State property “in a new way”: can the state steal less and earn more?

Corporate reform should transform the Ukrainian state into an effective owner and administrator of enterprises. To achieve this, top managers are given more freedom. UNIAN is trying to predict for whose benefit officials use the freedom they receive: the state or their own.

On March 5, President Volodymyr Zelensky signed a law that is stated to “improve” the corporate governance of legal entities in which the Ukrainian state is a shareholder or participant. Together with other bills, this document is part of a “package” that will unlock $1.4 billion in financial assistance from the World Bank. Corporate reform could not be carried out for 9 years, but here they did it in a matter of weeks - incentive makes all the difference.

There are different opinions regarding this document in Ukraine. On the one hand, Ukraine has been a non-Ukrainian SSR for three decades now, but many elements of state property management have remained virtually unchanged since then. And that's bad. On the other hand, attempts at improvement have been made many times, and as a result, Ukrainian policy regarding state property is “stuck” somewhere in the middle, between the “scoop” and modern Western corporate approaches.

And I received disadvantages from each system, not advantages. Privatization is also not always a solution, because in non-transparent conditions it leads to the sale not so much of enterprises as of the land under them - that is, it leads to the liquidation of entire strategic industries, because factories are cut down for metal.

So will the new reform solve the problems mentioned or create more problems? UNIAN looked for answers together with experts.

Everything went according to plan - but in the wrong direction

According to experts, before the full-scale invasion, there were more than 3,000 state-owned companies in Ukraine, which provided 10% of the country's production. They involved 16% of all officially employed Ukrainians. But from a business point of view, the results were not very impressive.

“Most businesses are not productive. By comparison, the average annual return on equity of private and public enterprises in 2021 was 8 and 0.3 percent, respectively. Only 14 percent of state-owned enterprises make a profit,” says Denis Shemyakin, director of the Reform Support Team of the Ministry of Economy. “The reasons are hidden in the ineffective company management system and difficulties in regulation.”

That's what corporate reform is supposed to do—make state-owned companies as efficient as private-sector businesses. In the West, one of the key tools for improving the performance of state-owned enterprises is the supervisory board. In Ukraine, unfortunately, there are practically no positive examples of their activities.

Such councils often become an instrument of oligarchs’ influence on the industry, because through their representatives the interests of private rather than state companies are lobbied. Or, as the media write, they simply give council members huge (as for unprofitable enterprises) salaries or “bonuses.” The reform aims to change this. But…. through increasing freedom for these supervisory boards.

However, experts say that not everything is so simple. The Soviets could have worked better, but the system itself prevented them from doing so. Because it was actually stuck somewhere between the Soviet and Western control systems.

“Despite the fact that the councils could make decisions on a number of issues, by law they were not vested with key powers and had no actual leverage on the development of companies,” continues Mr. Shemyakin, “For example, they could not appoint and dismiss a manager, assign a level remuneration, approve annual development plans of enterprises. All these functions remained with the Cabinet of Ministers, which created a conflict of interests. Ministries create the rules of the game and manage enterprises that operate according to these rules.”

That is, according to the expert, the “root of evil” is buried in the Cabinet of Ministers and is a manifestation of too high centralization against the backdrop of a critical shortage of qualified personnel to manage each individual enterprise.

“The problem is that the government cannot dive into the specifics of each enterprise and effectively manage all state assets. No ministry has the resources to manage 3,000+ businesses,” the expert adds. “As a result, strategic and financial annual plans lie on the shelves for months and even years and remain unapproved. The productivity of companies, their competitiveness and, as a result, budget revenues suffer.”

Excessive influence of the state and corruption are called the main problems of the public sector by Andrey Shvadchak, legal advisor at Transparency International Ukraine.

“Practice shows that, basically, the state is an ineffective manager and owner, which is reflected in the neglected condition and unsatisfactory financial results of state-owned enterprises. It also creates space for corruption. According to the reports of the National Anti-Corruption Bureau of Ukraine, it is the heads of state-owned enterprises that in recent years remain anti-leaders in terms of the number of corruption abuses exposed by the department,” says the lawyer.

The elimination of all the above problems is stated as corporate reform.

The essence of the reform: each “child” has a “mommy”

We've described the big picture, but what exactly does this reform change?

“There will be few indicators, but how they (the companies - ed.) will achieve them, what profitability they should have, how much they should grow - this is up to the companies themselves to decide. It’s very similar to how it works in business: I set KPIs for the manager and the supervisory board, and they themselves approve business plans for how to achieve them,” said Deputy Minister of Economy Alexey Sobolev, who is responsible for this reform.

We also asked experts to explain the essence of this reform in simple words, so that even ordinary people far from the public administration sector (like you and me) would understand what we are talking about and why it is so important. And also to see what emphasis they will place in their assessments.

Andrey Shvadchak, legal advisor at Transparency International Ukraine, pays special attention to the decreasing role of the state in, in fact, state-owned companies.

“The key innovation is the deprivation of the state of functions unusual for it and the expansion of the powers of supervisory boards to approve key strategic documents of enterprises, as well as the appointment and dismissal of managers. The government will retain the authority to approve the financial and strategic plans of key state-owned enterprises, however, for no longer than three years. We are talking about subjects of natural monopolies (for example, Ukrzaliznytsia) or whose profits exceed 50 million hryvnia,” the lawyer provides more details.

Denis Shemyakin describes the essence of the reform in a similar way.

“The new law expands the rights of supervisory boards. At the same time, the state retains the function of owner. The concept of “state property policy” and the authority of the Cabinet of Ministers to approve it are being introduced,” says Mr. Shemyakin, “And the appointment of a manager or the approval of strategic and financial plans is the exclusive competence of the supervisory board, as far as possible in wartime.”

As a practical example, he describes a situation that we know from the saying “where there are many nannies, there is a crippled child.”

“The government had several thousand “children” that needed to be “looked after.” And now each “child” has his own “mom” (a supervisory board with real powers). But this “mommy” doesn’t steal responsibility. She shows the way to the “school”, but the “child” goes and studies himself - he approves the course that the head of the enterprise is following,” the expert explains what will change during the reform.

According to him, the changes open up opportunities for attracting professional specialists to leadership positions - the state will now be able to hire effective managers with market salaries. It is these “market wages” for unprofitable enterprises, and even during war, that cause the most criticism from the public. But the expert insists that this is a positive thing.

“I think this is a very positive step for state-owned companies. This is an opportunity to attract productive managers with real experience in running successful businesses,” the expert is confident. “In addition, the internal control system is being fixed: instead of audit commissions there will be modern tools - compliance, risk management, internal audit.”

However, for now the remuneration system for supervisory boards remains the same as it was before the reform - that is, it is not very transparent.

“The remuneration policy for members of supervisory boards has not changed and depends on the annual income of the state-owned enterprise. However, it is planned to develop a new remuneration system for members of supervisory boards, which should correspond to the market level,” adds Denis Shemyakin.

More freedom for management and own KPIs for each enterprise - this looks useful. But if this management works for the benefit of the company. Because freedom also increases corruption risks. According to the authors of the reform, there will be a special ownership policy and various safeguards against abuses by top management.

New ownership policy and safeguards against abuse

Andrey Shvadchak from Transparency International Ukraine describes how such fuses would work.

“As a preventative against ineffective work of the Supervisory Board, a mandatory assessment of its activities is provided at least once every three years. The procedure for conducting the assessment will be approved by the government, but at the same time, activity reports from independent consultants must be taken into account,” he explains. “This will become known later, because the government will be responsible for establishing safeguards regarding the unreasonable establishment of bonuses and surcharges.”

The government has yet to approve the remuneration policy for members of the supervisory board and heads of enterprises.

“It is there that the maximum amounts of bonuses and additional payments will be regulated. However, the law also provides that a person cannot be elected as an independent member of the supervisory board if his remuneration is his only or main source of income, the lawyer adds. — In addition, the reform provides for the approval of the “State Property Policy.” This is a document that should answer the question of why the state continues to own certain enterprises and what goals are set for them.”

Thus, we are already touching on the topic of privatization. Even before the large-scale war, it did not impress with its effectiveness, and now the prospect of large investments from the sale of outdated state-owned enterprises seems even less likely. In addition, in most cases, during privatization, it is not the enterprise itself that is purchased, but rather the land underneath it - and the plant or factory is simply cut into metal. Thus, the country lost entire strategic industries that we once inherited after the collapse of the USSR.

On the other hand, chronically unprofitable state-owned companies that themselves do not work and take money and resources from others is also not a very good story. Especially during the war, when we go with outstretched hands almost all over the world to “carol” to cover the “hole” in the budget (almost half the size of the budget). And a significant portion of these funds from donors will be used to finance precisely these worthless, expensive, but unprofitable state-owned companies, and for additional payments to top management and supervisory boards.

“Ownership Policy” is a key strategic document that contains the rationale for which enterprises should remain state property. This document sets the framework and defines expectations for government and business management, that is, where to focus in producing the products necessary for the efficient functioning of the economy. Conventionally, both the government and management will no longer doubt what purpose a state enterprise should work for - to produce weapons or to produce tractors,” assures the director of the Reform Support Team of the Ministry of Economy, who, in fact, supports the reform.

Andrei Shvadchak also supports the very idea of ​​reform, but is more skeptical about its practical implementation. After all, the “Property Policy”, which will show whether it is “zrada” or “victory”, has not yet been written and presented by the Cabinet of Ministers. However, the problem must be solved and preferably as quickly as possible.

“The absence of such a strategic document has led to a situation where in Ukraine there are thousands of business entities in the public sector of the economy, but every second of which is non-working, and only every sixth is profitable. At the same time, the functions of the owner of such business entities are carried out by more than 80 bodies and departments,” says Mr. Shvadchak.

Choice without choice

Experts agree that life itself is now forcing us to solve these dilemmas with the public sector. It is no longer possible to wait longer, because there are fewer and fewer resources, and more and more problems. And now, in addition, there are incentives from partners. The receipt of $1.4 billion from the World Bank depends on this and other laws that should “unload” the state, leaving only important and profitable companies under ownership. This is a “carrot”, which, if the reform is not implemented, turns into a “stick”, because it will be more difficult to close “holes” in the budget.

“This law has been in preparation for about 9 years. Changes were made carefully because they affected many stakeholders with their own pressure groups. International partners have accelerated this process, and Ukraine has come closer to the best practices,” assures Denis Shemyakin. “This reform is bringing the principles of corporate governance to the international standards of developed countries. Transparency in the management of state-owned companies is what our international partners expected from us. These changes were one of the components on the path to European integration, further cooperation with the IMF, the World Bank, this is an indicator of the Plan for the Ukraine Facility program."

However, he also admits that corporate reform is still far from a “happy ending.”

“The reform sets the fundamental conditions for a new management system. But its implementation in by-laws and practical implementation will have great weight. Thus, this law is only the first step on a long path of transformation,” the expert believes.

Andrei Shvadchak also believes that it is too early to evaluate the reform, although even the activation of this area is already good.

“The adoption of the law is, in particular, the adaptation of our legislation on the management of state-owned enterprises to the requirements of the EU, and this is already a positive impact from the point of view of our movement in the EU. We expect that the triage of state-owned enterprises (dividing into those that must remain in state ownership and which must be sold or liquidated) will attract private investment both in the development of these assets and in the budget,” the specialist assesses the prospects.

But there are also risks.

“The urgent problem is the lack of public information about state-owned companies. An insufficient amount of data significantly reduces the transparency of the work of state-owned enterprises, complicates public control and promotes corruption, the lawyer is sure. “The new law provides that requirements for transparency and disclosure of information about the activities of state-owned enterprises will be determined in the State Property Policy, and we will monitor their implementation.”

That is, the idea of ​​corporate reform is generally not bad. It not only solves our long-standing problems with the “twine” between the Soviet past and the European future, in which our entire state industry has been stuck for more than 30 years. But it should also bring money from partners directly into the budget, which is extremely important during a war. Of course, if this and other bills from the “package” from the World Bank are voted on and signed on time before the deadline comes.

But everything will depend on the “State Property Policy” and other decisions of the authorities. As they say, “the devil is in the details” - and this is exactly the case. The reform has not yet received its practical implementation from the Cabinet of Ministers, which is why it is difficult to assess its future impact as “treason” or “victory.”

The only thing that confuses us is that if the World Bank had not promised to transfer us 1.4 billion for the reform, then we most likely would not have begun to resolve this issue. And it is precisely this “state helplessness” during the war that is upsetting.