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Policy Briefing Series

  • 01.10.2006

    Large privatisation receipts in Ukraine: Recommendations on how to use the money wisely

    (Code:V11)

    As shown by recent international experience, privatisation receipts can be rather large both in absolute terms and as a proportion of the state budget. This has been the case for Ukraine in 2005 when Kryvorizhstal was sold, and is likely to happen again in the near future. When privatisations are implemented, it is crucial that its proceeds are spent wisely. In particular, privatisation receipts should not be used to increase recurrent expenditures, since this can cause a precarious fiscal mismatch. Also, the consumptive use of the funds should be avoided. A proper spending strategy requires some time to prepare and implement. Therefore, we think that it is very important to discuss the spending options for Ukraine now, i.e. before large privatisation receipts flow into the state coffers again.

    In this paper we discuss three international best-practice options for spending large privatisation receipts: debt repayment, financing of infrastructure projects, and reform of the state pension system. We argue that the repayment of state debt should be given no priority, since the state debt has an important benchmarking function and its level is not particularly high in Ukraine. The financing of infrastructure projects makes sense, but only if the state provides just a minor share of the needed finance, while investors from the private sector and multilateral financial institutions should contribute the main bulk. The main use of privatisation proceeds should be in our view the implementation of the second pillar of the pension system. Large privatisation receipts should flow into a privatisation fund, whose only function is to support the initiation of the second pillar.

    Contents

    1. Introduction
    2. The prospects for large privatisation proceeds in Ukraine
    3. General criteria for an appropriate use of large privatisation receipts
    4. Evaluating the policy options for Ukraine
      4.1. Repayment of state debt
      4.2. Co-financing of infrastructure projects
      4.3. Supporting pension reform: the launch of the second pillar
    5. Conclusions
    Authors:  , . , г, .
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