7. State-Owned Enterprises
The Government of Ukraine operates 1,600 state-owned enterprises (SOEs) out of 3,358 registered SOEs, with an economic output of approximately ten percent of GDP. While the government lists 3,358 enterprises, more than 1,700 of them no longer operate as profitable businesses. SOEs in Ukraine are defined as companies which the state owns at least 50 percent +1 share. SOEs are active in areas such as energy, machine-building, and infrastructure. There is no common public list of all SOEs in Ukraine and each ministry publishes a list of SOEs under its respective management. The Ministry of Economic Development and Trade periodically updates information on annual financial reports of significant SOEs (100 of the largest SOEs), which it publishes on the ministry website.
The corporate governance law, which entered into force in 2016, requires SOEs to publicize annual financial reports and disclosures on official websites, including information on financial indicators, company officials, transactions, etc. Ukrainian law also stipulates that SOEs publish their annual financial statements and audits. In 2018, the government of Ukraine stepped up its corporate governance reform efforts, and created supervisory boards in strategic SOEs. Strategic SOEs, including Ukrzaliznytsia, Ukrenergorynok, Ukrposhta, and Ukrenergo, have selected independent and government board members. These reforms have been an important step in improving the management, efficiency, and responsiveness of the companies.
Most SOEs rely on government subsidies to function and cannot directly compete with private firms. Several SOEs capable of making a profit have already been privatized, and the result has been that mostly inefficient firms have remained in government hands. The Government of Ukraine heavily subsidizes its state-owned enterprises (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has supported debts of many SOEs with sovereign loan guarantees. SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.
SOE senior managers traditionally report directly to the relevant Ministry. Ukrainian law specifies that ministries are not permitted to interfere with the daily economic activities of an SOE, but numerous anecdotal reports indicate that ministries and vested interests ignore this restriction. The Cabinet of Ministers has the power to decide on the creation, reorganization, and liquidation of SOEs, and to adopt and enforce SOE charters. It can delegate this authority to relevant ministries supervising the SOE. The Cabinet of Ministers may also delegate to ministries the permission to create joint ventures with state property and prepare proposals to divide state property between the national and municipal levels.
In March 2018, the government began implementing a new law on the privatization of state property aimed at attracting more investors. The legislation allows investors to settle disputes under international law, makes it obligatory to employ international advisers for the sale of larger firms, and bans Russian and off-shore companies from participating in the privatization process. Despite the launch of the new law, the government did not complete a single large-scale privatization in 2018.
On May 3, 2018, the government approved a list of companies designated for sale. The list contained 26 SOEs, including several regional energy providers, or oblenergos, the Odesa Portside Plant (OPP), and electricity generator Centrenergo. With the exception of Centrenergo, sales of the remaining SOEs were targeted to proceed under terms of the new law signed in 2018. Of the 26 companies designated for privatization, the government initiated advisor tenders for six companies in 2018. Five of these tenders were challenged by competitors believed to be acting on behalf of vested interests. As of 2019, the five advisor appointments remained stalled. A lackluster interest and poorly-prepared bidders led to the government’s decision to cancel the sale in late 2018 of the sixth company, Centerenergo, despite a promising start to the process. In 2018, Ukraine’s central budget received only UAH 0.3 billion (USD 11 million) from privatization, comprising only 1.4 percent of the original plan.
The GOU approved a revised list of 21 SOEs designated for privatization on January 16, 2019. The 2019 list excluded most utility companies due to a government decision to transfer the utilities to a communal ownership structure. The government also approved a list of smaller-scale SOEs to put up for sale in 2019.
The State Property Fund (SPC) oversees privatizations in Ukraine. The rules on privatization apply to foreign and domestic investors and, theoretically, a relatively level playing field exists. Observers have cited, however, numerous instances in past privatizations where vested interests influenced the process to fit a pre-selected bidder. Despite these concerns, the government has stated that there would be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations.