The best estimates are that Ukraine’s central government owns 3,500 businesses, with another 12,000–15,000 owned by regional or municipal governments. But nobody knows for sure.
What is known for sure is that they collectively bleed billions of dollars a year through corruption or mismanagement. These costs are shouldered by their owners — the taxpayers — who would otherwise be able to spend this money on better education, transportation, environmental protection, health care, pensions, and more.
Andriy Boytsun, a specialist in corporate governance who publishes the State-Owned Enterprises Weekly newsletter, says Ukraine needs to sell off most of the enterprises, known as SOEs, or parts of them, and impose better corporate governance standards on the remaining ones.
He focuses on the top 15 businesses — big operations like the state railway company, oil & gas company and energy grid operator — which collectively account for 90% of the assets of all state-owned enterprises. Of them, only nine have independent supervisory boards — and none with the full governing powers called for by the Organization for Economic Cooperation and Development, which sets international standards. Those are: Naftogaz, Ukrenergo, Ukrhydroenergo, Ukrzaliznytsia, Kyiv Boryspil International Airport, Ukrainian Sea Port Authority, Ukrposhta, Automobile Roads of Ukraine and Polygraph Combine Ukraine.
“The best recipe in many cases is privatization,” Boytsun told the Kyiv Post. “Privatization is always the first best solution.”
Why so many SOEs?
There are three reasons why Ukraine keeps so many state businesses, Boytsun said.
Firstly, politicians enjoy regulatory and patronage power by having state businesses account for so much of Ukraine’s economy. “If you oversee SOEs, it gives you power. When public wealth is poorly governed, it attracts the type of politician who is interested in running SOEs, rather than professional politicians who are interested in promoting better public policies. That is how poor governance of SOEs explains the poor quality of the politicians in this country. This is why I believe that reforming SOEs and ensuring proper corporate governance is a way of improving public policy.” Political control of SOEs also leads to such situations in which the state, desperate to fill its $50 billion yearly budget, demands high dividends on net profits — up to 90% — which can starve SOEs of investment to modernize. For 2020, for instance, state-owned PrivatBank will pay $701 million in dividends to the state — around 90% of all the dividends paid by Ukrainian SOEs that year..
Secondly, oligarchs have become adept at manipulating state-owned enterprises for personal profit while sticking taxpayers with losses. A common way is to attach intermediaries that sell supplies to the SOEs at excessively high prices or receive goods at prices that are too low — or in the case of the State Gas Transit System Operator, for no price at all. The state company recently reported that regional gas companies owned by exiled billionaire oligarch Dmytro Firtash owe $326 million for natural gas supplies. The operator says it has no way to collect the debt.
Thirdly, a Soviet hangover of bureaucracy and centralized planning still lingers, even 30 years after the USSR collapsed. The mentality triggers fierce resistance to any change from workers, communities and politicians. Consequently, archaic work practices and featherbedding persist. One glaring example is Ukrzaliznytsia, the state-owned railway with at least 250,000 workers, more than twice as many as experts say is required.
Ukraine’s problems with state-owned enterprises are longstanding. They date back to early statehood in the 1990s and the creation of the oligarchs through non-transparent sell-offs of the country’s valuable assets like steel mills. Still, valuable assets remain today, Boytsun says, if they are properly managed or sold transparently.
3 reasons for SOEs
“In Ukraine, there are three situations in which the state should own a company,” Boytsun says. They involve businesses that:
- perform a national security function that cannot be regulated properly if the firms are in private hands;
- are monopolies and cannot be effectively regulated if the enterprises are privately owned; and
- serve critical public needs that the private market is not performing (such as Ukrposhta delivering pensions to rural residents).
“These are found in the principles of state ownership, which is not a bad document but legally very weak, unenforceable and not public,” Boytsun says. When the three criteria are applied, he says, it’s clear that most state businesses — in whole or in parts — “will have to go private.”
8 state firms ripe for change
Boytsun can list endless examples. Here are eight of them:
- Ukrzalyznytsia’s cargo business: This represents up to 70% of the business, depending on the season. “There is no reason it should be state-owned. Transport by roads is private, so why in God’s name should transport by railroad be owned by the state? I can see an argument for the state to own the infrastructure and the rails and ensuring equal access so people can compete. But the transportation itself — the cargo business — if you privatize that, we’re talking about billions of dollars” for the state.
- State Food and Grain Corporation: “They lost about Hr 5 billion ($181 million in 2020). That’s a lot for a single company that most Ukrainians don’t know exists. There’s no reason for it to be state-owned. Someone should take the responsibility to liquidate it.”
- Artymsol salt mines. “Do you have a problem buying salt? What is the rationale for the state to own a salt mining company?”
- Naftogaz. “It cannot be privatized in its present form. It needs to be restructured and parts of it can be privatized.” At the same time, some functions can be privatized. One small example: An internal company cleaning service bid $326,000 more per year than the winning bid from a private firm.
- Kyiv Boryspil International Airport. “I don’t see a reason for a state-owned airport.” Air traffic control, on the other hand, is a proper government function, he said, which is run by the Ukrainian State Air Traffic Services Enterprise, one of the top 15 SOEs.
- Automobile Roads of Ukraine. It is run by Ukravtodor, the State Service of Roads. There is no rationale for the state to own it, according to Boytsun. “Since the services that the company provides are readily available from private providers in the competitive market, Automobile Roads of Ukraine (ARU) should be privatized or liquidated. There is also a conflict of interest in Ukravtodor being the owner of ARU, the regulator and the main customer for road construction and repairs in Ukraine.”
- Hotels. State ministries and other government agencies own hotels. One of them, the Kozatskiy Hotel on Kyiv’s Independence Square, is owned by the Ministry of Defense. It was investigated by the National Anti-Corruption Bureau, which alleges that nearly a half-million dollars in payments from guests of this hotel ended up in the bank accounts of public officials. The agency found similar schemes in other state-owned hotels. No charges were filed.
- Ukrposhta. While it delivers pensions to rural areas — a service that no private entity will perform because of low payments — the state’s role is “not necessarily perpetual.” Boytsun says that private companies can do the task better. Additionally, Ukrposhta owns one of the most valuable pieces of real estate on Independence Square. It should be sold, Boytsun said.
Progress made
After the EuroMaidan Revolution prompted President Viktor Yanukovych to flee Ukraine in 2014, Ukraine moved to shore up its corporate governance. Boytsun was the architect of pioneering corporate governance reforms at Naftogaz, historically a cesspool of insider profiteering that cost taxpayers billions of dollars yearly, such as through Firtash’s RosUkrEnergo gas-trading intermediary.
Yet all post-revolution governments have refused to relinquish their powers to appoint the heads and supervisory boards of SOEs, as well as approve financial plans. “The government is reluctant to give up those levers of control,” he said.
Ideally, Boytsun says, a separate entity called the National Wealth Fund should be created to oversee and ensure proper governance of state-owned businesses. Their duties would include overseeing the hiring of CEOs, ensuring proper financial reports and promoting greater transparency, for instance, of top salaries.
“The people as ultimate owners should know how much management gets paid and why,” Boytsun says. While SOEs are required to disclose individual top salaries, the measure is poorly enforced.
In a recent financial report, for instance, Naftogaz lumped together the 2020 compensation of its top 17 executives at $25 million, with no individual breakout or explanation for why the compensation doubled over the previous year, when the state company lost $684 million.
“Since 2013, we’ve made a lot of progress,” Boytsun said. “I cannot be happy with the progress as such until it’s complete.”
Most large state-owned enterprises in Ukraine lose money — lots of money. Here are the 2020 finances of the top 15 government-owned companies.
Ukraine’s top 15 state-owned enterprises & their 2020 financial results
Net profits
Gas Transit System Operator of Ukraine: $743 million
Ukrydroenergo: $151 million
Seaports Administration: $96.5 million
Ukroboronprom: $91 million
Polygraph Factory of Ukraine: $8.7 million
Ukrposhta: $6.6 million
Net Losses (9)
Ukrenergo: $1 billion
Naftogaz: $692 million
Ukrzalyznytsia: $437 million
State Food & Grain Corporation of Ukraine: $213 million
Energoatom: $175 million
UkSATSE (Ukrainian State Air Traffic Services Enterprise): $55 million
Kyiv Boryspil International Airport: $55 million
Agrarian Fund: $7.2 million
Automobile Roads of Ukraine: $4.7 million
