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Concession - A Chance For Non-Privatized State-Owned Enterprises To Survive

The harmful practice of subsidizing unprofitable enterprises from the budget needs to be done away with. It does not make sense to privatize "negative costs," so it might be more expedient to just close the enterprise. But what if there are hundreds of thousands of jobs that are moving to Poland tomorrow? As international experience shows, the only solution is to bring such enterprises to self-sufficiency and positive capitalization by transferring them into concession and liberating management from the "chains" of bureaucracy and state corruption.

Concession - one of the key forms of public-private partnership in the modern world today - is undeservedly forgotten when discussing the future of state-owned enterprises and plans to reduce the role of the state in the economy. In Ukraine, there is much to reduce: as of 2018, the share of assets of state-owned enterprises in agriculture was 70% (!).

The main difference between a concession and privatization is preservation of the right of ownership and disposition of the state-owned enterprise with transfer to the investor of only the temporary right to use/manage it. This form of cooperation, on the one hand, provides for preserving strategic assets in the field of public administration, and, on the other, facilitates development of an effective system for managing state-owned enterprises.

Approval by a ministry of a financial plan for each state enterprise can often be delayed for non-objective reasons. The impossibility of deviating from the plan, as a result of external changes, makes this model archaic – merely an improved version of Soviet or Chinese five-year plans. Inability to make operational changes in the composition of the board and its payment/remuneration system, mandatory approval by the ministry of all bank loans and liabilities issues, obligatory rates of dividend payment to the detriment of capital formation, et cetera make management of state-owned enterprises extremely rigid and prevent them from responding quickly to challenges.

This problem is not new. Everyone has been talking about it in the last five years – government officials, parliament deputies, foreign partners and advisers. Each year for five years Ukraine has been preparing for large-scale privatization and wound up implementing this budget line item by 0.1-0.2%. Objectively speaking, the process of large-scale privatization is just ahead of us.Ukraine's Economy and Finance Ministries have long approached the development of a new methodology for evaluating state enterprises. But the methods developed and already introduced by them into the legislation do not take into account the peculiarities of a number of enterprises, which are usually referred to as "non-privatized."

First of all, we are talking about enterprises with some social obligations. An even larger share in the general pool of "non-privatized" enterprises is made up of enterprises with negative value. Offering private business to pay for an enterprise that costs less than the debt it has collected a priori makes no sense. The Agrarian Fund belongs to the pool of such "non-privatized" enterprises. Despite its significant success during the last three years, due to the high weighted average cost of capital of 17% (taking into account 14.25% interest on bonds incorporated in operating capital and 22% of the value of commercial loans), it still has not managed to complete provisions to recoup losses related to the unauthorized actions of the previous management. After losses incurred during 2014 - UAH 2.5 billion due to the liquidation of Brokbusinessbank and Radical Bank - the uncovered loss that persists today amounts to about UAH 1.5 billion. Approximately the same amount - UAH 1.5 to UAH 2 billion – would be the actual cost incurred by government if it decides to liquidate or privatize the Agrarian Fund.

The Agrarian Fund would fetch about UAH 3 billion if the government put it up for sale. The minimal direct loss to the Finance Ministry would be UAH 2 billion, as the difference between the cost of government bonds contributed to our charter capital of UAH 5 billion and the current value of the company calculated by DCF-model.

At the same time, because of the bureaucratization of approaches to managing the Agrarian Fund, like any other state-enterprise, is forced to develop more slowly than it would otherwise. Its management structure and operations are far less effective than they could be. A concession arrangement in this specific case the best solution. In addition to affording management of the Agrarian Fund new grants of authority and flexibility – with obligations not less than in the private sector to generate profits for investors (in the defined proportions – to the Finance Ministry and the concessionaire), it would support stable prices for flour products and provide agrarians with fertilizers and loans for sowing groups. It is important to note that the social functions of the Agrarian Fund defined its charter would remain the same.

As for the future investor who becomes a concession owner, the best cooperation format could involve two scenarios: 1) covering losses in the balance sheet of the Agrarian Fund over the term of the concession and parallel payment of from 30% to 40% of generated profits (after forming reserves on losses from previous years), or 2) covering complete costs of servicing bonds issued for creating authorized capital. Keep in mind that the term for the turnover of these bonds will expire in September of the current year, that is, they will have to be refinanced at rates prevailing in the market today. This is at least 21% to 22%. This means the annual cost of servicing the authorized capital of the Agrarian Fund for the state will increase from the current UAH 715 million to UAH 1 billion.

Against the background of all public finances, this is not a significant increase in the burden on the budget. It is namely these small gaps which create the huge chasm that today lies between the tax system of Ukraine and, for example, those in New Zealand or the United States.