Archive for May 3rd, 2012

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Naftogaz reorganisation and the role of the State in development

May 3, 2012

The Ukrainian loss making State owned behemoth that is Naftogaz Ukraine is about to get broken down, reorganised but not, as the EBRD have stated is necessary over the years, privatised.

Actually that may not be quite accurate, there are certain parts of Naftogaz that are now legally banned from privatisation and others that quite possibly could be privatised.

What has been legally banned from privitisation, be it existing or newly created entities within the Naftogaz structure we are about to receive, is the following:  Any part of the organisation that transports gas via pipeline through either trunk or distribution pipelines,  underground storage facilities and Naftogaz itself.

Now you may think that leaves nothing to be privatised or partially privatised, but Naftogaz is a behemoth as I state.  There is nothing to state that the Naftogaz subsidiaries such as exploration, transport, logistics (etc) entities under the umbrella of  Naftogaz, are off limits to privitisation that I have found within the newly signed law.

All I can see is that the gas transport system, gas storage facilities and umbrella/holding company will remain State owned and legally cannot be privatised.  This press release would seem to confirm that.  The rest of the organisation’s subsidiaries, as far as I can tell, could well be privatised at some point in the future or indeed closed and their roles put out to private sector tender.

It is not unusual in Ukraine for the government to keep possession of certain parts of the nation’s infrastructure.  Airports for example.  The terminals and all integrated bits and pieces necessary to make an airport run can be owned or leased for long periods privately, but the runways remain the property of the State.  The reason being, apparently, is that should there be a war, the State has immediate access to, and control of, all runways of Ukraine.

This goes someway to explaining many fairly nice and new modern airport terminals with runways that resemble suffering multiple IED incidents.  The terminal owners are not overly keen to maintain a State owned runway when it is really a State responsibility.  Likewise, the State know if they wait long enough, the terminal owners will eventually do something, even if it is the absolute minimum, to keep the runways serviceable.

Putting aside the inevitable conflicts and derelictions of responsibility where State meets private sector in Ukraine, it is possible to understand the retention of certain infrastructural assets by the State even if some would disagree with State ownership.  Some prefer no State involvement, others possibly limiting it to a “golden share” scenario in any privitisation, and yet others are more inclined to give the State legal powers to simply take control of such assets in times of national emergency and rely on State regulations during times of peace. – Different nations use different models, some use all the models I have mentioned and more in different areas of the national infrastructure and for different reasons.

Your position is probably based on how narrow or broad an economic definition you would give to what is “public goods” and what you consider is a national strategic asset.

This brings us to the tricky issue (or not depending on how hard your views are) of the role of the State in national development, and in the case of Ukraine, it is probably fair to say it falls on the developing nation side of the line rather than that of developed, despite any infrastructural legacy of the USSR.

I would say it probably actually sits on the line and falls completely into neither the standard definition of developed or developing, as far as nations go.

If we compare Ukraine to the USA or Japan (or other similar “Old EU” nations) the development path is likely to be far harder and less swift but for reasons that we may not immediately recognise.  It will be easier to blame the government (of which ever party is in power) for the lack of progression to reach those “Old European” standards, than it is to look back at the histories of the nations we are comparing them to and how they achieved their development successes.

Suffice to say, the State did have a big hand to play in those successes and in a far less globalised world, be it  economically, business-wise and through international laws.

Nations like the US, UK, Germany, France, and others succeeded in creating a far better entrepreneurial climate than Ukraine.  There is no denying that.  Ukraine still manages to kill off much of the white economy and white entrepreneurs through the bureaucratic and corrupt legacies inherited from the USSR.  Thus there is a large black economy, large black entrepreneurial base and a middle class that is small and in many cases un-auditable when it comes to discovering quite how their financial status and social strata has been achieved.

However, we must also recognise that the successful nations had State interference that created protectionism, subsidies and generally unfair trade conditions whilst building their developed nation status.  Even today we can watch Senate economics hearings via live podcasts where economists will sit and plainly state the the US is a protectionist economy.  The EU single market by nature and design is protectionist.  There are subsidies galore for alternative energy R&D and alternative energy companies to give a modern, contemporary example.   The controversial Common Agricultural Policy within the EU is yet another.

Such examples are bountiful when looking at the histories of the developed nations I have mentioned so far when it comes to insuring the establishment of a domestic sector via State protectionist practices before allowing a more liberal attitude.

The UK for instance even went as far as only allowing trade with other nations if the cargoes were carried by British ships.  The US upon independence imposed incredibly high tariffs and import taxes in order to allow the newly founded nation to develop internal producers and demand for the internally produced goods.  Even in the 1920’s the US maintained the highest import tariffs in the world, second only to Spain at the time.

German unification under Von Bismarck also brought with it incredibly high importation tariffs whilst Germany evolved internally through the State’s protectionist policies.  State manipulation occurred again when East and West Germany unified.

Where Germany differs from the UK and US under Von Bismarck, is simply that the State at the time was driven by an elite who wanted industrialised development and entrepreneurial classes, where as the UK and US did it via democratic governance.

I could go on and on and list developed nation after developed nation that has employed protectism for prolonged periods to reach the their developed status and not just within Europe or citing the US, but you by now get what I am pointing you towards.

Protectionism is not an option for Ukraine, at least to the scale and over the prolonged period of time that the “model developed nations” employed it.  Membership of the WTO, having to cede ground with the World Bank, IMF and others who have vested interests in Ukraine being opened up for the existing developed nations to enter, quite simply makes this a non-starter.

Ergo the protectionist policies that have allowed others to develop steadily and robustly whilst retaining absolute sovereignty beholding to none, have been replaced by the slower, liberal and politically manipulable  method of foreign direct investment (FDI) to only open and liberal developing nations.

Now I have no interest in protecting or attempting to justify the 20 years of continually wrong or poorly thought out policies of successive governments in Ukraine,  nor their consistently corrupt  practices when it has been their turn at the public trough.  Undoubtedly they, each and every one of them, have personally contributed to the lack of progress in Ukraine along with many of those they have appointed to run the agencies of State.

However, they are also not to blame for the time in history and global attitudes they have led Ukraine through, and having hoped to cast a light on the very different development paths available to those who have made it and those who are still in the process (now matter how retarded that process seems) maybe we can see some reasons why Naftogaz will remain a State owned company, why some subsidiary parts will not be privatised, why subsidies will continue to occur within the Naftogaz arena to the angst of external actors and why so much loss making infrastructure will remain, for want of a better label, “public goods” or deemed “strategic”.

Having written all of that, much of it still does not sit well with me as far as excessive State intervention is concerned, but as Aristotle put it, and who am I to argue, “It is the mark of an educated mind to be able to entertain a thought without accepting it”.

That said, much of what seems to be the modern agreement between State and society (not only in Ukraine) doesn’t sit well with me either.  I have the worrisome feeling that we as a society are far too keen to dump our personal responsibilities on the State and that the State in turn is far too keen to take them on.  Maybe it’s an age thing?

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