5.6. Production at factories without foreign investments

The remaining five factories in Pheodosia, Odessa, Dnipropetrovsk, Kamenets-Podolsky, and Monastyrische were privatized by their employees. For them we will use abbreviation ONIF - old non-invested factories. They could be called semi-state factories as they have many of the same problems as state enterprises, including: (i) overstaffing, (ii) paying excessive wages and benefits to employees, (iii) low autonomy and inappropriate incentives for managers, (iv) inefficient and unproductive operating conditions, (v) out-dated technology, (vi) corruption. 

All ONIFs wanted to attract foreign investors, but investors had no intentions of saving them. BAT-Priluky managing director Peter Quittenbaum said, "They can't be profitable. They have no capacity for growth." (Tobacco Reporter, July 1996). Foreign investors first simply expected small factories to close themselves. Later it occurred to them that the existence of these factories had some benefits for TTC, such as lower taxes.

The production at the ONIFs in 1992-2001 has decreased (Fig. 1.7) from 12,5 billion cigarettes to 2.65 billion cigarettes or from 22% to 3,8% of the total production. The worst situation was at the Odessa and Dnipropetrovsk factories. A portion of non-filter cigarettes in the ONIF production increased from 77% in 1992 to 96% in 1999, while their shares in the total non-filter cigarette production varied from 10 to 22% (Fig. 5.1, 5.2). 

The most successful year for ONIFs was 1999, when the excise tax rate was at its highest. They increased their production by 8%, while TTC factories decreased it by 10%. In November 1999, the parliament decreased excise taxes (especially for non-filter cigarettes) in order to save ONIFs from the smuggling of cheap non-filter Russian cigarettes. But mainly TTC factories benefited from the tax reduction, and in 2000 they increased their production by 12%, while ONIF factories decreased it more than twice. 

In November 2000, the directors of five plants - in Dnipropetrovsk, Donetsk, Lviv, Odessa and Pheodosia - issued a statement, claiming that: "Three tobacco plants - in Dnipropetrovsk, Odessa and Monastyrshchenska - have stopped producing cigarettes, since they are unable to compete with cheaper Russian cigarettes that are imported mostly illegally. The plants consider that the main reason for the fall in production and its suspension is the high rate of excise on non-filter cigarettes - Hr 10 per 1,000, introduced from July 1, 2000. The plants are forced to admit that they are not in a position to influence Parliament to adopt a draft law on reducing excise rates on non-filter cigarettes to Hr 5 per 1,000, which could improve their situation. The plant directors state that plants with foreign capital are against the reduction in excise, since they want to expand the market share of filtered production." (Kiev Post, November 23, 2000). 

The statement was not all true. Actually, anticipating tax increase in July (from 7 to 10 UAH/1000), most of the factories greatly increased their production of non-filter cigarettes in May and June (see Fig. 5.3), and the three mentioned ONIFs were closed down only for July and August. The directors also stated that "thousands of workers coulc lose their jobs", while total employment at these 5 factories was 1,031. The fight between TTC and ONIF factories was just a show for media, since all five TTC factories and all five ONIFs are members of the Ukrainian Tobacco Association. However, parliament again decreased the excise tax rate for non-filter cigarettes, and since January 1, 2001 it is 5 UAH per 1,000 pieces. However, TTC factories were again beneficiaries. In the first 6 months of 2001, ONIF produced only 860 million cigarettes and their shares in the production of non-filter cigarettes decreased to 10%. At the same time, the TTC factories increased their production by 12% and BAT Priluky factory produced 32% more non-filter cigarettes than during the whole year of 2000.

To compare the results of the 1999-2001 tax policy for ONIF and TTC production, see Fig. 5.3