In order to increase the efficiency of utility enterprises and the fair
distribution of municipal budget funds it was proposed to introduce the
disclosure of additional information about capital formation; to strengthen the
managers’ responsibility for the quality of publishing information with the introduction
of special KPIs; and to conduct financial and
performance audit, including in terms of capital formation.
Keywords: Municipal (communal) enterprise; Utility enterprise; Capital; Housing and utility services; Efficiency; Audit
1.
INTRODUCTION
In recent years, Ukraine has been reforming local
self-government in accordance with the provisions of the European Charter of
Local Self-Government. State policy in this area provides for decentralization
– changes in approaches to the formation of local communities and their
funding, accompanied by the transfer of a significant part of powers,
responsibilities and resources from the executive authorities to local
governments. The effective development of local communities directly depends on
the quality of their property management. In this regard, there is an ongoing
public debate on how to find solutions to the problems of functioning of
municipal-owned enterprises.
Municipal (communal) enterprises in Ukraine
traditionally play a significant role, as most of them belong to critical
infrastructure. These enterprises operate in such industries as energy,
transport, health care, utilities, which are strategically crucial for the
economy functioning and state security. The incapacitation or destruction of
such entities affects national security and defense, the environment, and leads
to significant material and financial losses. Simultaneously, the results of
Ukrainian utility enterprises indicate their inefficiency and show signs of
political corruption.
In Ukrainian law, the term "communal"
is used as a synonym for the term "municipal". Therefore, in this
publication we will use the terms "municipal ownership",
"municipal enterprise". The separation of municipal (communal)
ownership from state ownership in Ukraine took place in the early 1990s. Currently, in accordance with the requirements of
the Commercial Code of Ukraine (2003), utility enterprises can be organized in
the form of a municipal unitary enterprise (commercial or non-commercial) or a
business company (joint stock company or limited liability company). The
property of a municipal unitary enterprise is municipal property and is
assigned to a municipal commercial enterprise on the right of economic
management, to a municipal non-commercial enterprise on the right of operative
management. Such a mechanism makes it possible to ensure the ownership of
municipal property by the relevant community and to secure the community’s
rights. For instance, property on the right of economic management cannot be
pledged, secured, and cannot be seized. Local councils carry out all
transactions with the utility enterprises’ property on behalf of the community.
As of September 1, 2020, 14,182 municipal
companies are registered in the Unified State Register of Enterprises and
Organizations of Ukraine (State Statistics Service of Ukraine, 2020).
Unfortunately, generalized data in terms of these enterprises' types and
activities are not collected and published by official statistics. However, as
noted by Tulchynska and Solosich
(2019), municipal enterprises have different functional purposes, which allows
them to be divided into social entities (educational and health care
institutions, sports complexes, parks, media, etc.), infrastructure enterprises
(utility enterprises, urban passenger transport, etc.) and commercial companies
(provision of rent services, construction, parking, pharmacies, hotels,
markets, etc.).
Municipal enterprises of various types differ
in terms of financing, performance results, and the presence of social and
environmental effects. Nevertheless, the discussion around finding an effective
model for organizing the functioning of infrastructure utility enterprises is
the most acute. Recently the need to privatize utility enterprises has been
increasingly discussed. Nowadays various successful models of providing utility
services are known. However, according to experts, none of them can be fully
implemented in another country without taking into account national specifics.
In addition, over time, some countries become convinced of the need to modify
previously effective approaches as they cease to be active in a rapidly
changing environment. Considering this, it is essential to explore the best
international experience in this area.
2.
LITERATURE REVIEW
Different countries have various models of
housing and utility services – from a state monopoly to a competitive market.
Technological features, traditions and government policy in this area
significantly influence the choice of one or another model. For example,
central heating is typical for countries with transition economies. In the EU
countries, as of 2013, the share of central
heating was 12%, while in Ukraine this figure was 66%, in Latvia – 65%, in
Belarus – 50% (Ministry of Energy and Coal Industry of Ukraine, 2016).
Summarizing the study of foreign experience, we
identify three main models of housing and utility services (water supply and
sewerage, energy supply, heat supply, waste disposal, urban passenger
transport, etc.):
1) state (municipal) property is used worldwide, is typical for small communes in the
European Union, is the basic model for most Ukrainian entities providing
services in this area (excluding energy supply);
2) delegated management – provides for
the establishment of a joint stock company, the controlling stake of which
belongs to the local government (municipality), is typical for the Netherlands,
Germany, Greece, Belgium, etc.;
3) private property – the most common
in the UK and some states in the United States. Private companies provide
utilities to the population. In addition, municipalities and the state monitor
the quality of such services by licensing and establishing performance
criteria, followed by monitoring their compliance. In Ukraine, this model is
not applied, since there is a legislative restriction on the privatization of
engineering networks and facilities, equipment, which is associated with the
supply of water, gas, heat, the removal, and treatment of wastewater.
It should be noted that the advantages of one
or another model have been discussed since the late 1980s.
The widespread theory that private ownership is more effective than state or
municipal ownership is not supported today by numerous empirical studies in
different countries.
Thus, Boardman and Vining (1989) note that
partial privatization (mixed companies) is the most inefficient form of
ownership, which performs less profitability than private or state-owned
companies. The reasons for this are the limitations identified by the authors
on the example of North American companies, including the following: 1) some
companies operate in the field of natural monopoly (electric and water
utilities, fire services, and refuse collection); 2) in some areas there is a
regulated duopoly (airlines, railways, financial institutions); 3) output of
such companies cannot be assessed from a competitive standpoint.
Bartel and Harrison (2005) reached a
similar conclusion, and based on the calculations, confirmed that mixed
companies are the most inefficient. However, the authors support the need to
privatize companies because the state is a less efficient owner due to
monitoring problems, as well as the environment in which state-owned companies
operate, as measured by soft budget constraints or barriers to competition.
It is important the experience of countries
that initially preferred the private ownership of enterprises operating in the
housing and utility sphere, but eventually carried out re-privatization (re-municipalization) due to the results of privatized
enterprises did not meet the expectations of local authorities and the
community (Wagner & Berlo, 2015; Clifton et al.,
2019). Examples of such countries are the United States and Germany (energy
companies), France (water supply and sewerage), the Netherlands and Spain (waste
disposal services).
The reasons for the return of enterprises to
municipal ownership are the features of services provided in the housing and
utility sphere, which differ in the presence of not only economic but also
social and environmental effects. Private businesses are often unprepared to
fully upgrade their infrastructure, revise technologies to improve their energy
efficiency or provide services continuously under tightly regulated tariffs,
which significantly limit revenue and lead to low profits or even losses.
Proponents of municipal enterprises
privatization argue their point of view the advantages of a competitive market
environment, the need to improve the management of these enterprises, depriving
them of political involvement, and the need to reduce the burden on municipal
budgets supporting such enterprises (Villalonga,
2000; Bartel & Harrison, 2005). Nevertheless,
there is still no clear answer on how to stimulate the achievement of social
and environmental effects in the process of providing services by private
entities in the field of housing and utility sphere.
According to the authors of the study (UNDP,
2015), privatization is often, but not always, associated with efficiency
gains. The most convincing evidence of increased privatization efficiency is
observed in high-income countries. In contrast, in low- and middle-income
countries, the evidence is limited and ambiguous. Research identifies a group
of factors to increase privatization effectiveness, including competition,
regulation, financial and legal institutional development, and enforcement
property rights.
The operation of utility enterprises after
their privatization is characterized by negative consequences, such as a sharp,
sometimes tenfold increase in tariffs (Hungary, Poland, Czech Republic),
significant job losses (UK, Bulgaria, Philippines), low level of technological
re-equipment, the need to continue providing subsidies from local budgets to
support activities, etc. At the same time, the main advantages of privatization
were not achieved, such as reduction of budget expenditures for the maintenance
of municipal property, development of the housing and utility services market,
improvement of service quality and efficiency of enterprise management in this
area (Warner, 2012; Yelisieieva, 2012).
In our opinion, it is necessary to take into
account the results of the study by Ostrom, the Nobel
Prize laureate in economics (2009). In research that has lasted since the late 1950s, Ostrom used an
interdisciplinary approach that combined economic, legal, sociological, and
geographical methods and was based on official statistics and field research
results. Consequently, she concluded that communities are able to manage public
resources based on mutual trust more effectively than the state or private
owners (Ostrom, 2009). E. Ostrom's
research gave impetus to the development of ideas for the preservation of
municipal ownership and support for decentralization.
Moreover, Voorn, Genugten and Thiel (2017) summarize different studies on
the effectiveness of municipal-owned companies and emphasize the ability of
these companies to realize large efficiency gains, especially in utility
sector.
Therefore, the continuation of empirical
research, especially comparative between countries, will deepen the
understanding of the processes taking place in modern municipalities, in order
to find effective ways to further their functioning with increasing the role of
sustainable development.
Recently, the number of scientific and
practical publications devoted to finding ways to solve problems in the field
of housing and utility services and improving the efficiency of utility
enterprises has significantly increased in Ukraine. Specialists discuss the
following areas:
- at the level of individual economic entities – the
presence and amount of profits and losses, the structure and dynamics of
accounts receivables and payables, assessment of financial security of
enterprises and its modeling (Bagatska, 2020);
- at the state level – the assessment of the impact of the
aggregated loss of utility enterprises on the economy (Mykhailyshyna,
2019); state policy in the field of pricing for housing and utility services (Tarasiuk & Liskova, 2019); the need to privatize most utility
enterprises (except natural monopolies) in order to reduce the burden on local
budgets, the implementation of effective state control and regulation in this
area (Prokhorov, Lonevskyi & Vartovnyk,
2020).
Despite numerous studies in the field of
utility enterprises in Ukraine, the issues of efficiency of their capital
formation are not considered. According to the authors, these issues have a
significant impact on the stability of utility enterprises and their
sustainable development and therefore require additional research. Thus, the
purpose of the study is to analyze the approaches to capital formation of
Ukrainian utility enterprises, identify their impact on the financial results
of entities and formulate recommendations to ensure the efficiency of utility
enterprises.
3.
DATA AND METHODOLOGY
The methodological basis of our research is comparative analysis,
theoretical studies, statistical information, and analytical data prepared by
governmental and non-governmental bodies. The desktop study of documents is
combined with the processing of empirical data collected by the authors during
the analysis of primary data and financial and non-financial reporting of the 30 utilities from 11 regional centers of
Ukraine. Utility enterprises were selected for analysis
from all the
geographical areas covering regions with different economic, demographic,
climatic and administrative conditions, which are essential for providing
utility services. The data, including financial statements for 2017-2019 years,
have been obtained from open sources, as well as by sending written requests to
enterprises. Financial statement analysis was applied to 30 municipal utility
enterprises with emphasis on the capital formation ratios.
The
paper aims to
analyze the approaches to capital formation of Ukrainian utility enterprises,
identify their impact on the financial results of entities and formulate
recommendations to ensure the efficiency of utility enterprises.
4.
RESULTS AND DISCUSSIONS
Ukrainian utility
enterprises are the largest in terms of assets
and equity volume compared to other local-owned enterprises in the same
municipality. Because of providing vital resources and services, these
enterprises are essential for social protection and safety, so the cost of
services is critical to the population, and price changes can profoundly affect
social sentiment. Moreover, these enterprises have the following features
common to all regions:
-
a
significant part of enterprises belongs to natural monopolies (energy supply,
water supply and sewerage, public transport (subway, trolleybuses, and trams)).
In Ukraine, an electricity supply is also a monopolized industry concentrated
in private ownership. The rest of the infrastructure enterprises are
municipal-owned and are managed by the executive committees of the city or
regional councils;
·
technically
obsolete and worn-out networks prevail, which affects the extremely high loss
of resources in the process of their supply to the consumer (so-called losses
in networks);
·
regulation
of tariffs, the mechanism of calculation and approval of which is inefficient
and often non-transparent, has corruption features;
·
inefficient
management, along with other features, leads to unprofitable enterprises
financed from local budgets and affects the cost and quality of services
provided;
·
in
order to ensure utility enterprises’ ability to continue as a going concern
their losses are actually covered at the community’s expense, which is directly
contrary to current legislation. However, it is executed in a way that is not
prohibited (an increase of share capital, financing the acquisition of fixed
assets or other assets, compensation the difference in tariffs, etc.);
·
peculiarities
of financing and election of heads of utility enterprises often provoke political
interference and involvement, which leads to a low professional level of
appointed managers and general inefficiency of the enterprise;
·
lack of
effective levers of influence and the ability to control utility enterprises’
activities by the community.
These peculiarities affect the method of capital
formation of utility enterprises and some financial ratios. In previous
research (BAGATSKA, 2020), financial statements of
the 206 municipal enterprises were analyzed and revealed extremely low
profitability (almost 50% of enterprises got losses during several years until
2017). The low profitability of Ukrainian municipal enterprises is proved in
the Mykhailyshyna’s study (2019), where the author
investigated the ROE of 5,244 municipal enterprises and detected the lowest
value of this indicator compared to the state-owned and private enterprises. Study
of Yakimova and Kuz (2019)
also proved the financial unhealthy of most Ukrainian water and energy
utilities.
Low margin leads to the lack of capitalized income, which
causes the significant differences in the capital formation and equity
structure of municipal enterprises compared with the private and public joint
stock companies: substantive permanent predominance of invested capital over
accumulated capital; low level of using debt financing, large amount of
uncovered losses. As the invested capital of municipal enterprises is
replenished from the local budget, the problem of the disproportion of capital
formation and expenditure is a subject of external stakeholders’ interest,
primarily the community’s population due to taxes of which the local budget is
formed.
We investigated the reasons for this disproportion on a
sample of the 30 largest and most meaningful utility enterprises for community:
water supply and sewerage, heat supply and urban passenger transport
enterprises. The choice of such enterprises is due to the fact that they all
belong to the critical infrastructure, they also have
similar features of functioning and formation of their capital in all regions
of Ukraine. It should be noted that although electricity and
natural gas supply companies belong to the critical infrastructure, they are
not municipal-owned. Enterprises that provide waste disposal services in
Ukraine are small enterprises with insignificant budgetary investments; in
addition, in many regions they are often private entities or companies in a
concession. Therefore, such enterprises were not included in the sample for
research aims.
As the purpose of our research concerns capital
formation, in this paper, we did not consider the problem of capital
expenditures and utilization, so such ratio groups as liquidity and turnover
ratios are not included in the desktop analysis. However, according to the
previous study (Bagatska, 2020), most of the
municipal enterprises of Ukraine have satisfactory liquidity performance, and
their turnovers ratios vary depending on the sphere of activity (from extremely
low by the housing companies to high by the municipal farmer markets, tourism
and advertising agencies).
Two capital structure ratios and ROA
(Return on Assets) were chosen for analysis: Equity to Assets and Debt to
Assets. It should be noted that Debt to Equity ratio and ROE (Return on Equity)
are not appropriate for the sample because 20% of surveyed enterprises have
negative equity volume. To highlight the peculiar properties of equity
formation, two ratios are proposed: Retained Earnings (Losses) to Assets and a
ratio that represents the quota of Cumulative invested capital from the local
budget to Assets. Cumulative invested capital includes registered capital,
additional capital, and special-purpose financing. The average values of report
items for three years were used to calculate ratios.
It should be added that during the last three years
(2017-2019), all the companies from the sample received significant investments
in equity (registered capital or additional capital). Twenty-three enterprises
(77%) have negative ROA, though only thirteen enterprises
(43%) got losses during the period of analysis. Five enterprises achieved
profitability in 2019, but the profits were not enough to get a positive
average result. Only four companies (13%) had retained earnings during the last
three years. Results of empirical analysis summarized in the Table 1.
As for the first ratio – Equity to Assets, significant
predominance of the equity is not observed. 43% of enterprises have more than
50% of equity in total capital, and 20% have less assets than liabilities.
Under market conditions, these enterprises would already be under the threat of
bankruptcy and might not be able to continue as a going concern.
The median value of the Equity to Assets ratio is 43,09%
(including enterprises with negative equity). However, this does not mean that
enterprises from the sample are highly leveraged: 50% of enterprises did not
use debts as the source of financing or used them less than 5% in total capital
on average. The median of the Debt to Asset ratio is 3,06% for the sample, and
the median for those enterprises that use debts more than 5% in total capital
is 22,5%. Such relations confirm some atypical capital structure compared to
the private sector and contradict the bankruptcy legislation requirements.
Regarding the overall capital efficiency, the sample data
confirm the conclusions made by Mykhailyshyna (2019)
about the lowest return on capital of utility enterprises. Only 23% (7
enterprises) were profitable in average for three years.
The median ROA for profitable
companies is 1,9%; the median ROA for unprofitable
enterprises is -7,5%. Low and negative profitability values lead to capital
losses for the enterprises, which negatively affects operating activities and
investment opportunities.
Table 1:
Capital formation analysis of the Ukrainian municipal utility enterprises, %
|
Ratios Cities |
Equity to Assets |
Debt to Assets |
Capital invested by the local government to total Assets |
Retained Earnings (Losses) to total Assets |
Return on Assets |
|
Water supply and sewerage enterprises |
|||||
|
Zaporizhzhia |
87.0 |
0 |
86.3 |
16.0 |
0.3 |
|
Odesa |
38.1 |
0 |
33.2 |
5.0 |
15.9 |
|
Sumy |
48.8 |
0.6 |
80.6 |
-31.7 |
-1.5 |
|
Lutsk |
62.4 |
5.0 |
95.1 |
54.1 |
-1.2 |
|
Chernihiv |
-19.8 |
94.4 |
53.7 |
-73.4 |
12.0 |
|
Vinnytsia |
52.7 |
6.1 |
60.8 |
-8.0 |
-3.2 |
|
Ivano-Frankivsk |
21.3 |
63.0 |
71.6 |
-68.6 |
0.1 |
|
Kropyvnytskyi |
37.4 |
24.0 |
51.8 |
-13.0 |
-5.0 |
|
Zhytomir |
43.4 |
23.7 |
107.5 |
-44.0 |
-0.3 |
|
Chernivtsi |
77.9 |
0 |
138.8 |
-60.9 |
-13.3 |
|
Urban passenger transport enterprises |
|||||
|
Zaporizhzhia |
42.8 |
0 |
108.6 |
-29.6 |
-12.6 |
|
Odesa |
24.4 |
30.1 |
20.7 |
7.2 |
1.9 |
|
Sumy |
96.5 |
0 |
139.1 |
-31.7 |
-7.5 |
|
Lutsk |
-95.6 |
33.6 |
403.0 |
-489.5 |
-8.0 |
|
Chernihiv |
93.8 |
0 |
119.8 |
-26.0 |
-2.8 |
|
Vinnytsia |
77.1 |
1.1 |
109.1 |
-32.0 |
-7.5 |
|
Ivano-Frankivsk |
59.5 |
32.2 |
108.6 |
-16.4 |
-6.7 |
|
Kropyvnytskyi |
86.8 |
0 |
84.0 |
2.8 |
1.1 |
|
Rivne |
94.3 |
0 |
123.6 |
-26.1 |
-6.2 |
|
Zhytomir |
79.8 |
0 |
308.3 |
-44.0 |
-28.7 |
|
Chernivtsi |
89.1 |
17.3 |
167.0 |
-44.3 |
-8.1 |
|
Heat supply enterprises |
|||||
|
Zaporizhzhia |
17.4 |
0.1 |
20.4 |
-35.7 |
5.3 |
|
Odesa |
-43.3 |
9.2 |
16.6 |
-59.9 |
-20.0 |
|
Sumy |
38.4 |
5.7 |
32.1 |
7.3 |
-0.2 |
|
Lutsk |
-10.6 |
22.5 |
31.0 |
-35.7 |
-6.1 |
|
Vinnytsia |
62.0 |
0.9 |
138.0 |
-32.7 |
-8.3 |
|
Ivano-Frankivsk |
-11.7 |
20.8 |
51.6 |
-92.7 |
-10.7 |
|
Kropyvnytskyi |
-66.2 |
0 |
8.2 |
-74.4 |
-13.5 |
|
Zhytomir |
14.1 |
10.4 |
77.7 |
-51.4 |
-0.4 |
|
Chernivtsi |
8.9 |
0.9 |
96.8 |
-62.4 |
-23.8 |
|
Median |
43.09 |
3.06 |
85.15 |
-32.36 |
-5.53 |
Source: calculated by the authors based on the enterprises’ financial
statements
Thus, the ratio of Retained Earnings (Losses) to Assets
(Figure 1) shows that only 23% of the sampled enterprises capitalized their
value through operating results. The rest of the enterprises disrupted invested
capital. The median value of this ratio is negative (-32,36%).
Figure 1: Retained Earnings (Losses) to Assets distribution
Source: calculated by the authors based on the
enterprises’ financial statements
57%
enterprises from the sample have more than 80% average volume of invested
capital in total assets used to cover negative operating results. At 40% of
enterprises the amount of investments in registered and additional capital
exceeds the total balance value. This median ratio is 85,15%. It should be
added that all examined enterprises received investments in registered or
additional capital in 2017-2019 years from the municipal budget.
Thereby,
the vast majority of examined enterprises decapitalized their value and
accumulated large losses. Moreover, these losses were covered from the
municipal budget through investments in registered and additional capital, as
evidenced by the latter ratio (Fig. 2).
Figure 2: Invested Capital to Assets distribution
Source: calculated by the authors based on the
enterprises’ financial statements
Consequently,
calculations of the five ratios allow us to get empirical evidence of the
municipal utility enterprises’ inefficient capital formation. Constant
replenishment of equity from the municipal budget does not increase the
efficiency of enterprises, which are unprofitable in 77% of cases. The
critically low level of using debts makes it impossible to diversify the
sources of financing of the municipal utility enterprises. This method of
financing enterprises contradicts the theory of company efficiency and does not
fit any theory of capital structure.
Ukrainian joint-stock companies publish
information about the correspondence between registered and total equity
capital in the yearly public reports. They are given one year to rectify the situation
if equity is less than registered capital. We cannot demand compliance with
this ratio for utility enterprises due to the high risks of violating the
principle of going concern. However, it is advisable to propose separate
disclosure of information about the correspondence of registered capital to
equity, for example, in management reports on utility enterprises’ performance.
Thus,
study results indicate that the problem of the utility enterprises capital
formation has a long-term nature, is currently unresolved, and is transferred
from one municipality to another. The lack of a strategy for capital formation
and utilization leds to significant budget resources overspending. As
emphasized in studies by Mykhailyshyna (2019) and Tarasiuk and Liskova (2019),
the problems of Ukrainian utility
enterprises over time only exacerbate and not only pose an economic threat, but
also can provoke related social and environmental problems such as a climb in
debt of recipients of housing and utility services; loss of access to services
due to disconnection for non-payment; inability to comply with the requirements
for pollutant emissions as a result of income shortfall by service providers
and lack of funding for relevant programs, including energy conservation.
The importance of strategy formation as a basis for
continuity in utility management is also highlighted by Sandoval-Minero (2019), who emphasized that budget subsidies
provision without commitment to improving efficiency prompt utility enterprises
to ignore administrative and financial expertise they would if they were
competing for funding on capital markets.
With regard to operating income, municipal councils usually approve
rates, usually without linking the income plan to the investment program. The
Mexican experience proves that the possibility of obtaining budget resources in
the absence of clear distribution criteria salvages potential bankrupts and
causes shortcomings in the administration, operation, and assets management of
municipal enterprises. As a result, the quality of services is deteriorating
and infrastructure is becoming inadequate and outdated.
In Ukraine, utility tariffs are set by the state
regulatory body – National Energy and Utilities Regulatory Commission (NEURC) on the base of the investment programs approved by
the local authorities except for urban passenger transport enterprises, tariffs
of which are directly set by the local authorities. The majority of the
investment programs are not published, and even in the programs available for
review, tariffs calculation approach are not explained. It should be emphasized
that despite the legislation requirements to publish financial statements and
other information, many utility enterprises often violate the terms of
promulgation or even do not comply with the law, as confirmed in the paper (Gurt Resource Centre, 2019). For our sample, at least 20%
of enterprises’ financial reports were obtained through the direct request.
Thus, information that should be public becomes challenging to access for
stakeholders. This situation violates transparency, which is a fundamental
principle for developing effective communication with service consumers based
on trust. The lack of utility enterprises’ transparency causes a deficiency of
stakeholders’ concern and provides opportunities for enterprises’ malversation, which leads to inefficient formation and
utilization of public resources. According to Ostrom (2009),
the effectiveness of municipal (communal) property is only possible under
transparent and confident communication with stakeholders – residents of the
community who are service consumers.
Unfortunately, the analysis of the financial
statements and managers' reports published on the official websites of utility
enterprises and local councils revealed the low quality of the disclosed
information, its incompleteness, and management’s formal approach to its
preparation. The lack of real
managers’ responsibility for non-disclosure or disclosure of incomplete and
inaccurate information devalues data placement in the public domain, aiming to
provide truthful information to the public and build trust in the state’s
actions. Instead, the
real levers of public influence on the management of communal property are
lost, and citizens are removed from making important decisions, including in
the housing and utilities sector.
The solution to this problem may be to conduct
audits of the financial statements of utility enterprises since audit is an
effective tool to increase confidence in disclosed information. Currently, the Commercial Code of Ukraine
(2003) stipulates that local councils can require a statutory audit of the
financial statements of a utility enterprise, and they have the right to
determine the criteria for selecting an auditor. Nevertheless, this legislation
has not become widespread. The main reason for refusing to conduct an audit is
called the lack of funds to purchase audit services. However, such a position
clearly contradicts the community interests, which, based on the results of an
independent audit, can obtain not only confirmation (or refutation) of the
financial statements reliability, but also an objective
assessment of the effectiveness of the utility enterprise management. In addition, the application of management
audits proposed by Junevicius et al. (2017), as well
as performance audits, including the efficiency of capital formation of utility
enterprises, can be actual.
5.
CONCLUSIONS AND RECOMMENDATIONS
Based on the study of scientific publications
and analysis of empirical data, the authors came to the following conclusions
and suggestions:
1) We consider that the widespread
privatization of municipal (communal) enterprises is inexpedient, given their
social role and importance for the functioning of the municipality.
Furthermore, it is necessary to consider the potential for improving the
efficiency of such enterprises in the long term.
2) To increase the efficiency of
capital formation of utility enterprises, it is necessary to ensure
transparency of information about the applied approaches and their
effectiveness.
The solution
can be additional disclosures in the notes to the financial statements on the
amount, sources of replenishment of registered and additional capital
(municipal budget funds, donations, other contributions), and justification for
the decision to replenish. Additional information that reveals the
correspondence between invested and accumulated capital, as well as their
growth rates will allow users to draw a conclusion about the formation of
municipal enterprises capital. In our opinion, outpacing the growth rate of
accumulated capital over invested capital will indicate capital formation
efficiency. Such disclosure allows for the establishment of communication
between local authorities, citizens, and municipal-owned enterprises.
3) To ensure transparency and
accountability of the utility enterprise management, it is crucial to introduce
a mandatory KPI, which will provide the
correspondence between changes in the enterprise’s capital structure and
financial results. Directors of utility enterprises should be required (under
the terms of the contract) not only to publish their report on the website, but
also to conduct a public reporting procedure with open access for community
members, answers to the questions, and information on responding to auditors'
recommendations. KPIs should include financial
indicators such as return on capital invested, increase in profitability, or
increase in cost savings. If the enterprises have objective limitations in the
ability to generate profit, KPIs should include
qualitative indicators (reduction of losses in networks, an increase in quality
service, customers’ satisfaction, etc.).
4) It is also necessary to strengthen
the responsibility of the management of utility enterprises for non-disclosure,
incomplete and/or untimely disclosure of financial statements and other reports
(including management reports) in the public domain, providing for appropriate
sanctions and control mechanisms by local councils (for example, by adding to
the contract of the director).
5) It is essential to start conducting
financial and performance audits of the utility enterprises, based on the
results of which it is possible to decide on the feasibility of changes in
capital, as well as taking other organizational and economic measures to meet
the interests of the community.
The implementation of these recommendations, in
our opinion, will not only increase the efficiency of capital formation of
utility enterprises but also help ensure their stable and efficient development.
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