It is not a regular routine for the Ukraine’s Cabinet of Ministers to approve a regulation and cancel it within the matter of two weeks. Yet, this is exactly what happened in March 2000. At first, the government approved regulation No.434 “On amendments t
CONVINCING ARGUMENTS
It is not a regular routine for the Ukraine’s Cabinet of Ministers to approve a regulation and cancel it within the matter of two weeks. Yet, this is exactly what happened in March 2000. At first, the government approved regulation No.434 "On amendments to the list of mining and metallurgical enterprises participating in the economic experiment" on March 1. In two weeks, that is on March 14, the government issued a new regulation No.481 countermanding the previous act. Indeed, this is far out. The Metal asked Segrei Grishchenko, deputy chairman with the State Committee for Industrial Policy of Ukraine, to comment on this case.
- Mr. Grishchenko, what has in fact happened? What urged the Cabinet to approve the former regulation?
- 10 mining and metalmaking companies were deprived of tax incentives upon request of the State Tax Administration, which believed that these companies tried to evade paying UAH 12.3 million to the state budget. Besides, these enterprises seemed to have neither growth in outputs, nor improvement of financial performance. If this were to be true, the punishment would be nothing but serious, e.g. Nikopol Yuzhnotrubny Works would lose about UAH 54 million. However, the question to ask is a bit different, namely does the State generally benefit from this curtailment of the number of experiment’s participants? For this reason, the parliamentary Standing Committee for Industrial Policy and Entrepreneurship strongly opposed the former decision of higher executive authorities.
- Probably, these objections were well-reasoned.
- Naturally they were, because only in a couple of days everything swung back to where it had been in the very beginning. These arguments are pretty convincing for they are based on a profound analysis of manufacturing and financial performance of metallurgical mills and mining companies and on actual figures proving certain favorable trends. However, prior to considering specific facts and figures that illustrate the dynamics of changes within the framework of the economic experiment, let’s return a couple of months back in time. It is worth recalling how bad the situation on the metal market was after the global financial turmoil and especially after the deep recession in the Russian economy. These events had a truly adverse influence on the business of Ukrainian mining companies and metallurgical mills. The situation was nothing but grave. Therefore, all sorts of executive and legislative authorities started searching for unusual emergency ways out of the crisis. Undoubtedly, it was the event of the year for metallurgists when the Verkhovna Rada (the Ukrainian Parliament) passed regulation No.166 (dated October 6, 1998) "On measures to overcome the crisis in mining and metallurgical complex of Ukraine" and a law "On economic experiment in mining and metallurgical companies of Ukraine". It was mostly up to the legislative initiative of our deputy Vadim Gurov who is, perhaps, the most prominent representative of the metallurgical lobby in the parliament.
- The law was passed in July 1998, but became effective much later.
- That’s correct. The Cabinet approved the list of companies participating in the experiment only on October 1, 1999 (see regulation No.1820), i.e. the law actually came into force in the last quarter of 1999. However, the atmosphere of preparations to the experiment, joint efforts of a number of mutually related participants, together with recovery of foreign markets, made it possible for most metallurgical companies to successfully tackle the manufacturing problems and score high. By the way, their performance turned out to be the best for six consecutive years.
- Mr. Grishchenko, this issue of the Metal will feature an in-depth article with detailed analysis of the whole mining and metalmaking activities and of performance of individual top companies in 1999 and early 2000.
- That is even better. This means that I don’t have to get into details. Let me word the general conclusions only, firstly as regards metallurgy. The year 1999 saw a substantial growth in outputs of iron, steel, commercial rolled products, and ferroalloys. Unfortunately, recession kept on ravaging in tube-making, production of metal products, and mining. We will discuss the reasons of this recession later on. So far, let’s mention another important achievement, namely a considerable improvement of financial and economic performance of metallurgical mills simultaneously with growth in outputs.
Throughout 1999 metallurgical enterprises increased outputs of commercial products (in established prices) from UAH 11.8 billion to UAH 16.4 billion, up 38.9% against 1998.
Reduction in barter transactions is yet another important attainment because it is one of the main things the experiment is targeted at. Of course, selected companies still engage in much barter. What we are actually talking about here is the general positive trend, which is a weighty argument. Another significant achievement is the growth in the portion of direct exports excluding intermediaries.
- Can we state that the other mining and metallurgical sectors also feature similar auspicious trends?
- Without any doubts, we can report changes for the better. State-owned joint-stock company Ukrrudprom that does mining business is a good example. This company boosted production, lowered production costs per UAH 1 of commercial products, reduced outstanding accounts payable and receivable, started receiving more cash for the products realized, transferred more due tax payments to the state budget, and lowered outstanding arrears to the Pension Fund and employees. The same fortunate trends are traced in refractory-making and coke-making as well.
- You keep on emphasizing the favorable tendencies. Does it mean that you are talking about the auspicious changes when companies actually enjoy growth or do you also mean the areas where the negative "minuses" are just growing shorter?
- Naturally. These tendencies are the most important things because they have started showing themselves only during the economic experiment.
- Perhaps, all this is not enough to comfort the creditors of mining and metalmaking companies.
- Are you talking about suppliers of electric power and natural gas? Well, of course, it is a little too early to state their complete satisfaction. However, there are clear proofs that this will eventually happen, e.g. metallurgical mills owed UAH 164.5 million for the consumed electric power as of early 1998 and this amount more than doubled during the 1998 financial crisis, while in the second half-year of 1999 metalmakers completely settled all the current invoices for electric power and discharged UAH 64 million worth of outstanding payables. Isn’t this a good argument proving that the industry is gradually recovering?
The situation with settlements for natural gas is about the same. Prior to the law on the experiment, metallurgical mills kept on building up greater debts for natural gas, while in the second half of 1998 companies transferred all the due current payments and paid off UAH 54 million of old debts.
- Mr. Grishchenko, when you were speaking about the growth in outputs in mining and metalmaking, you meant the overall and average performance figures. Yet, there are companies that failed to improve their performance or even did worse. Why is this happening? Incentives of the experiment seem to be the same for all the participants.
- The incentives are the same indeed. However, one should keep in mind that not all the companies were adequately ready for the experiment owing to a number of reasons. For instance, some of them were technically re-equipping their manufacturing facilities or adjusting new capacities to be phased in during that period. There were also some other objective reasons. The situation with supplies of electric power to metallurgical mills is nothing but critical. Because of frequent power cuts, metalmakers failed to manufacture some 800 million t of iron, half a million t of rolled steel, and roughly one and a half million t of iron ore. The situation with supplies of ferroalloys to metallurgical mills has turned into some kind of a drama. That is why, for the first time ever, Ukraine had to lower output of aluminum and aluminum alloys. Of course, all of us comprehend that the forced power cuts are our common problem.
- Perhaps, it was not only up to objective reasons, but to subjective ones as well, wasn’t it?
- If you mean some kind of managerial mistakes in selected companies, I think it is quite possible. However, these occasional erroneous decisions are not something typical. It is more that metalmaking is a power-consuming sector, which is exposed to the hardships and problems of power-generating companies and related businesses. However, this is a good topic for a separate debate.
- What is your personal attitude towards the attempt of the State Tax Administration to erase ten companies from the list of experiment’s participants?
- There is no easy answer to this question. The State Tax Administration is a fiscal executive body that has a clear objective of bringing in enough revenues to the state budget. The full-blooded budget itself is a matter of special importance because it backs the vital activities of the State. So, how should I, as a citizen and as an officer in charge, treat attempts of the State Tax Administration to do its job? Of course, my attitude is nothing but affirmative. The problem is different in this case. When it comes to such a large-scale problem, all the parties involved should try to settle the problem in a good-tempered businesslike manner trying to consider all the pros and cons, e.g. what position is more suitable for the state interests, what seems to be the best in the short run and in the long run, etc. For instance, I am absolutely positive that, if all the supporters of continuing the experiment were timely heard out, there would be no conflict.
Take a closer look at what is happening. The statistics on the fourth quarter of 1999 clearly prove that actual payments to the state and local budgets went up. This increase is massive enough, e.g. payments to the budgets amounted to UAH 161 million in the third quarter of 1999 and gained 2.3 times in the fourth quarter. Let’s take another figure. In the second half-year of 1999 metallurgical mills were granted UAH 388.5 million of tax incentives. What was this money spent on? Mostly, the money was expended on replenishment of current assets, on technical re-equipment of manufacturing facilities, and on pollution control. In other words, it is not about the incentives, but more about nourishing adequate conditions to help the industry break even. I believe that continuation of the experiment during the time designated for this purpose suits our common interests. That is why Ukrainian deputies, notably the mentioned Vadim Gurov, strongly resisted the attempt to "truncate" the experiment. Moreover, this ill-famous decision was illegal by itself because executive authorities have to get approval of the appropriate standing committee of the parliament to exclude or include companies to the list of participants, while in this case the opinion of representatives was simply ignored.
- Mr. Grishchenko, do you feel comfortable that over a couple of years the share of such power-consuming basic industries as metalmaking, chemistry, power, and fuel-making has been increasing further on and now they account for almost 60% of the total manufacturing output in the country? Meanwhile, the portion of mechanical engineering and light industry is going down.
- These figures raise the issue of fundamental structural adjustments of the Ukraine’s industry. This is the problem to be tackled by the top authorities of the country. On April 19 the President of Ukraine Leonid Kuchma drew attention to this problem during the Cabinet’s meeting. We are only approaching the true structural adjustments, while the disparities are still tremendous.
It seems to me that all the hopes that the market economy will balance everything up by itself will prove wrong.
- Does this mean that you will keep on lobbying the interests of mining and metallurgy?
- I wouldn’t dare saying so. When I argue in favor of mining and metalmaking, I just have to give similar treatment to the other industrial sectors of Ukraine owing to my moral and official principles. It is just that we are talking about a specific metallurgy-related case. As regards lobbying, it is becoming more of a regular practice in the political life of Ukraine. It is a whole different issue who pursues what objectives with this lobbying. If the objectives are private, then state interests are usually hurt. In the civilized world, this is not called the lobbying.
the Metal