At the end of June, the European Council, at a summit in Brussels, approved the decision to grant Ukraine and Moldova the status of candidates for accession to the EU. A new round of russian aggression accelerated the flow of political processes and in 4 months after the submission of the application, Ukraine received a positive verdict from Charles Michel.
Together with the new status, numerous obligations have emerged, without which negotiations on accession to the EU will never begin. From the technically simplest and already completed — appointment of a new head of the Specialized Anti-Corruption Prosecutor’s Office — to the continuation of judicial reform and the implementation of the anti-oligarchic law.
There are no requirements that directly relate to the management of public assets or oblige to reduce the share of state ownership in the requirements of the EU. However, European integration will not be limited to the steady implementation of overt requirements. Many other positive changes will indirectly and directly help meet these criteria. For example, the announced reduction of the state in the economy through mass privatization will partly contribute to the fight against corruption and to limiting the excessive influence of oligarchs.
Let us find out how approaches to property management have changed in the European Union, and when the European Commission forced national governments to sell their assets. And also, whether privatization will really ease Ukraine’s path to the stars on the blue canvas.
From non-intervention to mild coercion
Traditionally, the policy of the EU institutions in matters of public property has been neutral and based on equal treatment to public and private sector enterprises. This principle dates back to the birth of the predecessor organization of the European Union — the European Economic Community. It was the result of long and arduous negotiations leading up to the conclusion of the Treaty of Rome in 1957. Then the founding countries, having radically different shares of the state in the economy, reached a compromise held on three whales:
- Non-interference in member states’ ownership policies. Countries agreed to give preference to competitive markets. At the same time, the EEC (and then the EU) will intervene at the level of the institutions only when the policy of the government of a certain state contradicts free and fair trade in the community.
- State-owned enterprises will be treated in the same way as private ones.In fact, this means that it is prohibited to grant government assistance (subsidies in particular) to certain enterprises as it distorts competition in the common market.
- All enterprises that provide services of general economic importance are also subject to these rules, but only to the extent that they do not interfere with the performance of the tasks assigned to them.
The term “services of general economic importance” stems from the belief that state monopolies are critically necessary in some sectors of the economy. It is about communications, transportation and, especially, the provision of municipal services. In post-war Europe, postal services, telecommunications, railways, electricity, the gas industry, and water supply were usually owned either by the central government or by municipal authorities.
This was enough until the 1980s, when Margaret Thatcher started her privatization program in the United Kingdom. It was her policy that inspired other countries to follow her example and made them think about the scope of state intervention in the economy. In 1985, one of the closest associates of the “Iron Lady,” Lord Arthur Cockfield, became European Commissioner for the Internal Market and Services. In this position, he wrote and published a White Paper in which he identified 300 measures to be taken in order to fully establish a single market. His recommendations formed the basis for the adoption of the Single European Act in 1986, which enshrined the free movement of goods, services, persons, and capital. This removed non-tariff barriers to free trade between member states and effectively destroyed the monopolistic position of many state-owned enterprises. Competitors from the private sector, including foreigners, have emerged.
The conclusion of the agreement on the formation of the European Union in 1992 had a decisive impact on the fate of public property. The agreement enshrined the Convergence Criteria that countries had to meet in order to introduce the euro. They provided for cuts in public spending so that the budget deficit would not exceed 3% of gross domestic product, and public debt would not exceed 60% of GDP. Such conditions put governments under severe fiscal constraints. It was necessary to make decisions: reduce social benefits, raise taxes, or privatize state assets. The last option was the least painful.
And the Stability and Growth Pact of 1997 actually gave the Council of the European Union the right to impose penalties on a participating country that had not made enough effort to meet its budget deficit ceilings.
The facts show that privatization was not a deliberate policy of the European Union, but rather a consequence of European integration. Countries often resorted to it to accelerate their accession to the EU and the eurozone and to solve acute economic problems. However, history knows cases when the European bureaucracy went beyond soft coercion and made unambiguous decisions about the further fate of state-owned enterprises.
Italy
The tendency of the state to interfere in Italy’s economy is a consequence of the domination of the fascist regime. As early as 1933, on the initiative of the Head of Government Benito Mussolini and Finance Minister Guido Jung, the Institute for Industrial Reconstruction (Instituto per la Ricostruzione Industriale, IRI) was founded — a public institution for the rescue, restructuring and financing of banks and private companies that went bankrupt during the Great Depression. Over time, its influence has spread to the steel, arms, and chemical industries. By 1939, 80% of shipping and shipbuilding in Italy, 75% of cast iron production and almost 50% of steel production were already under government control. Unlike classical nationalization, IRI’s activities were limited to enterprise financing, accounting, and administrative control. After World War II, IRI became one of the largest conglomerates in the world, among other things, owning highways, as well as food and telecommunications companies.
By signing the Treaty of Rome in 1957, Italy formally accepted the inadmissibility of subsidizing state-owned holdings, but was in no hurry to comply with this norm. The case of ENI-Lanerossi is illustrative in this regard.
In 1962, the state-owned holding company Ente Nationale Indrocarburi (National Hydrocarbons Administration, ENI) acquired Lanerossi, a well-known Italian brand of the wool industry. Lanerossi, in turn, merged with several other private companies in the textile sector. Due to the ongoing losses of some subsidiaries, Lanerossi repeatedly benefited from subsidies from the Italian government. In 1980, the European Commission informed the Italian side that these measures would not be interpreted as a violation only if the aid was granted for a limited period and aimed at restoring the self-sufficiency of the enterprise. Officials in the Apennines ignored and for more than a decade provided funds, continuing to argue with European institutions about the legality of their decisions.
The Convergence Criteria significantly changed the situation. In 1993, an agreement was concluded between the Italian Minister for Foreign Affairs, Beniamino Andreatta, and the European Commissioner for Competition, Karel van Miert, which allowed the government and public holdings to fully comply with the obligations of their unprofitable subsidiaries. At the same time, the Italian Government committed itself to reducing public enterprise debt to levels acceptable to the private sector in the market economy by 1996. The agreement left the Italians with no room for maneuver: it could only be implemented through large-scale privatization.
ENI and IRI are becoming joint stock companies, but their fate has turned out differently. Over the next seven years, all of IRI’s key assets were privatized — Credito Italiano and Banca Commerciale Italiana banks, Telecom Italia’s telecom operator, and Autostrade per l’Italia, the company managing sections of the motorways in concession. The Institute itself was finally liquidated in 2002. ENI also experienced a large-scale divestment of assets, and the state remained a minority owner.
Poland
Equally, large-scale denationalization was unfolding in post-communist Poland. In 1995, voucher privatization was launched, allowing citizens to become shareholders of 15 national investment funds, which managed 512 enterprises in the country. During the 1990s, Polish treasury income from privatization amounted to USD 17.8 billion, in 2000-2011 — more than USD 16 billion. A total of 5,992 state-owned enterprises were sold from 1990 to 2011. The most expensive asset was the telephone company Telekomunikacja Polska (more than USD 6 billion).
But life at shipyards in Gdańsk, Gdynia, and Szczecin on the Baltic Sea coast was barely active. After market reforms, the enterprises that previously existed due to orders from the USSR were in an extremely difficult situation. Let’s say that a shipyard in Gdańsk, which used to produce an average of 30 vessels during the year, could now only produce 6-8 ships. Already by the mid-1990s, half of the 17,000 workers remained. The legendary enterprise, where the anti-communist movement “Solidarity” was born, was twice declared bankrupt.
To somehow keep shipbuilders afloat, the state decided to subsidize them. All three shipyards received considerable funds from the national budget. The EU estimated that only two enterprises — in Gdynia and Szczecin — received approximately EUR 3.3 billion.
In November 2008, the European Commission ruled that government assistance and investment that had been channeled to shipyards for years violated EU competition rules and failed to contribute to their long-term survival. In this connection, Brussels pressed shipbuilders to repay the multimillion-dollar subsidies already consumed. It was in fact bankruptcy. The Polish government was ordered to sell the shipbuilders’ assets of Gdynia and Szczecin and the shipyards themselves. All the restructuring proposals were also rejected: the European Commission concluded that this would require even more funds from the country’s budget, while still having to reduce the number of jobs by 40%. This decision no longer applied to the enterprise in Gdańsk: in 2007, the controlling stake was sold to ISD Polska, a subsidiary of the Ukrainian industrial conglomerate Industrial Union of Donbas of Serhii Taruta.
In May 2009, Poland announced the sale of shipyards in Gdynia and Szczecin. Qatari investment bank QInvest was named the buyer. However, by September, the potential investor had not paid the required amount, and the Polish government was forced to look for new buyers. It did not find them, and therefore, the enterprises finally ceased to exist.
Greece
In 2009, an economic crisis erupted in Greece. The country was living beyond means for years and got deeply in foreign debts. The budget deficit reached almost 13% of GDP, and the public debt exceeded EUR 300 billion (115% of GDP). The economy was in for default. Greece had long violated the convergence criteria and was on the verge of being excluded from the eurozone. It became particularly unpleasant when everyone found out that officials in Athens lied about the real state of affairs and tampered with statistics.
In spring 2010, the Greek government sent a formal request for emergency financial assistance to the European Central Bank, the European Commission, and the IMF. Greece received EUR 110 billion under 5% p.a. in exchange for the implementation of the structural transformation program. Freezing the growth of wages for 3 years, raising the retirement age, increasing taxes, and liberalizing the system of closed professions are not an exhaustive list of reforms that government officials pledged to implement. Among them was the privatization of public property worth USD 50 billion. However, the political class showed no desire to sell assets and successfully failed the agreed plan.
On July 1, 2015, a technical default occurred in Greece. And on July 5, the state held a referendum in which 61% of Greeks rejected new proposals of austerity from international creditors. Dissatisfaction with Athens’ policy culminated in an emotional speech by the leader of the Alliance of Liberals and Democrats for Europe, Guy Verhofstadt, directed at Greece’s new prime minister, Alexis Tsipras, in the European Parliament:
“I’m angry! You’re talking about reforms. But we never see concrete proposals of reforms. We are, in fact, sleepwalking to watch a Grexit, but it is not you, and it is not we who shall pay the bill, these are going to be Greek citizens. There is only one possible way, is that you come forward in the coming 48 hours with a credible reform package of reforms.”
Tsipras yielded to the pressure of international creditors. On July 9, the Greek government provided them with a plan for more radical changes, which included a list of infrastructure facilities for privatization. Already in 2016, the Chinese company Cosco buys 67% of the shares of the Piraeus Harbour for EUR 368 million and invests more than EUR 500 million in the construction of new facilities. Subsequently, the company of German origin will acquire the same share fraction in the port of Thessaloniki for EUR 1.1 billion. The Chinese state electricity grid for EUR 320 million will own 24% of the national electricity supplier ADMIE. Moreover, Greece will complete the sale of 14 regional airports to the German consortium Fraport i Shentel Ltd for EUR 1.2 billion and the railway company TRAINOSE to the Italian state railway Ferrovie dello Stato for EUR 45 million.
Privatization helped to reduce public debt substantially. In the summer of 2018, the ministers of economy and finance of the eurozone states noted the end of the economic crisis and agreed to write off the remaining debts. The creditors also agreed to pay an additional EUR 24 billion to Greece as a “safety cushion,” that is, to reduce the risks of the country slipping into another crisis.
Before the big war, there were more than 3,500 thousand state-owned enterprises in Ukraine. Of these, only 1,382 are actually functioning, and only 862 are profitable. The lion’s share of them is not very significant for the Ukrainian economy, but they still consume funds from the national budget. Under European standards, this state is incompatible with the rules of fair competition and the free market.
The war only exacerbates this problem. And so, privatization looks like a logical solution. In the face of a total fall in GDP, eliminating the unnecessary loss generator from the economy becomes more important than ever. In addition, the private owner will be able to set up processes at the relocated enterprise and restart its work much faster. And every operational business today strengthens the Ukrainian economy.
European experience confirms that privatization is one of the least painful ways to strengthen the economy in critical situations. At the same time, it helps to rejuvenate and liberalize the market. In a war, having a successful and strong economy is critical for survival. And as Ukraine aspires to the EU, privatization will accelerate the necessary transformation of the economy. Even though it is currently not among the mandatory requirements.
Source: www.eurointegration.com.ua
