Aivaras Abromavicius urges to radically change the approach to compensation to CEOs of state unitary enterprises

The public sector has over 3,350 companies, of which only 1,833 are functioning, while it is a fairly large part of Ukraine's economy, accounting for almost 20% of Ukraine's GDP in 2014, with about a 1-million-workforce. However, instead of supporting the economy, state enterprises appear as a burden - according to the IMF, the amount of direct and indirect subsidies and compensation of losses to state enterprises in 2014 reached nearly 5% of GDP (1% - without Naftogaz Ukrainy).

Why does the public sector, which is owned by the people of Ukraine, bring losses, while the private sector is making money by playing on the same business rules?

The reason for this lies in, above all, ineffective management. First, salaries of CEOs of state enterprises are much lower than private sector wages, which provokes abuses. Second, managers of state enterprises, to put it mildly, are not very motivated to improve the performance of their enterprises, because the system of benefits is tied to low, non-market salaries, limited and is very stiff. Third, the current system of corporate governance of the public sector is outdated, extremely non-transparent and ineffective.

The above-mentioned facts indicate the need for decisive, effective and timely reforms. The public sector needs efficient managers, who possess up-to-date management methods and have high ethical standards. To attract CEOs of such level it is necessary, firstly, to introduce transparent and fair competition for these positions, and secondly, to establish the level of salaries that would meet their competence and efficiency of management.

While a transparent procedure for appointing managers has been already introduced, the problem with their salaries is still not resolved.

Because of this, Minister of Economic Development and Trade Aivaras Abromavicius offers to enable management bodies of public enterprises (ministries, State Property Fund of Ukraine and other central executive bodies) to establish the level of wages close to the market and closely related to the performance indicators of the company. For example, managers will receive bonuses only in case of increasing income, resource efficiency of enterprises as well as improving other specific performance indicators.

Along with the increase in transparency of state enterprises through the introduction of requirements for mandatory independent audits, proposed changes will get rid of corruption in state enterprises and attract highly qualified CEOs from the private sector with modern methods of management in order to increase the efficiency of use of state resources.

The proposed changes are crucial for economic reform in Ukraine and at the same time quite difficult in a political and economic point of view, bearing in mind the current economic situation of the state. However, without the introduction of these changes the whole sector reform of state-owned enterprises will have no meaning. For a noticeable positive effect for Ukraine's economy it requires deep reform of state enterprises at all levels with a view to bringing them to the world standards of efficiency and transparency, and most importantly - profitability and increase in revenues to the budget through taxes and dividends.