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Stability and Work for Defense: TOP-50 Profitable State-Owned Enterprises

31 October 2019

Stability and Work for Defense: TOP-50 Profitable State-Owned Enterprises

YouControl has found out in which fields the TOP-50 most profitable state-owned enterprises operate, for how long they have been in the market, where they are located and whether they consistently demonstrate such successful work.

Currently in Ukraine there are about 3,2 thousand state-owned enterprises. For comparison in Poland, according to data of 2016, there were only slightly more than 300. In most European countries there are only a few dozens of enterprises in which the state owns the largest share. And in the USA, Australia or Japan they can be counted on fingers of hands. It seems that the direction of movement for Ukraine is obvious, and the authorities also have plans to reform the sphere of state property management. It is planned to privatize some state-owned companies, the more so because the list of institutions banned for this procedure has been canceled recently. Some enterprises will be liquidated or reorganized. Changes in the public sector will take years. But until then SOEs will continue working as before – one part with impressive losses and the other one with decent profits.

Recently the Ministry for Development of Economy, Trade and Agriculture of Ukraine has published the list of 50 state-owned companies with the highest net profit in the first half of 2019. It contains big names: “Ukrainian Railways”, “Naftogas”, “Ukrposhta”, “Enerhoatom”, “Antonov”, the airport “Boryspil”, several regional power companies, etc. But it is interesting to know in what fields the most profitable state-owned enterprises operate. For how long have they been in the market and in what parts of Ukraine are they located? Do they constantly work “net positively” and what are the features of their work in general? Analysts of YouControl, the system for checking of counterparties, and industry experts were searching answers to these questions.

Among Successful State-Owned Enterprises There Is the Largest Number of Transport and Energy Companies

As many as 18 state-owned companies from the TOP-50 are involved in the transport market and 6 of them operate according to the KVED (classifier of types of economic activity) “Manufacture of air and spacecraft and related machinery”. At the same time five most profitable state-owned enterprises built up a “fortune” on electric power distribution, three more – on its production, two – on transmission and one – on trade. Therefore this field, together with thermal power, “brought together” 12 most successful state-owned companies. They are followed by the industry most enterprises of which work on the production of weapons and ammunition.

If we pay attention to the total profit of companies by certain fields, then the field of management, to which “Naftogaz” belongs, will become the leader. Only its profit of almost 24,3 bln UAH and the first place among the TOP-50 most successful state-owned enterprises left no chance for anyone else. This also proves that “Ukrenergo”, which occupies the second place, is 13 times behind in terms of profit level.

Why are these, not other, fields of activity presented in the TOP? The Candidate of Economic Sciences, a lecturer of the Zaporizhzhia National University Kostiantyn Denysov offers some explanation: “There are a lot of energy and defense enterprises in the TOP-50. The former are natural monopolists, the latter are in high demand for their products in view of the war against Russia and the export potential of Ukrainian weapons.” In the expert’s opinion, those state-owned enterprises engaged in the manufacture of unique (SE “Antonov”, printing company “Polihrafkombinat “Ukrayina”) or high-tech products (construction design office “Konstruktorske biuro “Luch”) also took their place in the rating.

It is also interesting to whom the most successful SOEs (state-owned enterprises) are subordinated. Considering the war that has been going on for 5 years, it is not surprising that the governing body for 20 institutions out of the TOP-50 is UkrOboronProm. Among these twenty enterprises there are “Antonov”, “Artem”, “Ukrspecexport”, “Specoboronmash”, etc. 9 more state-owned enterprises are subordinated to the State Property Fund of Ukraine (among them there are several regional energy companies, “Odesa Port Plant”, etc.) and 6 – to the Ministry of Infrastructure of Ukraine.

Concentrated in the Capital and No Longer Newcomers

Most, 27 to be precise, state-owned enterprises from the TOP-50 are registered in Kyiv. However some of them have a diverse geography of units. Among them there are “Enerhoatom” (about 20 units, including large nuclear power plants in Zaporizhzhia, Khmelnytskyi and Rivne regions), “Ukrainian Railways” (almost 40 units), “Ukrposhta” (about 30 units). And “Ukrspecexport” from the capital has representative offices even in Pakistan, China, Algeria and Egypt.

And among Ukrainian regions, except Kyiv, the most successful state-owned enterprises represent Mykolaiv and Kharkiv regions more often than other regions.

The “base” of state-owned enterprises in Ukraine was formed in the 1990s, the largest part of the TOP-50 most profitable enterprises were registered at that time. From 1991 to 1999 33 companies out of 50 were created. 12 state-owned enterprises “originate” from the 2000s, and five were registered in the 2010s. But a part of the companies are newcomers only at first glance.

For example, trains of “Ukrainian Railways” have been familiar to us for decades, but the date of creation of the company according to the register is 2015. In fact, in 2014 the government issued a decree by which it created the public joint-stock company “Ukrainian Railways” through the merger of Donetsk, Lviv, Southern, Odesa, Southwestern and Cisdnieper Railways, as well as several other institutions. And only on October 21, 2015 state registration of the state-owned company took place. And, for example, SE “Ukraine Sea Port Authority”, whose creation in 2013 was the result of the reform of the maritime industry of Ukraine, is the successor of twenty other companies-oldtimers.

Most Are Steadily Profitable and Engaged in Export

28 state-owned enterprises from the TOP-50 most profitable ones were included in the list for the first half of 2019 not accidentally – this is a stable result of their work. All of them were profitable during 2013-2018, sometimes even with a minimal “plus” in the work.

At the same time in the TOP-50 there are those who have been operating at a loss for three or even four years out of five analyzed years. Among them there are:

•  “Ukrposhta”;

•  “Odesa Port Plant”;

•  “Zaporozhye Aluminium Combine”

•  “Kherson Combine Heat Power Plant”.

Therefore, these and other state-owned companies, which had been unprofitable for 1-2 years during 2013-2018, either re-thought their work strategy or made other changes that allowed them to become more successful. But premature conclusions should not be drawn. It is necessary to wait for the end of the financial year to fully understand whether they have entered a new trajectory of profitability.

An important role in the positive financial indicators can have been played by the fact that most of the TOP state-owned enterprises are engaged in international trade. During 2018 25 companies exported their products abroad. At the same time seven of them did so in volumes of billions (“Antonov”, “Turboatom”, “United Mining and Chemical Company”, “Specialized Foreign Trade Firm “Progress”, “Ukrspecexport”, “Spetstechnoexport”, “Naukovo-vyrobnychyy kompleks Hazoturbobuduvannia “Zoria – Mashproekt”). During the first half of 2019 23 out of 50 state-owned enterprises exported their goods. The list of those whose profit from it exceeded a billion over the past six months is almost the same as in 2018 except for “Turboatom”. These six exporters mostly sold weapons, aircrafts, engines and other components, as well as various ores.

One Fifth of Them Do Not Pay Salaries In Time and One Enterprise Is a Bankrupt

It turns out that profitability is not an indicator of responsibility of state-owned enterprises. In 2019 10 companies from the TOP-50 had salary debts, some of which had been accumulating and lasting for months. “Odesa Port Plant”, “Kherson Combine Heat Power Plant”, “Ukrainian Railways”, “Administration of the Ukrainian Seaports” and “Zaporizhzhiaoblenergo” turned out to be the largest debtors. Throughout the year in different periods information emerged that they had debts of over one million UAH to their employees.

Despite the success of work, not everyone hurries to pay taxes. Currently 44 companies do not have debts, but six companies did have debts as of October 1, 2019. Among the debtors there are  “Zaporizhzhiaoblenergo”, “Kharkivoblenergo”, “Kherson Combine Heat Power Plant”, “Kyyivskyy Avtomobilnyy Remontnyy Zavod”, “Kyyiv-Dniprovske mizhhaluzeve pidpryiemstvo promyslovoho zaliznychnoho transportu” and “Ukrposhta”. In general, they owe almost 878 mln UAH to the tax inspection.

But the situation with “Kyyivskyy Avtomobilnyy Remontnyy Zavod” is the most interesting. There are data on its bankruptcy. In addition, the “Report on declaring a debtor bankrupt and starting the liquidation procedure” appeared in 2014. Since then the company has been actively selling its property and even became profitable in the first half of 2019.

What Affects the Level of Profit of State-Owned Enterprises in General?

The high profitability of certain state-owned companies is ensured by the exclusive monopoly position in the markets with constant demand for their goods and services. Another reason for the success of some state-owned enterprises is the arrival of new management teams that have been able to rebuild their business models to be more viable in terms of profitability. It is also worth mentioning the favorable market conditions that have developed in certain industries. For example, the profitability of SE “Boryspil International Airport” has increased due to the visa-free regime and the building up of a passenger flow,Roman Kornyliuk, the Candidate of Economic Sciences, a financial analyst of YouControl, explained.

At the same time, according to the expert, most other companies of the public sector are not able to show high indicators of profitability. This happens because of operational inefficiency, management unprofessionalism or its conscious unwillingness to improve the efficiency due to the corruption element. In addition, often the actions of more efficient competitors from the private sector do not contribute to the growth of the market share and revenues of such companies.

In addition to the size of the market and the presence of competitors, several factors are very important for such SOEs. They are the quality of assets, the possibility to approve and implement investment programs for upgrading or expanding assets and the possibility of cross-subsidizing (non-profit activity at the expense of the profit one), as well as collecting a share of revenues in a foreign currency. It is interesting to know that quite a large share of successful SOEs are PJSC, JSC and OJSC. Therefore corporate governance is also important for the success in the market,Oksana Zatvorytska, a project manager of “Egis Ukraine”, is convinced.

The fact that management plays an important role is confirmed by another expert, he gives additional conditions for success or the opposite result. “Different destinies of state-owned enterprises are caused by unequal possibilities of the top management appointed by the Cabinet of Ministers and different interests of the financial groups standing behind the management of state-owned enterprises. If the top management wants to withdraw excess profits from taxation to offshores, such an enterprise becomes “unprofitable”, Andrii Martynov, a leading researcher of the Institute of History of Ukraine of the National Academy of Sciences of Ukraine, explained.

Is Profitability Paramount for SOEs and Where Should Reforms Move?

State-owned enterprises do not always set earning as much money as possible to be their primary goal. Often they face more important, even strategic, tasks. For example, state-owned enterprises such as “Ukrainian Railways” or “Ukrposhta” perform an important social (communicative) function, according to Andrii Martynov. And according to Oksana Zatvornytska, the goal of activity of these companies and their targets have to correlate with the aims of public policy (equal access to infrastructure, security of these facilities, implementation of innovations).

“Of course, not for all state-owned companies profit is the main goal. For example, a public service company does not have to include excess profits in the tariff at the expense of the population itself. However export-oriented, high-tech companies that represent the interests of the state abroad have to be profitable and super-profitable,Vitalii Opanasiuk, the Candidate of Economic Sciences, Docent of the Faculty of Economics of the Kyiv International University, said.

So where should the reforms of these enterprises move? To look for better management, reorganization or privatization? How farsighted and logical is to put strategically important state-owned companies into private hands? And whether anyone at all will be willing to invest in them?

If there are financial and industrial groups interested in buying, for example, nuclear power plants, they will definitely add them to their business empires. Moreover, safety issues, timely appreciation of equipment will be sacrificed. We have to be careful with the privatization of natural monopolies. For example, such a monopoly is “Transgas”, because it is impossible (it will cost 100 bln dollars and take 15 years) to build a gas transportation system competitive with the existing one. Of course, such property may be unnecessary in case of absence of a gas transit contract. At the same time capitalization of such an enterprise will be equal to the price of scrap. It is hardly possible to find a strategic investor for such enterprises,Andrii Martynov is convinced.

But even if a buyer appears, are there any guarantees that privatization will bring fundamental positive changes to the enterprise?

Not always a change of ownership brings development. “Zaporozhye Aluminium Combine” from the TOP-50 list can serve as an example. It is a unique aluminum production enterprise that was sold to Russian business, driven by it to bankruptcy and subsequently taken back by Ukraine into state ownership. Reforming government assets can go two ways: changing a form of ownership or changing a model of management. The latter involves revision of financial policy standards (today SOEs pay 75% of their net income to the budget, that reduces their investment opportunities), management systems (abolition of their subordination to many regulatory bodies), principles of remuneration and awarding management with bonuses (introduction of the approach “pay for the result, not activity”),Kostiantyn Denysov, the Candidate of Economic Sciences, a lecturer of the Zaporizhzhia National University, explained.

At the same time there are other examples when the state had a detrimental effect on its property and prevented it from developing. So isn’t privatization the best way out in such cases? “The economic history of North Korea, Cuba, Venezuela shows that the state as the owner is inefficient because of materialization of the risk of collective irresponsibility at the simultaneous ensuring high levels of corruption rents for the interested parties. We should not be afraid of selling even profitable companies to private investors, as the new owner will be personally interested in increasing profitability and efficiency. As a result, there will be less corruption, more new jobs and state budget revenues,Roman Kornyliuk assured.

Read also: Big Sale: Which Titbits Will the State Privatize?

Not by Profit Alone: What Other Financial Indicators of a State-Owned Enterprise Are Worth Finding Out About

Profit is just one of the important financial indicators of any enterprise, including a state-owned one. Its revenues, assets and liabilities, results of participation in state tenders and the history of financial indicators over the past years are also interesting to consider. You can learn all this from the section “Finance” in the company card of the YouControl system.

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