How to increase investments in the Ukrainian economy through privatization?

The sale of state-owned enterprises to foreign investors will encourage the attraction of private investment, which is a key driver of economic growth. Moreover, the success of investment attraction depends on the method of privatization and on who will be the new owner of the enterprise.

This conclusion is made by the analysts of the Center for Economic Strategy, the authors of the analytical note “HOW TO INCREASE INVESTMENTS IN THE ECONOMY OF UKRAINE THROUGH PRIVATIZATION?”

Based on the foreign experience and research of privatization practices in Ukraine, the authors of the analytical note indicate the following factors that contribute to the successful work of a state-owned enterprise after its sale to a private investor:

Buying an enterprise by a foreign investor;

Absence of previous relations of the buyer with the activities and management of the company;

Substitution of the previous managerial staff;

Minimization of control and share of the enterprise in the property of the state after its privatization;

Increase of a competitive pressure as a result of loss of the state support and equalization of rules of the game;

Providing guarantees and respecting the property rights of buyers of state-owned enterprises;

Transparency of the contract and reduction of information asymmetry.

In particular, the study [1] of the privatization effects in Ukraine shows that during 6 years the state-owned enterprises were able to increase productivity by 16-18%. The effect of privatization for the enterprises acquired by foreign buyers was by 17-33% higher compared to the enterprises purchased by national owners. It is worth noting that this effect was much weaker for the enterprises bought by owners from offshore countries and Russia.

Now, with the start of a new wave of “big” and “small” privatization in Ukraine, it is too early to state for sure about the amount of investment. It would be possible to estimate its amount in 5-10 years. However, the new procedure with open auctions has a positive effect on competition in the process of sale, thus increasing the volume of revenues for the company. In this case, the most favourable option for purchasing a state-owned enterprise is its acquisition by the investor a) from a foreign country; b) not related to the activity of the enterprise; c) the one who will completely substitute the old management.

The authors of the analytical brief state that the privatization of state-owned enterprises can become a source of investment inflow either directly through the acquisition of a business by a new owner or through additional investment needed to restructure predominantly inefficient state-owned enterprises.

Thus, the authors conclude that privatization can accelerate economic growth under the following conditions:

Active involvement of foreign investors in the privatization.

Reducing the level of information asymmetry by attracting investment advisers.

Linking the system of financial and non-financial incentives for the top management to fulfil privatization plans.

First of all, to privatize the enterprises operating in the competitive markets. The state will not retain the ownership of its share at the state-owned enterprises.
[1] Brown, J. D., Earle, J. S., Shpak, S., & Vakhitov, V. (2015). Is Privatization Working in Ukraine? New Estimates from Comprehensive Manufacturing Firm Data, 1989-2013. SSRN Electronic Journal. doi:10.2139/ssrn.2641200