The privatization is not a panacea

Will the Ukrainian economy benefit from the sale of state-run enterprises?

We often hear from government officials that there are too many state-run enterprises in Ukraine and that their privatization will give a powerful impetus to investment influx and economic growth. Is it so?

One should look at the contribution of state-run enterprises to the Ukrainian economy, not at their number, which currently exceeds 3,000. Moreover, this contribution should be assessed not only as a whole, but also by sectors.

According to the Ministry of Economy, the share of state-run enterprises in the Ukrainian economy amount to just 13%. In the meantime, state-run enterprises are concentrated in the energy (Naftogaz, Energoatom, Centrenergo etc.) and transport (primarily Ukrzaliznytsia) sectors. Their contribution to the Ukrainian economy is estimated at 40.5% and 29.3% respectively.

State-run enterprises operating in these sectors are natural monopolies. What matters in this respect is not the form of ownership, but transparent and effective activity of national regulators, the National Commission for State Regulation of Energy and Utilities (NCSREU) and the Antimonopoly Committee, that regulate the activities of natural monopolies.

With weak (‘privatized’) national regulators, it doesn’t matter whether monopolists are state or privately owned. Hence, the privatization of companies of the energy and transport sectors where natural monopolies operate will not produce any tangible effect without proper actions of the national regulators.

In other words, the effective and transparent work of the national regulators will help increase the efficiency of natural monopolies even without the privatization.

When it comes to the industrial sector, the share of state-run companies is already minimal:

• mining industry — 6.5%;
• processing industry — even less, 4.7%.

These privately owned sectors get no investment; the processing industry has been declining since May 2019. And this is not because of the form of ownership, but because of poor protection of property rights and a lack of proactive industrial policy of the government.

Automatic privatization of the remaining miniscule share of state-run enterprises of the mining and, especially, processing sectors will trigger neither an influx of investment nor an expansion of export markets.

Therefore, the privatization is not a panacea.

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This column is published with permission of the author