Transformation of the public sector: why Ukraine is liquidating classic enterprises and what to expect next
9 September 18:17
Ukraine is starting a large-scale transformation of the state-owned sector of the economy. According to the new rules, all state-owned enterprises should be transformed into economic companies with 100 percent state ownership or liquidated within six months, "Komersant Ukrainian" reported citing information from the Cabinet of Ministers of Ukraine.
This decision may become a turning point in the reform of state property, because it actually liquidates the current status of “state enterprise” in the classical sense.
The Cabinet of Ministers explains: the adoption of a number of resolutions occurred within the framework of the reform of the system of organizational and legal forms of ownership.
From the moment the Economic Code of Ukraine loses its force, state enterprises have three years to undergo the process of transformation into joint stock companies or limited liability companies, or state non-profit companies.
Developed resolutions, which were adopted by the Government, define how state and municipal enterprises will live under the new legislation. We are moving away from the Soviet legacy, unifying the rules of the game for everyone and putting the public sector in the same conditions as the private sector,” explained Darya Marchak, Deputy Minister of Economy, Environment and Agriculture of Ukraine.
The adopted norms establish unified rules for transformation of state and municipal enterprises into JSC, LLC or DNT. They will contribute to the effective implementation of the new legislation on the peculiarities of legal entities during the transition period.
In particular, we are talking about the following resolutions:
- “On Approval of the Procedure for the Transformation of a State Enterprise into a State Non-Profit Society”.
- “On approval of the Procedure for the transformation of a state enterprise into a joint stock company, a limited liability company, 100 percent of shares (stakes) of which belong to the state”.
- “On Amendments to Certain Resolutions of the Cabinet of Ministers of Ukraine in connection with the entry into force of the Law of Ukraine “On Peculiarities of Regulation of Activities of Legal Entities of Certain Organizational and Legal Forms in the Transition Period and Associations of Legal Entities”.
Choice of organizational form
The decision on which form to choose – joint stock company (JSC) or limited liability company (LLC) – is made by the founder of the enterprise. The key difference lies in the method of capital formation: in an LLC it consists of shares, whereas in a JSC it consists of shares. The latter can be traded on the stock market and therefore are subject to stricter state regulation.
This step, according to the Government, should provide state-owned companies with a more modern corporate form of management, understandable for investors and partners, as well as unify business standards.
If the decision on transformation is not taken
In case the founder of the enterprise does not decide on its future, this issue will be decided by the Cabinet of Ministers. Then the property complex of the state enterprise will be transferred to the State Property Fund, which will decide its further fate: termination or privatization.
This provision can significantly accelerate the process of transferring assets for privatization, because it actually removes bureaucratic barriers and concentrates control in the hands of the State Property Fund.
New management rules
In newly established companies, until the formation of management bodies in accordance with the charter, the institution of acting managers will temporarily work. This will avoid a “management vacuum” and ensure the continuity of economic activity of enterprises during the transition period.
Read also: State enterprises were obliged to publicize financial statements for the period of martial law
What will happen to the property of enterprises
Property, which today is in the economic management or operational management of state-owned enterprises, will be transferred to the authorized capital of new successor companies. Thus, the assets will remain in state ownership, but will acquire a clearer corporate status.
At the same time, the enterprises will continue to be able to use the assets that are not subject to privatization. These are assets that they will dispose of on the basis of operational management rights without the right of alienation. In essence, this is an analog of the European usufruct mechanism: the use of property without the possibility to sell it or transfer it to another person.
Licenses and permits
An important point is that all permits, licenses and certificates issued to state-owned enterprises remain valid. They remain valid also for new successor companies within the terms for which they were issued. This means that business processes will not stop and companies will not have to go through repeated bureaucratic procedures.
Reforms of the system of organizational and legal forms of ownership: why it is important
The Cabinet of Ministers notes: the purpose of the innovations is to create a more transparent and controllable system of state assets management. For many years Ukraine has been facing problems of inefficiency of state enterprises: some of them are unprofitable, others are in “gray” zones, where financial flows are not transparent and are often used for corruption schemes.
Transformation into business entities with a clear management and financial reporting structure should make their work more efficient. In addition, it opens the way for further privatization or attracting investors.
The new reform from the government: what potential challenges it conceals
Despite the obvious advantages, the reform will also have challenges. Some state-owned enterprises may be unprepared for the transition to new management standards. There is also a risk that the transformation process will be delayed for political or bureaucratic reasons. At the same time, keeping socially important enterprises in the status of 100% state ownership may create an additional burden on the budget.
The reform of state-owned enterprises is Ukraine’s next step towards economic modernization and adaptation to international standards. Within the next six months, hundreds of companies should decide on their organizational form, and the state should decide which assets to keep in ownership and which to prepare for privatization.
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Experts believe that the success of this initiative will depend on the government’s ability to ensure the transparency of the process, avoid corruption risks and at the same time create conditions for increasing the efficiency of the public sector. For the business community, this is a signal: the rules of the game in state property management are changing, and the processes are becoming closer to European practices.
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