The government of Ukraine has announced another plan to privatize about 20 state-owned enterprises, explaining that this step is aimed at attracting funds to finance military expenses, as well as stimulating economic growth.
“The budget is in the red. We need to find other ways to get money to keep the macroeconomic situation stable, help the military and win this war with Russia.” – stressed Deputy Minister of Economy of Ukraine Oleksiy Sobolev.
Therefore, the government optimistically declares that the privatization of state-owned enterprises is a necessary measure to overcome the budget deficit and ensure macroeconomic stability, hoping that the sale of state assets will attract investments and contribute to the development of the economy.
In addition, the head of the State Property Fund of Ukraine Vitaliy Koval also considers the quick sale of assets extremely important for financing the defense sector of our country and its economic growth.
“Privatization is timely, as the funds are directed to support the Defense Forces of Ukraine. Today, state enterprises cannot generate losses, all “liabilities” must become “assets” and work to support the domestic economy. In 2024, we plan to announce about a thousand new privatization auctions. We urge investors to cooperate. The Fund’s investment menu includes objects in different parts of the country and with different technical characteristics.” said Koval.
Among the largest assets up for sale in the near future are United Mining and Chemical Company (U.M.C.C.), one of the world’s largest titanium producers, and a number of other mining and chemical companies. The following are also subject to privatization: YEMK SE “TVK”, located in the suburban area of Odesa and consisting of 17 trade and warehouse premises with an average area of 2,000 m² each; EMK SE “Agricultural enterprise “Land Fund”, whose assets consist of 15 registered units of real estate with a total area of 7,285.1 m² – the building of the “Kolos” hotel in Kyiv and 14 units of buildings and structures with an area of 5,428.4 m² in Zhytomyr; Dnipro State Enterprise, its property complex, located in the center of Kyiv, includes non-residential premises with a total area of 784.8 m² and 32 units of movable property. Its main activity is wholesale trade, it is a monument of cultural heritage of local importance. Hotel “Ukraine” in Kyiv, which has accumulated a debt of 1 million dollars, is also being privatized, it will be put up for sale with a starting price of 25 million dollars.
18 auctions for the privatization of state property are planned for January, the total starting value of assets is 242.5 million hryvnias.
As of 2024, there are 3,116 state-owned enterprises in Ukraine, of which only 854 enterprises (27% of the total number) are operating, 475 (15%) are profitable, and 1,736 (56%) are not operating. At the same time, 526 state enterprises (17%) do not report on their activities. In addition, hundreds of thousands of private enterprises work in Ukraine, taxes and fees paid by businesses are one of the main sources of funding for our defense.
It should be noted that the number of non-working state-owned enterprises has increased 4 times over the past five years. In 2018, there were 422 of them, in 2023 there were 1,736, and now there are even fewer. In addition, state-owned enterprises consistently have about UAH 1 billion in arrears for the payment of wages per year, the largest was in 2020 – UAH 1.19 billion.
The reasons for the catastrophic state of state-owned enterprises
- Inefficient management and corruption
One of the main reasons for the catastrophic state of state-owned enterprises is ineffective management, the absence of unified modern management principles. Their owners are more than 80 bodies and departments, each of which has its own approach, where each “pulls the blanket over itself”. Therefore, there is a low efficiency of the enterprises, as well as a wide scope for corruption abuses.
In general, corruption is one of the main reasons for the decline of state-owned enterprises. High-ranking officials use their positions for personal enrichment, which leads to inefficient use of enterprise resources. Managers are often appointed not for professional qualities, but for political or personal connections, which also negatively affects the effectiveness of management.
In addition, if private business considers everything that is not prohibited to be permitted, and shareholders give company management carte blanche for flexible management in conditions of uncertainty, then the management of state-owned enterprises, as a rule, is forced to act according to the principle: “everything that is not permitted is prohibited.” , because any risk can be considered as causing damage to the state. Thus, modern innovations are inhibited.
- Political influence and instability
Political instability and frequent changes of governments have a negative impact on state-owned enterprises. Politicians often use state-owned enterprises as a tool to achieve their own goals, leading to inefficient governance. A change in the political course can lead to drastic changes in the development strategy of enterprises, which negatively affects their stability and prospects.
A change in strategic priorities, asymmetric requirements for state-owned enterprises from one industry, spontaneous revision of the amount of dividends (which is connected with the tendency to use state-owned enterprises as sources of additional income to the budget), leads to difficulties with planning. In addition, a negative factor is the atmosphere of uncertainty, which exists against the background of frequent changes of power at the level of ministries, which can directly interfere in the activities of state-owned enterprises. It is also influenced by the presence of a wide range of interested individuals and groups trying to influence the management of the asset to satisfy their own political or commercial interests.
- Imperfection of the legislative framework
The inconsistency and complexity of the legal framework is also an important problem. Frequent changes in legislation, inconsistencies between various regulatory acts create additional difficulties for the effective management of state enterprises. The lack of clear rules of the game complicates the planning and implementation of long-term projects.
- Lack of adequate funding
Many state-owned enterprises suffer from a chronic lack of funding. The state is often unable or unwilling to allocate sufficient funds for equipment modernization, introduction of new technologies, and infrastructure support. This leads to a decrease in productivity and competitiveness.
- 3 outdated equipment and technologies
A big problem is the use of outdated equipment and technologies that do not meet modern standards. This leads to low productivity, high maintenance and repair costs, and reduced product quality. The lack of investments in modernization becomes a serious brake for the development of enterprises.
State policy in the field of management of state enterprises
The Government of Ukraine is currently developing an improved management policy for state-owned enterprises, its plan is to reduce the number of state-owned enterprises through the privatization of non-strategic ones and improve the management of strategic ones. At the same time, for effective management, the Ministry of Economy plans to leave only 100 enterprises in state ownership, the government transfers non-strategic enterprises to the State Property Fund of Ukraine (SPFMU), which puts them up for privatization or sends them for liquidation.
The state policy of Ukraine is significantly influenced by foreign countries and international organizations. In 2023, the International Monetary Fund (IMF) published an updated Memorandum on Economic and Financial Policy after the second review under the Enhanced Financing Program (EFF) for Ukraine, which includes Ukraine’s commitment to reduce the number of state-owned enterprises.
In addition, the state narratives regarding state ownership until 2030 look as follows:
- citizens perceive private property as more efficient than state property;
- private property is the rule, and state property is the exception;
- for a small number of enterprises that remain in state ownership, the Organization for Economic Co-operation and Development (OECD) State-provided Guidelines for Responsible Business Conduct by International Enterprises have been implemented. They represent voluntary standards and principles covering a range of topics including: human rights, employment, environment, disclosure, anti-corruption and taxation.
It is not yet clear how effective they are. It is known only about how the state authorities put pressure on the enterprises from the side of taxes and endless checks from the control bodies.
Is the policy of privatization of state property justified?
Despite the critical situation, state business plays an important role in the economy of Ukraine. It plays a significant role in the development of the economy, the formation of the general dynamics of growth and provides the state with tools for conducting countercyclical policies (stimulating investments, positive dynamics of GDP and creating new jobs during the recession period within the economic cycle). Although the last option is almost not used in Ukraine, which increases the level of inefficient use of state-owned enterprises and forms a negative public discourse about them, in particular, the statement that the state cannot be an effective owner is established.
Currently, state-owned enterprises are less efficient than private ones. Thus, according to the calculations of the Center for Economic Strategy, the profitability of enterprises from the same industry, but with different forms of ownership, differed by an average of 61%, not in favor of state enterprises. However, in conditions where the attraction of foreign investments is complicated by a number of global and internal Ukrainian problems, it is the state-owned enterprises that can become points of economic growth. However, provided that business models in the public sector have the same mobility as in the private sector.
Privatization policy of state enterprises (SWOT analysis)
Taking into account the factors and data listed above, we will make a final analysis of the process of privatization of state-owned enterprises
Strengths:
Improvement of management efficiency: private owners usually have more incentives to improve the efficiency of enterprises, since their income is directly dependent on the productivity and profitability of the business.
Investment attraction: privatization can attract domestic and foreign investors who are ready to invest in the development of enterprises, which contributes to economic growth.
Reduction of public debt: the sale of state assets can provide significant revenues to the state budget, which can be used to repay the state debt or finance other important state programs.
Reducing the budget burden: privatization allows the state to reduce the costs of supporting and managing state-owned enterprises.
Reducing corruption: privatization can reduce the level of corruption because the private sector is less prone to corrupt schemes than the public sector.
Innovation and development: private companies are often more flexible and prone to the introduction of new technologies and innovations, which contributes to the overall technological development.
Improving the quality of services: private companies, competing in the market, often seek to improve the quality of their products and services in order to attract more customers.
Weak sides
Loss of jobs: private owners often optimize costs, which can lead to job cuts or lower wages for workers.
Market monopolization: in some cases, privatization can lead to the formation of private monopolies, which can negatively affect competition and lead to overpricing of goods and services.
Social inequality: privatization may increase social inequality, as wealthier investors may benefit more from privatization, while less affluent sections of the population may be left without support.
Loss of state control: privatization may lead to the loss of state control over strategically important sectors of the economy, which may affect national security and economic stability.
Unsuccessful privatization: if the privatization process is not well planned and transparent, it can lead to failure when the new owners are unable to effectively manage the enterprises or deliberately withdraw assets from the country.
Dependence on foreign investors: the sale of state-owned enterprises to foreign investors can increase the economy’s dependence on external factors and decisions made outside the country.
Threats and risks
Monopolization: in the case of ineffective regulation, privatization can lead to the creation of private monopolies that can abuse their position in the market and overestimate the prices of goods and services.
Job losses: cost optimization and enterprise restructuring may lead to significant job cuts, which will negatively affect the level of employment and social stability.
Economic instability: improperly conducted privatization can destabilize the economic situation in the country, especially if sales take place in conditions of economic crisis or political instability.
Losses of state control: privatization may lead to the loss of state control over strategically important sectors of the economy, which may affect national security.
Political instability: dissatisfaction of the population and political forces with the privatization process can lead to social protests and political instability.
Corruption risks: lack of transparent procedures and proper control over the privatization process can lead to corruption schemes and sale of assets at underpriced prices. In addition, the participation of officials and their relatives in the privatization process can create conflicts of interest and promote corruption.
Strategic threats: the sale of state-owned enterprises to foreign companies can increase the economy’s dependence on external factors and foreign capital. Also, foreign owners can withdraw profits from the country, which can lead to a decrease in national capital and a slowdown in economic development.
Opportunities
Increasing efficiency: private owners have an incentive to increase efficiency, reduce costs and optimize the operation of enterprises, which can lead to increased productivity.
Investment attraction: privatization can attract both domestic and foreign investors who will bring capital, new technologies and management expertise.
Increase in state budget revenues: the sale of state assets can increase the revenues of the state budget, which will allow financing important social and economic programs, as well as the defense sector.
Development of competition: privatization can contribute to the development of competition in the market, which is ultimately beneficial to consumers by improving the quality of goods and services and lowering prices.
Reduction of public debt: the funds obtained from privatization can be used to reduce the public debt, which will improve the financial stability of the country.
Innovation and development: private companies are more flexible and able to innovate faster, which can lead to the development of new products and services.
Therefore, the policy of privatization of state property can be justified under the condition of proper planning and implementation. It has the potential to increase management efficiency, reduce the budget burden and attract investments. However, it is important to take into account possible social consequences and ensure effective state regulation of privatized companies.
The strategic goal of creating effective management models of state-owned enterprises should be the creation of an optimal balance between profitability and the performance of socially significant functions.
Historical facts
In 1991, the Ukrainian economy was the 60th in the world out of 250 countries. It received a huge industrial heritage – as part of the Union republics, it was one of the leading metallurgical bases (smelted 40% of iron and 34% of steel), mined almost half of iron ore, produced a third of all steel pipes, occupied one of the leading places in the production of many types of products engineering. In Ukraine, the rocket and space industry, shipbuilding and oil refining, aviation industry, mechanical engineering were successfully developed, and it ranked third in the world in terms of the power of nuclear potential. That is, our country in the state sector of the economy had virtually all types of industry, as well as developed communication routes and established sales markets.
At the same time, Ukraine was famous for its high educational, scientific and industrial potential, unique black soils and agricultural opportunities, Black Sea and Azov ports. At the time of independence, there were 3,594 enterprises producing military and dual-use products with a total workforce of about 3 million people.
In 1990, the GDP of Ukraine ($81.5 billion in current prices) exceeded the combined GDP of the Czech Republic ($40.5 billion) and Romania ($39 billion), as well as the production volumes of Poland ($66 billion) and Israel ($59 billion).
In 2021, Ukraine ranked last among European countries and 97th in the world by PPP GDP (purchasing power parity) per capita.
In 2024, the International Monetary Fund determined that Ukraine is the poorest country in Europe in terms of GDP per capita. Currently, our country ranks last in the ranking of GDP per capita in Europe with an indicator of 5.6 thousand dollars. At the same time, the basis of the Ukrainian economy is multi-branch industry, agriculture and the service sector.
