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Subsidising corruption

September 15, 2015

In a recent entry pondering the lack of adult to adult conversation between government and constituency over impending privatisations, the following paragraph appeared:

“Of the 1200 plus State owned companies, the vast majority are badly managed and subsidy dependent. The drain to the Ukrainian budget in subsidies is in $ billions for a nation whose GDP is measured in $ billions. Grim!”

Whilst the issues of subsidies and the privatisation of State assets (or perhaps in most cases more accurately described as State liabilities) are yet to be meaningfully discussed with the public, there appears to be one economic sector that is already in a position where substantial subsidies can be removed.

Of the subsidised sectors of the economy, the font of major league Ukrainian corruption – the energy sector – is a major drain.  A staggering 10% of GDP in 2014 is likely to have gone into the Ukrainian energy sector by way of State subsidies.

subsidy

As subsidies exist to cover the difference between actual price and market price, that 10% of GDP may as well simply be given to the oligarchy that control the limited access energy market, for the benefits to Ukrainian society of these subsidies are now difficult to quantify.  With the IMF forcing the current government to move energy pricing to more than meet production costs there is surely an economic imperative to cancel all subsidies to the energy sector immediately.  Now.  Instantly.

When the energy sector is the gilded font from which so much economy warping corruption flows, how can any Ukrainian politician claim to be tackling corruption when in effect, the Ukrainian politicians are subsidising corruption to the tune of approximately 10% GDP in the energy sector alone?

Without completely removing subsidies from the energy sector it seems impossible to make any claims to be effectively combating corruption.  Therefore in continuing to subsidise the energy sector it is to continue to subsidise corruption, and thus the Ukrainian State is subsidising the undermining of the rule of law, and thus democracy – notwithstanding the Ukrainian economy.

Let’s be blunt, by immediately saving (approximately) 10% of GDP via the immediate and complete removal of energy subsidies, throwing about 3% of GDP in cash payments to the poorest Ukrainian constituents would be sufficient for them to cope with the rising unsubsidised energy prices and still leave the State with another 6% or 7% to invest in energy efficiency, or energy exploration – or something entirely unrelated to energy.

With the government dutifully fulfilling its agreement with the IMF and complying with its obligations regarding consumer price rises in energy, all subsidies for the energy sector have to end – for with ending those subsidies a significant amount of corruption will also be curtailed.

When the Ukrainian constituency begin to feel the effect of the long announced price rises as the colder months approach, it stands a chance of being shouldered and accepted with more understanding in the absence of all subsidies within the sector, a redistribution of some of those savings to the poorest to cover the costs, and the effective and transparent and well communicated investment of what remains into the development of the nation.

Subsidy removal within the energy sector is therefore perhaps a worthy benchmark when it comes to both energy and economic reform but also in combating corruption.  If nothing else removing subsidies from the corrupt energy trough means there is less to gorge upon for those with access.

We are perhaps left to wonder when there will be a governmental announcement that all subsidies within the energy sector have stopped – permanently and in their entirety.

 

 

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