What came first – privatization or nationalization?
They are parallel processes. The emergence of states led to property being either publicly- or privately-owned. In Ancient Egypt, for example, all huge infrastructural projects were built by pharaohs. At the same time agricultural enterprises were privately-owned. It is very similar to “state capitalism”.
Humanity gradually changed its understanding regarding what functions had to be carried out by states. In the Ottoman Empire and France before the revolution of 1789 taxes were collected by individuals, who had bought the right to do so from the monarch; they, instead, kept the money collected for them. Nowadays it would look rather strange. In the XIX century private banks could emit their own banknotes, which were medium of payment. To sum it up, with the passage of time, some private things became public and vise versa.
Are there any types of enterprises nowadays, which cannot be privately-owned?
Officially there are such types of enterprises. Ukraine has a list of strategically important enterprises, which cannot be privatized due to their crucial importance for the state not only from the economic perspective, but sometimes from the side of the state security. I am talking about certain technologies, which are hard to manage if they are privately-owned.
Who has determined that certain enterprises are strategically important?
In Ukraine the majority of the enterprises in the list are those, which have long been state-owned, because they were constructed in the Soviet Union times; then there were some fears regarding their being privatized. For example, all huge old enterprises of military industrial complex are state-owned in Ukraine. In the USA and some other Western countries, for example, some enterprises of this type may be privately-owned. At the same time there arise issues of security and state interests. For instance, if an enterprise is private, may a state restrict its export to the third countries, which are troublesome?
Are there any examples globally when nuclear energetics is privately-owned?
Yes, there are. For example, notorious APP (nuclear power plant) in Fukushima Prefecture in Japan, which suffered from the earthquake and tsunami in 2011, is private. The property type doesn’t affect the security or reliability of technology – if it were state-owned, most likely the destruction and emissions would have been the same.
Can it be the case that a state establishes enterprises purposely to transfer them into a private ownership?
Yes, it happens that a state establishes an enterprise, and then develops it to make it competitive in the market and finally sells it. However, such state enterprises and projects are unprofitable very often. For example, the state builds infrastructure for the Olympic Games in many countries because of the significant investments. At the same time the state believes in these constructions making profit later, so it plans to sell them, but usually such hopes are not realized. This, indeed, was the situation for Greece and Russia. Instead, dishonest people very often employ such state enterprises to launder money through, for example, the management of private enterprises acting as intermediaries. Such a scheme was often used in Ukraine. It even got its informal name as “management privatization”.
Why are state enterprises considered less efficient than private ones, even though they operate in the same labor marker and can employ the same specialists?
It can be explained by the fact that a state often does economically impractical things. For example, if an enterprise is unprofitable, then in the case of private ownership, the number of employees will be reduced or the enterprise itself will go bankrupt. In contrast, a state enterprise can always “ask for” money from the State Budget increasing state expenditure.
How can this issue be coped with?
It is reasonable to establish independent supervisory boards in the state enterprises, which won’t be affected by the state and at the same time will have approved KPI to evaluate performance.
When should private enterprises be nationalized?
It should be done when the problems of an enterprise can create problems for the whole state.
Let us use the nationalization of “PrivatBank” as an example. Banks work not on the owner’s money (capital), but on the attracted money, which are deposits and loans. Accordingly, if such a bank goes bankrupt, then people having deposits in it lose. In the case of “PrivatBank”, it was a third of all deposits in the banking system; in particular, more than a third of it belonged to the entrepreneurs.
Another issue is whether a state should save such an enterprise or help those, who have suffered because of its problems. That is, there are alternatives to nationalization.
Nowadays everyone is discussing the fact that the Ministry of Economic Development and Trade of Ukraine allows cultural objects to be privatized, notably the Circus. Does the state have to own such enterprises?
The majority of state museums and theatres in Ukraine are from the Soviet Union times. Can they be privately-owned? Yes, they can. But it should be noted that in western countries cultural institutions are often financed from donators, who cover the difference between their revenues and expenditures. Such a tradition has not become common in Ukraine yet. The state owns such objects not because of economic practicality, but because it is in charge of building up and preserving the national culture. At the same time it is rather hard to evaluate such notions as “preservation of culture” as well as to consider some alternatives (maybe better) for such state expenditures, which are currently transferred to such cultural assets.
Are there any standards regarding the number of state enterprises for a state?
There are no such standards, however, there is a rule to evaluate the efficiency of state enterprises – they have to earn the same amount of revenues and pay taxes as similar privately-owned enterprises.
What body decides regarding the privatization of state enterprises?
From one side it is the Verkhovna Rada (by approving the list of enterprises) and from the other side it is the State Property Fund (by acting as an operator of those assets). The Verkhovna Rada adopts the State Budget, where revenue plan from privatization of certain enterprises is specified. The State Property Fund managing all the state property prepares and puts the enterprises up for a sale.
What are the advantages and disadvantages of different property types?
The main advantage of a private enterprise is that its poor economic results don’t directly affect the state.
It is good to have state enterprises if they have positive impacts on the market (they create positive externalities (external effect – ed.)), pay taxes to the budget and provide services, which are important for people, but not profitable for private enterprises.
For example, private banks may not be willing to open their departments in mountainous or scarcely populated regions, but it may be important for the state to provide all citizens with an access to financial services. In that case departments of state bank will function without profits, but the task will be fulfilled. Indeed, this can be achieved without state banks, for example, by giving benefits for commercial banks, which will agree to such a proposal. However, there is no 100% guarantee, that private banks will even be interested in that.
The translation is done by Maryna Shykun and Mykola Kravets, EA1.