Almost all state-owned enterprises are a black hole in the pockets of average Ukrainians. They bring significant losses to the state, and the only winners have been corrupt managers and directors who live off taxes paid by us all. In 2019 alone, these losses amounted to 170 billion hryvnias, or $6.1 billion. Because of the failures of privatization in the 90s, the public is understandably afraid. Therefore, we need transparent and efficient privatization without the slightest possibility to entice corruption.
As of now, there are about 3,500 state enterprises, and they lay dormant without bringing any economic benefits. The vast majority of these companies are at various stages of bankruptcy and therefore are not attractive to investors. The added value isn’t being created, and most state enterprises don’t pay taxes. Moreover, behind every state-owned enterprise, there is a deeply-rooted corruption interest. For comparison, in Poland, the number of state-owned enterprises is about 63 times lower, and in Sweden – 76 times lower.
The situation can be compared to having fertile fruit trees in one’s garden but choosing not to grow fruit. Would any sensible gardener do that? Most likely no. Not using the tools at hand to improve one’s well-being and save money is not rational, to say the least. And yet, that is what we have been doing with our economy by sustaining state-owned enterprises and blocking privatization. There are billions of assets that are on the payroll of taxpayers and can be used to boost the economy.
Inefficient public administration of state-owned enterprises, high risk of creation, and the existence of corruption schemes demonstrate the urgent need to invest in these enterprises in order to modernize their outdated technological processes and restructure their management using international best practices.
At the same time, state resources are extremely limited, so finding an effective owner, attracting investment in these enterprises through a privatization process should be prioritized in order to boost the economy and put Ukraine on the path towards economic success.
Owners of state enterprises enjoy enormous powers in Ukraine and their influence has spread into all branches of the Ukrainian government. In the Verkhovna Rada, Ukraine’s parliament, there are entire lobby groups consisting of dozens of members of parliament. Their only goal is to protect enterprises from the changing status quo, and many of them are more powerful than the oligarchs. One such example would be the case of Sumykhimprom. Two weeks after Aivaras Abromavičius’s decision to fire its head, it backfired. The head believed himself to be above Abromavičius, the economy minister from 2014-2016, and in pursuit of revenge, he made sure the minister was removed from the office.
Although the Ukrainian public is understandably wary of privatization talk, for as long as these objects are in the hands of the state, the situation will not change. Let us start with the privatization procedure. To prepare a state-owned enterprise for privatization, a number of steps have to be taken, including audit, registration of real estate, full disclosure of information about the object, advertising, and marketing campaign that requires time and resources. It takes 11 months to prepare an object before privatization, and 70 internal documents need to be prepared for each object. Every quarter, the State Property Fund prepares more than 21,000 documents. Every new document and procedural step implies corruption risks and hindered economic growth.
The Office of Simple Solutions and Results has been working together with the State Property Fund to develop a coherent privatization reform. As a result, a package of draft laws has been drafted and registered in the Verkhovna Rada. Without a doubt, privatization is among the most problematic areas in Ukraine, and I call on the members of Ukrainian parliament to support it. To succeed, we are proposing a structural change to the existing approach in order to make the most out of our opportunity to put an end to economic backwardness.
Privatization implies a transparent and open transfer of state-owned facilities into the hands of efficient private owners. Incentivized by profit, private owners will seek to make the most out of the newly obtained objects. This will result in job creation and more fillings of the state budget, and that is why we need privatization now. Every hryvnia spent on the acquisition of a privatization object will attract Hr 4-6 million of further investment in the future.
First, we need to increase the institutional capacity of the State Property Fund by extending its role in the privatization process. The Cabinet of Ministers should only be able to intervene in a very limited number of cases, for example, when the facility isn’t used effectively or when its debts exceed the value of its assets by 50%. Additionally, in order to speed up privatization, courts shouldn’t be allowed to block privatization through the security for claim. There should be a possibility to privatize seized property.
In order to avoid a further decline in the efficiency of state-owned enterprises and to stimulate the transfer of privatization of operating investment-attractive enterprises, we propose to use a part of the funds received from the privatization of state-owned enterprises to improve the management of the state sector. Ukraine’s public services are crippling, in many ways due to lack of funding and thus the inability to upheld a thorough digitalization, and the privatization we are proposing can help us solve this issue.
Furthermore, in order for the regional community to be interested in the privatization of state-owned enterprises, it is proposed to allow them to use 30 percent of the revenue from the sales of small-scale state property registered in the relevant local government to fund their local activities.
There are of course hundreds of those who favor the old corrupt order arguing that we just need to find a way to better manage state enterprises. Such an approach is flawed and hasn’t proved to be successful. In fact, it has been one of the mindset reasons why we are lagging behind other post-Soviet countries on privatization. We should take action now, and not wait for some miracle to happen in the next years or even decades. I call on members of the Ukrainian parliament and all conscious citizens to support our draft laws №4572-4575.
Together, we can succeed and move the needle towards economic prosperity.
Mikheil Saakashvili has been the chair of the executive committee of the National Reform Council since May 7, 2020. He served as governor of Odesa Oblast from May 30, 2015, to Nov. 9, 2016. He was president of Georgia from Jan. 25, 2004, to Nov. 17, 2013.
