Draft law No. 9494, threatening transparent privatization, has been registered in the parliament. .
The Ukrainian people have come up with numerous proverbs to warn against thoughtless actions.
Don’t kill the goose that laid the golden egg. Don’t spit in the well, you might drink from it later. Don’t reinvent the wheel (yes, it works in the context, too), and finally, “don’t take saw to the branch you’re sitting on.”
Folk wisdom is a very practical thing. Interestingly, it is also scalable.
This chicken may be an important public process worthy of billions. This well may be an established internationally recognized anti-corruption mechanism. This reinvented wheel may be the system of asset transfer from public or communal property into private. And this branch may be the public faith in anti-corruption mechanisms in Ukraine, in the few victories that we have.
What am I talking about? On 23 January 2019, the Verkhovna Rada Committee for Economic Policy received draft law 9494 on amendments to the Law of Ukraine “On Privatization of National and Communal Property.”
Under the pretext of “control over the privatization process,” the draft law actually creates corruption risks when cities sell small privatization objects – state-owned and communal assets under UAH 250,000,000.
Yes, the same small privatization that First Deputy Minister of Economy Maksym Nefiodov spoke about in his interview. The same small privatization whose success in Lviv is a fair point of pride for mayor Andrii Sadovyi. Which already brought about UAH 580,000,000 to various budgets in 2018.
The Law “On Privatization of National and Communal Property” came into effect in March 2018. Since then, small privatization has been taking place through the electronic trade system ProZorro.Sale.
Small privatization objects are auctioned off on ProZorro.Sale by the Deposit Guarantee Fund (DGF) and local self-government authorities.
According to the calculations of SE Prozorro.Sale analysts, last year municipalities made about UAH 260,000,000 by selling or leasing their small privatization assets. Lviv accounts for about a half of that profit.
Small privatization through ProZorro.Sale has proven to be an extremely useful anti-corruption tool and an effective mechanism.
After the ProZorro.Sale system was included in this process, the cost of small privatization has significantly grown. In 2016, the DGF made UAH 101,000,000 from small privatization, in 2017 – UAH 121,000,000, and in 2018 – already UAH 379,000,000, including UAH 311,000,000 earned from auctions held in the ProZorro.Sale system.
Another pure wonder for Ukraine is that none of the ProZorro.Sale auctions held since August 2018 has had a court decision cancelling its result. It attests to the auctions’ reliability. The big number of auction participants means that the market trusts this mechanism.
Risks of Draft Law 9494
Now, the bad things. Draft law 9494 includes a number of amendments that invalidate the ProZorro system’s role in small privatization at the municipal level. Moreover, they enable the use of other intermediaries in small privatization and sale of real estate in cities for prices way below the market level.
The first dangerous amendment changes Article 15 of the aforementioned Law. It allows cities to use “other electronic systems or electronic platforms” to sell assets.
If this amendment is adopted, any city will be able to use any electronic system for sales. Even one made by your mom’s friend’s son somewhere in his basement in a tiny town of Khmilnyk near Vinnytsia. Nobody will care that KhmilNyk.Sale has no compliance certificates, because they are not required.
As a reminder, last year ProZorro.Sale received an award from C5 Accelerate and USA Institute of Peace as the best anti-corruption startup in the world.
The second dangerous amendment to article 18 of the Law says that the lessee will have the primary right to purchase the facility they rent – not through an auction, but only because they rent them.
“That makes sense,” you will say. “If I have invested in renovation, pay substantial rent, why do I have to be in the same conditions as any random person?” Logically, yes, but in practice, there is a significant corruption risk here.
Now, the decision on primary right to purchase can be made under the condition that the lessee has made 25% of irrevocable improvements. For instance, they have legally constructed another floor of the building and thus proven their serious interest in this specific property.
Under draft law 9494, the primary right is granted if the lessee has paid 25% of the building cost established by an appraiser. This leads to the dangerous situation where the appraisal may be done in a way that would make it easier to go around the transparent mechanisms.
The third dangerous amendment has to do with final and transitional provisions of the Law. Objects that have to be privatized by a buyout (sale beyond the auction) according to a decision made before the Law is adopted have to be sold beyond ProZorro.Sale. It will allow cities to privatize most objects through old corrupt schemes.
I did not bring up the small town of Khmilnyk in Vinnytsia oblast accidentally. It ranked 8th in the city ranking made by SE Prozorro.Sale. Here, thanks to ProZorro.Sale system, UAH 4.2 million worth of small privatization objects have been sold, which has contributed heavily to the local budget.
The key achievement here is the effective use of the ProZorro.Sale system.
Unfortunately, Khmilnyk, Lviv, Dnipro and Kolomyia are only individual examples of cities actively engaging in small privatization. Many other cities seem to be waiting for something.
Perhaps, what they are waiting for is adoption of laws like 9494, which will enable them to work around ProZorro.Sale and go back to the old cycle of corruption?