Are the state owned enterprises less profitable than the private ones? Research findings presentation www.ces.org.ua facebook.com/cesukraine twitter.com/ces_ukraine
Why should a state own an enterprise? The state can own the enterprises with two primary objectives in mind: 1. Financial obtaining a return on the capital employed As long as a state owns enterprises for the purposes of obtaining a profit, ROE (Return on equity) level has to be higher than that generated by private companies. The lower ROE can be stipulated by two factors subsidies related to certain social objectives or an enterprise inefficiency. 2. Social mission can be related to fulfillment of public service obligations. A state might have such obligations in the following spheres, for example: post (universal postal services), social services (services for disabled people), energy (power supply), transportation (connection to remote settlements), and banking (financial inclusion). 14.03.2018 2
State-owned enterprises efficiency Main reasons for the potential ineffectiveness of state enterprises: involvement in political schemes and corruption. 14.03.2018 3
State-owned enterprises efficiency The European Commission s research State-Owned Enterprises in the EU: Lessons Learnt and Ways Forward in a Post-Crisis Context demonstrates that private companies ensure much better results than the state-owned ones. According to this research results, enterprises in all sectors have less ROE if they are owned by a state. At the same time, during crisis periods, the state enterprises in half of the industries reported the profits almost on par with the private ones. 14.03.2018 4
Key indicators for state and private enterprises in Ukraine Indicator median value State enterprises Non-state enterprises ROE 2% 10% Registration Date 16/03/1998 26/12/2005 Revenue (UAH thous.) 7790 735.9 Assets (UAH thous.) 9336 551.8 Number of Employees (persons) 72 3 Accounts Payable (UAH thous.) Current Liabilities (UAH thous.) 282 9.8 2626 109.5 Sources: CES calculations based on YouСontrol data 14.03.2018 5
Variable Coefficient Standard effor State enterprise -2.9085*** 0.7386 Registration Date¹ 0.0012*** 0.00003 Number of Employees (logarithm) -1.956*** 0.0406 Capital (logarithm) -0.6295*** 0.0329 Assets (logarithm) -4.7178*** 0.0413 Revenue (logarithm) 6.7146*** 0.0384 Private Enterprise 1.9646*** 0.2266 Limited Liability Partnership 0.9437*** 0.2063 Farm Enterprise 5.1919*** 0.3276 Municipal enterprise -1.8014*** 0.3941 Foreign Enterprise 0.9682 2.4916 Municipality -0.2354 0.1707 Accounts Payable (logarithm) -0.0796*** 0.0172 Current Liabilities (logarithm) 0.748*** 0.023 Wholesale Trade (except vehicles and -0.3481*** 0.1558 motorbikes) Agriculture, Hunting, and provision of related 7.1659*** 0.2633 services Real Estate -3.1034*** 0.1989 State enterprise in the sphere of Agriculture, -11.8831*** 2.9313 Hunting, and provision of related services Constant -9.7321*** 0.3957 Number of observations 194650 R^2 0.084 CES Model results Dependent variable profitability (ROE, %) [1] January 1, 1970 as a zero value Each following day equals one unit. Dependent variable profitability (ROE, %) * significant coefficient on 95% confidence interval *** significant coefficient on 99.9% confidence interval Sources: CES calculations based on YouСontrol data 14.03.2018 6
Ukrainian Realia Based on such analysis results, if we assume that each of the state enterprises generated 2.9% less profits in 2016, it should mean the state, as an owner, had lost around UAH 4.93 bln during one year only. 14.03.2018 7
Ukraine vs EU Obtained results for Ukrainian state-owned enterprises deviate from European figures due to the following factors: Private enterprises conceal profits to evade taxation Underdeveloped credit market Almost non-existent stock market Similar effects in various sectors of EU economy: from 8 to 32 percent. 14.03.2018 8
Conclusion Obtaining of profits cannot sufficiently justify state ownership of enterprises in Ukraine Based on the analysis results, we have arrived at a conclusion that the state owned enterprises in Ukraine demonstrate less ROE levels than the private ones. E.g., in agricultural sector 14.8 percent 14.03.2018 9
Are the state owned enterprises less profitable than the private ones? 36D Saksahanskoho Str., Kyiv, 01033, Ukraine Tel.: (044) 492-7970 office@ces.org.ua www.ces.org.ua facebook.com/cesukraine twitter.com/ces_ukraine