Archive for August 22nd, 2017


Privatising the unprofitable

August 22, 2017

Over the past week, Rinat Akhmetov, via Ornex which is under the umbrella of his SCM company, acquired the 25% of government shares for sale in Zakhidenergo, Donetskenergo and Kyivenergo – entities in which he previously held shares, and thus the further acquisition comes as no surprise.

It is perhaps also no surprise that there were no other bidders in this public sale via the Innex Stock Exchange.  Such assets have a somewhat limited attraction.

23rd August will see the sale of 25% shares in Sumyoblenergo for which there is an unidentified bidder, and Donbasenergo which, perhaps understandably, appears to have no investor interest.  29th August will see 25% share sales in Odessaoblenergo which currently has also garnered zero interest, and on 31st August 25% shares in Dniprooblenergo and Dniproenergo may yet be sold – once again Mr Akhmetov already holding shares in the latter two.

In short, aside from Mr Akhmetov consolidating his ownership in these companies, there appears to be no other interest – be it foreign or domestic.

Woeful then, appears the outlook for any major privatisation – albeit each and every asset is naturally somewhat unique and therefore will perhaps appeal to some investors while not others – if they have any appeal at all.

Further some economic sectors are profitable and others (currently) not.

“Public goods” by definition are not likely to provide a direct return.  Ergo as such State enterprises, depending upon their role, will not necessarily provide direct returns to the budget – though indirectly they may.  Profitability is therefore not necessarily always the best benchmark for State enterprises.

Needless to say, of the almost 100 State owned companies entirely owned by the State, the banks are doing OK in the banking sector.

One of the other (currently) profitable sectors in which 100% State owned companies operate are oil and gas, and energy and engineering.  In fact these are perhaps the only sectors that make a profit outside of banking.

To be specific, according to Maxim Nefyodov, Deputy Minister for Economic Development & Trade, there are only 5 profitable companies – Naftogaz (UAH 22 billion), AMPU (UAH 4 billion), Ukrenergo (UAH 3 billion), Ukrhydroenergo (UAH 2 billion) and Yuzhny Design Bureau (UAH 4.5 billion).  The other 90+ companies makes losses.  (Figures rounded by the blog)

The other 90+ each do their bit in accumulating total losses of UAH 10 billion between them.

Thus those 5 companies provide a profit of UAH 26.4 billion when offsetting the losses of the rest.

Nevertheless an improvement on the figures of the previous year.

However, official government figures would state the asset value of the aforementioned 90+ State owned enterprises is UAH 1.4 trillion (as decrepit and woefully under-invested in it may be).  Thus a lowly UAH 26.4 billion profit is not exactly the return the State might expect – even accounting for any “public goods” that any of these entities may be involved in delivering.

Further, among the 90+ State entities in question there may be some that are too sensitive and/or of national security/strategic importance that may also be allowed to operate at a loss rather than privatising them or otherwise opening up the market – however a reader might suspect that qualifying bar being far too low to leap when considering the above figures.

A reader may well suspect poor management, lack of fiscal discipline, awful supply chain management, and a generous sprinkling of corruption as contributory causes to losses.  (After all economic indiscipline is not a knew phenomenon for Ukraine – it can’t (or won’t) even collect owed taxes from the oligarchy.)

Thus what to do in a particularly barren investor landscape?  From 90+ such entities, a reader could reasonably expect more than 5 to be profitable.

How many require State investment to provide the technology required to make them more efficient and more likely to be profitable?  Has the State identified those it will and those it won’t invest in?

Thus far changing the management has produced mixed results (with Naftogaz being a major beneficiary, whilst others continue to fail dismally).

Can any simply be closed?  (“Simply” being the operative word.)

Could and should any be put on the market, even if for a $1.00, with the usual contractual clauses relating to investment, employment etc to get continuous losses off the books – whatever the formal asset value?

For those that would part with a solitary Buck, but take on an otherwise very difficult investment and a market that may be anything from almost monopolistic to one that will be thrown wide open, would any investor that turned any of these entities around and thus make them profitable then find themselves on the wrong end of a court decision to reverse matters?

Even though the year’s figures are an improvement on those preceding, they remain very much a sobering snapshot of just how far there is to travel where the State control and management of its enterprises are concerned.

With privatising the unprofitable very unlikely, perhaps next year’s figures will be another improvement, -although the question perhaps should not be answered by UAH profit alone, but rather the profitable width of the base from which it is generated?

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