Bel arus country economic memorandum
However, vertical integration masked the inefficiencies among SOEs. Profit-making firms at the top of vertically integrated chains cross-subsidized their less efficient loss-making supplier firms. The top-down direction of subsidies within the vertical chains suggest that softer budget constraints prevail among supplier SOEs because they: (1) have almost three times lower average effective interest payments; (2) adjust prices of their output to costs and not market signals; (3) despite overall poorer performance, have higher debt-to-equity ratios; and (4) have higher arrears compared to the top-of-the-chain SOEs. Despite access to economic rents for SOEs, on average, private firms in Belarus outperform the state-run ones. Econometric evidence, based on firm level economy-wide data, suggest that: (1) there is an inverse relationship between average return on assets and state ownership; (2) the share of lossmaking enterprises in the private sector is significantly lower than that among mixed-ownership or stateowned firms; (3) the level of productivity in non–state-owned enterprises exceeds by 40 percent the corresponding level of productivity in SOEs; and (4) state firms have become relatively less productive between 2005 and 2010 due to significantly lower total factor productivity (TFP) growth in SOEs compare to the TFP growth in private companies. Productivity differentials between SOEs and private firms in Belarus are a result of structural differences rather than the temporary impact of exogenous factors. SOEs tend to converge toward long-run productivity levels significantly lower (between 11 and 16 percent) than the productivity levels of privately owned firms. Empirical evidence presented in the report suggests that these differences stem from the unproductive use of the factors of production. The core objective of reforming the SOEs is to attain efficient employment of assets. This would include a set of policy measures to expand the role of the private sector, including: •• Introduce a time-bound plan to phase out soft budget constraints in SOEs. SOEs should face the same credit, tax, energy, raw material, labor pricing, and procurement norms faced by private corporations. Resources have alternative uses and, therefore, should be priced accordingly, regardless of the ownership of the enterprise. •• Restructure vertically integrated SOEs by bringing strategic investors to the top-of-the-chain companies and privatize the feeder companies. Assess critically to determine when vertical integration is economically justified and when it is used to hide inefficiency. This will lead to a cut in the inefficient product segments of SOEs, and thus, reduce the cost of cross-subsidization. It will also mean that non-core activities are taken away from the state firms. In fact, outsourcing or divesting such noncore activities of SOEs will contribute to the development and the strength of the private sector. •• Enhance incentives for SOE managers. Managers of SOEs should be empowered to make decisions regarding the appropriate mix of inputs (labor, capital, materials) in production, as well as the level of prices of all outputs. This will require the elimination of the system of quantitative targets in the economy. The introduction of true performance-based contracts, delinked from the quantitative targets system, would reduce the control over the performance of managers, but will put the right incentives in place and may simplify considerably the design of the reforms ahead.
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Executive Summary