State-owned enterprises (SOEs) report improved financial performance. However, DS data suggests this is happening against the backdrop of an unprecedented non-payment crisis, which could result in SOE losses as early as this year.
"Everything is simply wonderful," a representative of the Berdyansk Seaport declared bravo at a government meeting broadcast online on February 11. The Seaports Administration, which includes the Berdyansk Port, increased its revenue from UAH 2,7 billion to UAH 4,9 billion in the first nine months of 2015, while its profit grew from UAH 1,2 billion to UAH 3,3 billion. Has the public sector emerged from the crisis?
Data from the Ministry of Economic Development, released on Wednesday, February 17, at first glance, suggests precisely this. In the first nine months of 2015, the top 100 state-owned companies earned a combined net profit of UAH 2,2 billion, while for the same period in 2014, their combined losses exceeded UAH 66 billion. A key factor was the significant improvement in Naftogaz of Ukraine's financial results thanks to tariff increases for households, which occurred as part of the transition to market-based natural gas prices. This allowed Naftogaz to finish January-September 2015 with a profit of UAH 0,2 billion, compared to a loss of UAH 60,2 billion, or over 90% of the total losses of the top 9 state-owned companies for the same period in 2014.
Besides Naftogaz of Ukraine, Energoatom demonstrated the best profitability growth dynamics, ending the first nine months of 2015 with a profit of UAH 1,3 billion, compared to a loss of UAH 3,8 billion for the same period in 2014. Besides them and the already mentioned Sea Ports Authority, the leaders in their sectors also included Turboatom (UAH 1,3 billion in net profit for the first nine months of 2015), Agrarian Fund (UAH 706 million), Ukrenergo (UAH 408 million), and Odesa Port Plant (UAH 205 million).
There are two reasons for the increase in profitability of state-owned enterprises in 2015. First, the size of losses and the volume of subsidies to NAK from the state budget decreased. Second, the effect of the hryvnia devaluation led to an increase in revenue and profits for many state-owned companies with exposure to foreign markets (airports, seaports, Turboatom, and others).
However, it's not all that simple. DS has obtained a Ministry of Economic Development and Trade analytical report on the performance of the 100 largest state-owned enterprises in 2015, which highlights the phenomenal growth of accounts receivable. They jumped by UAH 30 billion to UAH 145 billion. In simple terms, this represents massive non-payments to these enterprises.
The main growth in non-payments was observed in the energy and agricultural sectors. In the former case, it's a market-wide problem, led by Naftogaz Ukrainy. Due to rising tariffs, residents are accumulating debt. Last week, for example, Kyivenergo announced that in January 2016 alone, Kyiv residents' heating debt increased by 35% of the total debt of UAH 1,3 billion, which had been accruing for years. Heat and power companies are failing to pay Naftogaz, and as a result, it is the leader in accounts receivable growth. This, along with its hidden funding through the budget (in the form of subsidies, which this year are set at UAH 32 billion), has allowed the oil and gas monopoly to continue to improve its financial performance.
Essentially, this maneuver was intended to please the IMF, which considers NAK's deficit-free status a key requirement for Ukraine and prioritizes this issue when deciding whether to allocate financial assistance to the country. The fact that the debts are being shifted to the budget is an afterthought.
Will the situation improve by the end of 2015? Unlikely. Another reason for non-payments in the energy sector is the advance payment of subsidies. Due to the warm winter, according to DS, the volume of overpayments in the country reached 4-4,5 billion UAH by the end of January. In practice, this means that all energy market participants were operating in January, providing services using this "virtual" money, leading to a drain on working capital and, consequently, an increase in accounts receivable.
As for the agricultural sector, the State Food and Grain Corporation of Ukraine bears full responsibility. Last year, the State Fiscal Inspectorate discovered 11 companies with which the State Food and Grain Corporation of Ukraine had entered into grain export contracts (purchasing grain using a loan from a Chinese state bank in exchange for an obligation to supply the grain directly to the Chinese). These contracts were signed during the Viktor Yanukovych era, but only came to fruition in 2014-2015. It turned out that the corporation did sell the grain, not to the Chinese, but to shell companies. For example, the Hong Kong shell company Sonders Trading owes the State Food and Grain Corporation of Ukraine over UAH 1 billion. However, this isn't always a simple scam. "By failing to repay their debts to state-owned companies for a long period, the defaulting companies effectively gain free access to capital without providing any collateral," says Concorde Capital analyst Roman Topolyuk. Thus, laundering money from state contractors under hryvnia-denominated contracts is becoming a profitable alternative to expensive lending for many companies. And if non-payments continue to rise, state-owned companies will experience significantly different results in a year or two due to a lack of working capital.
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