To what extent state-owned enterprises are less profitable than private firms: a 10-year analysis

There are about 3,300 state-owned enterprises (SOEs) in Ukraine, which operate in many sectors.

The state may own an enterprise to fulfil a unique public function that a private enterprise cannot provide or generate a return on equity (ROE) . Previous CES research has found that SOEs are generally less profitable than private enterprises. Consequently, it is not beneficial for the state to own them for revenue.

Form of ownership, industry specifics, economic conditions, and many other factors can affect each particular enterprise’s profitability. This study analysed anonymised financial indicators of Ukrainian companies over ten years (2011-2020) provided by research partner YouControl, highlighting ten industries.

We compared Return on Equity (ROE)1 and employee cost share to the median values for private companies in the respective industry and year, adapting the methodology of the IMF study of state-owned enterprises in Central, Eastern and South-Eastern Europe.

Overall, 61.1% of Ukrainian state-owned enterprises have profitability lower than the median private firm. Our analysis shows that in sectors such as construction, mining, manufacturing, HoReCa, significantly more state-owned enterprises are less profitable than the median private firm. In construction, there are 89.5%, while only 10.5% overperform the median private counterpart.

The median profitability of state-owned enterprises in these sectors is also lower than that of private firms. The median SOE in construction has only 0.6% of the median ROE of a private firm, while in manufacturing, it is 15%.

The situation is somewhat better for SOEs in the agriculture, other services and transport sectors. In these sectors, 55.6-60.6% of state-owned companies are less profitable for the median private firm. The ROE of the median state-owned enterprise in these sectors is only 53-63% of that of the median private firm.

State-owned enterprises tend to spend more on labour than their private competitors in most industries, but this does not necessarily mean lower profitability.

A general recommendation for public policy in the governance of SOEs is to transfer them to the State Property Fund and privatise companies with no unique public value. According to the OECD Guidelines, corporate governance reform should be implemented in those SOEs that remain in state ownership.