Less state in the economy: restarting mass privatization

According to what principle will privatization take place and which objects will remain in state ownership?

SATURDAY, JULY 30, 2022, 08:05

Source - https://www.epravda.com.ua/columns/2022/07/30/689818/

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YULIA SVIRYDENKO

First Deputy Prime Minister – Minister of Economy

In the previous column "What kind of economy are we building?" I set out the approaches that our team uses for the economic policy carried out by the government.

Our vision sparked a wave of publications in which authors expressed their thoughts on economic development.

This is great because the topic of GDP growth is finally high on the agenda. But let's leave the theoretical controversy for scientists.

Let's move on to practice. The eighth step of the program announced by us is the further reduction of the state in the economy through mass privatization.

This week, we made a real breakthrough in this direction: the parliament in the second reading adopted the draft law on rapid privatization, which significantly accelerated the procedures and removed numerous restrictions that for years prevented the sale of state assets.

In addition, the government immediately handed over 420 enterprises for privatization and liquidation. And there will be more to come.

Accelerated privatization becomes possible

The Verkhovna Rada adopted draft law No. 7451, which unblocks "small privatization" and significantly shortens the duration of all privatization procedures: from 100 to 25 days.

Soon dozens of businesses that were in decline will find new effective managers. Production will be launched, products will be manufactured for export and new jobs will be created. This is part of our overall strategy to reduce the presence of the state in the economy.

Starting a small privatization in conditions of war. What is needed for this?

Business should be done by private companies, because the authorities in most cases cannot compete with private entrepreneurial initiative.

There is no consensus on privatization in Ukrainian society. Part of the population is still under the influence of Soviet narratives about a strong state in the economy.

However, the creation, existence and, finally, the fall of the Soviet system proved that it is impossible to ignore private property, to replace entrepreneurship with the state in the long term.

It just doesn't work. The state is not capable of controlling all aspects of people's lives and economic activity, unless it turns into an authoritarian system.

The key here is the dominant motive - making a profit. No motive - no result. Therefore, in the long-term system, capitalism wins and contributes to better social outcomes, because it provides a personal motive.

At the end of August, we expect the announcement of auctions by the State Property Fund for a large pool of objects: elevators, distilleries, industrial sites - there is a huge demand for these objects.

Russia's war against Ukraine fundamentally changed our logistics routes. Storage space is needed for the new harvest.

We need processing facilities for raw materials that we cannot export. Private owners will be able to organize it quickly. And we will give them such an opportunity through privatization.

The state will have a small number of assets that can generate income in the long term.

Can the state own commercial enterprises? Of course, the state can be a shareholder. The purpose of such ownership is simple - to make a profit through dividends.

But the world's best practices prove that in order to achieve maximum dividends, it is necessary to separate business ownership (shareholder role) and business management (management role).

This separation of functions is the main idea of the corporate reform, which we are now actively implementing.

Given our stated goal of generating profit from state-owned enterprises, it is necessary to understand which enterprises can generate profits in the long term and which cannot. This should be the determining factor for deciding whether to own or sell.

A company can have a profit above the cost of its capital only if it has a strategic competitive advantage – that is, it can do what its competitors cannot.

There are three types of competitive advantages: 1) monopoly (for example - "Ukrzaliznytsia" for the railway system, the Sea Ports Administration); 2) availability of technology unavailable to other players ("Energoatom" for nuclear energy system, company of the "Ukroboronprom" military industrial concern), 3) access to limited resources (forest farms).

Actually, all enterprises that fall under these three definitions can remain in state ownership and generate income for the state.

There is another, fourth, category - companies that perform a social function or a state function (for example, "Ukrposhta", the postal service which delivers pensions even to the most remote corners of Ukraine, where there are no bank branches and ATMs, or the Shipping Register, stipulated by international conventions).

According to our plan, no more than 100 enterprises should remain in state ownership, and most of them will be subordinated to the Cabinet of Ministers of Ukraine.

All of them must be transformed into joint-stock companies or limited liability companies.

There should be a fully implemented system of corporate governance, when management is controlled not by officials, but by members of the supervisory board, most of whom are independent.

This week, the government transferred 420 enterprises to the State Property Fund - some for privatization, the rest for liquidation. Out of 3.5 thousand state-owned enterprises, 1.8 thousand have not been working for a long time - they do not conduct activities, do not bring profits, do not generate added value.

Therefore, it is advisable to hand them over for liquidation. Unfortunately, there is nothing to privatize there. In addition, on such objects, debts are often greater than the potential value of assets, and under the terms of privatization, the buyer is obliged not only to pay the price determined at the auction to the budget, but also to repay all previously accumulated debts of the enterprise.

According to the results of 2020, the state received UAH 51.3 billion in losses from non-working enterprises. This is the ballast that we inherited from the post-Soviet economy.

Without investment and modernization, they only collapse and lose their value. Only private investors who are able to develop business in the long term can give them a chance for a new life.

Privatization for growth

66 state-owned enterprises, according to the triage carried out by the Government, have been transferred to the State Property Fund for privatization. There is a common misconception that privatization is about replenishing the budget.

In fact, privatization is primarily about economic growth. A new owner comes to an abandoned factory and invests in its renovation. He modernizes equipment, launches new lines, produces products, including for export.

At the same time, jobs are saved and created, taxes are paid, added value is generated, and GDP increases.