The Cabinet of Ministers can now transfer assets to the management of the State Property Fund without the approval of their previous management bodies. What it means, and how it will help counter corruption.
Previously, without the approval of the management bodies, it was not possible to transfer their assets to the State Property Fund. However, in early September, the government made significant changes to the procedure for transferring state-owned enterprises to the SPFU. In accordance with them, such approval is no longer mandatory. Moreover, not only the management bodies but also the Cabinet of Ministers, the Ministry of Economy, and the State Property Fund can initiate the transfer of objects.
Such a decision made it possible to transfer the assets of inefficient state-owned enterprises, as well as of defendants in criminal cases, to the SPFU.
Augean Stables of Academies of Sciences
The most vivid example is the assets of the National Academy of Agrarian Sciences. According to the analytical report of the SPFU, in the first half of 2022, the NAAS refused to grant 90% of the claims of potential buyers that wanted to privatize its property. At the same time, an audit of the Accounting Chamber in 2020 showed that the Academy did not dispose of its assets very effectively:
- out of almost 1.1 million sq. m of total area, 772,000 sq. m are in unusable condition;
- another 284,000 sq. m are serviceable, but are not used;
- in the State Land Cadastre, there is no information about almost 145,000 hectares of land, which is in the use of the Academy.
At the same time, according to the former Prosecutor General Iryna Venediktova, as of 2020, the National Academy of Agrarian Sciences was one of the record holders in terms of the number of proceedings regarding its activities. The prosecutor’s office carried out procedural guidance in 110 criminal proceedings on the facts of unlawful use of the property of the National Academy of Agrarian Sciences of Ukraine.
56 objects of the National Academy of Agrarian Sciences have already been transferred to the management of the SPFU.
The situation with the National Academy of Sciences of Ukraine is similar. In 2019, the State Audit Service checked the implementation of the budget programs of the National Academy of Sciences of Ukraine since 2016 and established violations in the amount of UAH 865 million. The auditors noticed that the NASU did not receive funds from rent, the property was being destroyed, and subordinate institutions duplicated each other’s functions — the state paid twice. At the end of July, more than 50 objects of the National Academy of Sciences of Ukraine were transferred to the SPFU management. In October — 96 more.
State Monopolist with Corrupt Executives
One of the most attractive assets for investors, from among those that got under the management of the Fund in October, is the operator of liquid ammonia transportation “Ukrkhimtransamiak.” It has two structural units: the Prydniprovske and Mykolaivske departments of the main ammonia pipeline. The enterprise annually transports more than 2.5 million tons of ammonia, and its income for 2020 amounted to UAH 1.7 billion. The value of assets is also significant — UAH 1.8 billion.
At the same time, Ukrkhimtransamiak regularly gets into corruption scandals, and its leaders appear in the materials of criminal proceedings regarding abuse of office, misappropriation, and embezzlement of funds of the state enterprise.
In 2017, the NABU detained the former acting director of Ukrkhimtransamiak on suspicion of taking over the company’s funds in the amount of more than UAH 40 million, which were intended to re-equip the notification systems for the population living next to the ammonia pipeline section. The case is still being considered by the High Anti-Corruption Court. But within the framework of its investigation, the Bureau detectives established the facts of abuse and causing losses to the enterprise in 2017 in the amount of more than UAH 42.5 million already by another ex-head of the SE, who is now wanted.
The total amount of losses incurred by the company in all episodes of embezzlement of funds exceeded UAH 700 million. But new facts of abuse continue to emerge — at the end of 2021, the SBI prevented the withdrawal of UAH 55 million through non-transparent procurement, and in July 2022, the prosecutor’s office served the ex-director of the SE with charges of professional negligence, which led to causing damage to the state for USD 1.5 million.
Endangered Horse Breeding of Ukraine
The land bank of tens of thousands of hectares, 10 horse ranches, and a racetrack in Odesa — according to the financial statements for 2020, the value of the assets of “Horse Breeding of Ukraine” was estimated at UAH 541 million, and income amounted to UAH 396 million.
At the same time, the enterprise is now actually fighting for its existence in the courts. It was driven to bankruptcy, concluding loss-making contracts so that an artificial debt of more than UAH 150 million was formed. Of course, with the assistance of the then senior management of the company, which, with controlled legal entities, intended to get the SE’s attractive assets for peanuts: 13 property complexes of horse ranches and according to various estimates — from 43,000 to more than 50,000 hectares of land.
The bankruptcy case of “Horse Breeding of Ukraine” was initiated back in 2015, but the Ministry of Economy of Ukraine continues to contest the disputable agreements of the SE in court. So, there is still hope that the enterprise will restore solvency.
In 2020, Yevhen Veretiuk was appointed acting director of the enterprise. According to the media, before working in the State Enterprise “Horse Breeding of Ukraine,” he worked as a director of the “Metalist” plant in the occupied Makiivka and in 2016 personally participated in its opening along with the so-called “officials” of the DPR. According to YouControl, Yevhen Veretiuk remains the current head of both enterprises.
With the change in management, the financial results of the company improved. According to the results of work in the first half of 2021, “Horse Breeding of Ukraine” received profit of more than UAH 65 mln. However, the State Audit Service revealed violations and shortcomings in the activities of the SE for 2017-2020 in the amount of almost UAH 3 billion.
The enterprise could have been privatized as early as 2016. However, it was impossible to alienate it because its branches (horse ranches) were among the objects that were not subject to privatization. In 2019, the law that defined this list became invalid. So now the assets of the enterprise can be sold to the private owner.
Agrarian Fund Draining Its Assets
The “Agrarian Fund” enterprise was created in 2013 to support agricultural producers. It buys grain at minimum prices and then sells either it or the already processed flour to consumers when prices go up to the maximum. This is how they ensure a balance in the market in lean years. Today, “Agrarian Fund” takes up 20% of the domestic market of food grain, and its assets in 2020 were estimated at UAH 1.6 billion with an income of 2.2 billion.
Since its creation, “Agrarian Fund” has been generously funded by the national budget — the company received more than UAH 7 billion in 2013 alone. But as we know, where there is a lot of money (especially budget money), there are ways of its embezzlement.
In February 2014, “Agrarian Fund,” contrary to the charter and without the permission of the Ministry of Agrarian Policy, placed more than UAH 2 billion on the deposit accounts of Brokbusinessbank, which belonged to the infamous Serhii Kurchenko. A few weeks after that, the bank went bankrupt. According to the investigation, officials of Brokbusinessbank spent the obtained UAH 2 billion to pay off fictitious debts. So, the SE lost assets — because the bank allegedly could not return them.
In the criminal proceedings, the senior officials were responsible for these facts: First Deputy Head of the NBU, Chair of the Board of “Agrarian Fund,” Chair of the Supervisory Board of Brokbusinessbank. The case is still being considered by the Darnytskyi District Court of Kyiv. As for Kurchenko himself, the pre-trial investigation of criminal proceedings on suspicion of his misappropriation and further legalization of property and funds of a number of state-owned enterprises, including “Agrarian Fund,” has been completed; until December 1, familiarization with the materials will take place.
The audit of the company for the period 2018-2019 showed other financial violations, and it ended 2020 with a loss of UAH 197 million.
Opaque Procurement of Coal Mining SEs
According to the NABU, the largest corruption among all spheres of the state economy is at the enterprises of the fuel and energy complex. In particular, due to the number of persons involved in corruption schemes and the amount of losses.
In April last year, the NABU and the SAPO completed a pre-trial investigation on the fact of abuse of office by employees of SE “Pervomaiskvuhillia.” One of its mines in Luhansk region was on the verge of a man-made disaster. In 2018, the Cabinet of Ministers allocated funds to finance work at the mine. However, the heads of the state enterprise and its subdivision conspired to conduct procurement without a tender and chose a contractor according to independently determined criteria. But the winner and the subcontractor company, instead of performing the work, turned to the mine employees, and they performed all the necessary work on their own. As a result, more than UAH 14 mln was overpaid for mediation. The former acting head of the SE was taken into custody, and in June this year, the SAPO referred the case to the High Anti-Corruption Court.
In 2020, the scheme of UAH 51 mln of damage to coal-mining state-owned enterprises was exposed, among them was “Selydivvuhillia.” During 2016-2018, a group of officials practically established control over public procurement of these enterprises. Every time, they awarded the same private company and did not allow other participants because of intentionally created obstacles. For almost three years, they purchased various equipment, materials, and other goods at inflated prices for a total amount of almost UAH 174.5 million, while illegally overpaying more than UAH 51.17 million. At the end of 2021, the case was referred to court.
Both of these SOEs were transferred to the management of the SPFU.
Large-scale abuses turned state-owned enterprises into hotbeds of corruption that deplete the country’s economy. This is confirmed by statistics. In 2021-2022 alone, the NABU reimbursed the SOEs more than UAH 2.6 billion of damages caused. And over the entire period of the Bureau’s activity, more than 100 heads of enterprises in which the share of state or municipal property exceeds 50% were served with charges of committing corruption offenses, which is a quarter of all charges served. As of the end of the previous year, every sixth case referred by the NABU and the SAPO to court concerned corruption at these enterprises. However vigilant the control of law enforcement agencies over abuses in enterprises may be, they will remain a sweet spot for corrupt officials.
Therefore, privatization is a great solution. On the one hand, it replenishes the budget. On the other hand, it allows the state to focus on managing only strategically important enterprises and assets and not to spend resources on thousands of different objects, whose effective control and development at the same time is simply impossible. At the same time, reducing the number of state-owned enterprises will simply reduce the number of opportunities to steal.