyzhden.UA
Translation: Argument
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