The state assets sector in Ukraine is very ineffective and the option for resolving of the problem in the medium-term outlook is the creation of an external incorporated holding company and hiring professional asset managers, according to the report of the IMF experts entitled "Technical assistance report — reforming management and oversight of state assets" and published on Monday.
“This would have the advantage of putting in place managers and analysis with the relevant private sector skills of actively managing and developing the portfolio. This would serve to insulate the portfolio from political interference, particularly if the managers were clearly held accountable for the performance and consequently incentivized to maximize the value of the portfolio for the shareholder (the government),” the IMF said, adding that the report is based on information as of February 2015.
The fund said that the downside to this arrangement is that efforts to do this in the past have failed, due to the absence of the necessary prerequisites including proper political insulation of the holding company, a clear objective and the proper transparency that would allow such a vehicle to achieve its objectives without being compromised by various vested interests.
“In seeking a ring-fenced vehicle at arm’s-length from short-term political influence, it is essential that its activities are subject to rigorous scrutiny and performance assessment with concrete consequences for failure to reach performance targets, as with an asset management company in the private sector. As many of the prerequisites are not currently in place, it is likely that this option can only be seen as a more medium-term objective,” the fund said.
“A variant of the holding company model described in above, is the Romanian example, the Fondul Proprietatea model, where the holding company was not only listed on the local stock exchange, but also where the management was outsourced to an international professional asset management firm,” the IMF said.
The IMF experts also analyzed other options: 1) establishing a discrete unit within the Economic Development and Trade Ministry (or another economic ministry such as the Finance Ministry) with responsibility for determining and managing the risks associated with the portfolio and 2) establishing a series of holding companies that would manage groups of state assets in individual sectors of the economy.
According to the report, the first one is the approach that has the technical advantage of being relatively easy and cheap to establish. However, the downside is that the public administration has no experience of active management of commercial assets and few of the financial analysis and portfolio management skills necessary to manage a complex portfolio of companies and assets. In addition, existing civil service pay guidelines would make it difficult to attract people with these skills.
“In addition, a unit within government would run the risk of being side-tracked from its goal of portfolio value maximization by the temptation for policy makers to use the portfolio to carry out policy objectives,” the fund said.
According to the document, therefore, this option may be appropriate as a short-term measure to establish the framework for managing the portfolio, but is unlikely to be an effective longer-term solution.
As for establishing a series of holding companies, this would have the advantage of allowing the manager to manage portfolios in what could be regarded as a more manageable number of assets. However, it also has a number of (possibly overwhelming) disadvantages. In the first instance, it would probably be an extremely expensive proposition requiring establishment of separate holding companies with professional management and qualified staff with the requisite skills to manage several portfolios. This appears to be the least attractive option in the short or medium term.
