Anti-Corruption Policy in State Property Management: Plans to Be Implemented by 2025

Ineffective management of state-owned enterprises

According to the State Property Fund, as of last year, there were more than 3,200 state-owned enterprises and business entities in which the state’s share exceeded 50%. However, they were managed by more than 80 different bodies. The Ministry of Economy monitored the effectiveness of this management and found that almost every second such enterprise was not working or was unprofitable.

The continuous lack of a unified strategy for the functioning of the public sector of the economy has led to low efficiency of management of state-owned enterprises. Due to the insufficient quality of control mechanisms and the unsatisfactory level of transparency of their activities, they have become a source of losses and corruption. In just 9 months of 2022, losses from economic activity (or inactivity) of these enterprises amounted to more than UAH 58 bln, and the heads of state-owned enterprises remain the leaders in the number of exposed corruption-related violations.

In recent years, Ukraine has taken several steps to reform the management of state property, in particular:

• launched corporate governance reform in the largest state-owned companies in accordance with the guidelines of the Organization for Economic Cooperation and Development (OECD);
• launched transparent privatization and lease of public property;
• created an electronic system to display the financial results of state-owned enterprises.

However, it should be noted that these reforms are still at the stage of implementation.

One of the factors that determine the ineffective management of state-owned enterprises is the lack of an approved comprehensive state property policy. This document shall define:

• general principles and objectives of ownership, management, and disposal of state-owned enterprises, in particular regarding the exclusivity of such ownership and transparency of activities to reduce corruption risks in this field;
• powers, functions, and responsibilities of the management bodies of such enterprises;
• priorities in the management of state property.

It should also reflect the relationship with other available strategies and policies (privatization, lease, or dissolution of state-owned enterprises).

To solve this problem, the SAP provides for a set of measures, in particular, the adoption of the law on the development and approval of the State Property Policy by the government, its direct development and approval, as well as the approval of individual ownership policies at state-owned enterprises.

It is worth noting that the 15 largest state-owned enterprises have already approved their ownership policies. However, the problem lies in their quality — they do not set clear goals for the activities of these enterprises, but describe only the types of economic activities that will be carried out. Moreover, these policies are simply not applied in practice.

Therefore, it is important to ensure not only the adoption of a law that will provide for the mandatory development and approval of individual ownership policies. It is necessary to establish clear requirements for them — regarding the goals of state ownership, the main tasks of state-owned companies, the main types of economic activity and performance indicators, and ensure control over the implementation of these requirements. When discussing the draft SAP, we drew attention to this problem, and our comments were considered.

Another significant issue is that individual authorities combine the functions of the owner, the regulator, and the body that forms the policy regarding state-owned enterprises. This leads to a conflict between functions, the implementation of which contradicts each other, and makes effective management impossible.

It is proposed that the solution to this problem may be the creation of a centralized body to manage the main enterprises of the state form of ownership. The OECD’s guiding principles of corporate governance of state enterprises provide for the application of such an approach.

According to the SAP, before that, the Ministry of Economy should prepare and publish an analytical report that will contain recommendations on the most optimal model for the distribution of the relevant functions. We support this idea. At the same time, 70% of state-owned enterprises are already concentrated under the management of the State Property Fund of Ukraine, and by the end of 2023, according to its head, the agency intends to achieve the transfer of the remaining 30%.

Considerable attention is paid to the continuation of corporate governance reform at state-owned enterprises, in particular, to prevent corruption risks due to the possibility of influence of management bodies on their activities.

By June 2024, the government is expected to have approved an Action Plan to bring the system of corporate governance in economic entities that have:

• strategic importance for the economy and security of the state;
• the highest level of corruption risks or
• belong to the most important economic entities of the military-industrial complex,

into compliance with OECD corporate governance standards.

This will be preceded by updating the lists of such enterprises. By the end of 2025, supervisory boards should be formed in all state-owned enterprises, for which their creation will be determined as mandatory.

However, today there are a number of problems related to the activities of supervisory boards that need to be addressed:

• approaches to determining the criteria for the formation of supervisory boards in state-owned enterprises are outdated;
• members of the supervisory boards are independent only nominally, in particular, due to the fact that the owner can dismiss them at any time;
• there are no clear, objective criteria for dismissal of supervisory board members.

To solve these problems, the SAP proposes to adopt a law that will provide for:

• an objective and transparent procedure for the formation of supervisory boards of state-owned enterprises;

• requirements for independent members of supervisory boards and their functional responsibilities;

• exhaustive list of grounds for early termination of powers of members of supervisory boards(including in case of gross violations of anti-corruption legislation or rules of ethical conduct).

In addition, the Ministry of Economy will prepare a report every three years on the relevance and validity of the criteria for the mandatory establishment of independent supervisory boards in state-owned enterprises.

The primary version of the SAP also proposed to abolish key performance indicators for members of the supervisory boards of state-owned enterprises. However, we stressed that the performance of supervisory boards should not be left without assessment. Key performance indicators for individual members of the supervisory board could have been used as grounds for improper dismissal. However, this does not mean that it is unnecessary to evaluate the effectiveness of supervisory boards at all. They need to be evaluated but as collegiate bodies, according to clear and transparent criteria that the government will determine. Based on the results of the discussions, the need to develop an appropriate methodology was considered and included in the list of SAP activities.

The adoption of a separate law on the features of the formation and functioning of supervisory boards of state-owned enterprises is important from the perspective of the threats to corporate reform that emerged during the martial law.

In last April, MPs adopted a law allowing the dismissal of a member of the supervisory board of a state-owned enterprise or bank if this person does not immediately appear at its address. Subsequently, the Verkhovna Rada registered a new draft law, designed to solve this problem. However, it contained a number of new corruption risks, in particular, it proposed to abandon the competitive selection of members of the supervisory boards of state enterprises and banks during the war.

The draft law was withdrawn from consideration, but the government picked up the idea and canceled the competitive selection of managers, heads of executive bodies and members of the supervisory boards of economic entities of the public sector of the economy, except for a number of the largest companies. On our initiative, the SAP included provisions providing for the resumption of competitive selection of managers, heads of executive bodies, and members of supervisory boards of the entities of the public sector of the economy.

Among other key measures to prevent and combat corruption in the public sector of the economy, it is worth highlighting:

• the introduction of an annual independent audit of public sector economic entities by the end of 2023. Interestingly, the document does not clearly define for which enterprises such an audit will be mandatory — only for state-owned enterprises that are of strategic importance for the economy and security of the state or for all of them without exception. This will help establish an analytical report, which the Ministry of Economy had to publish by the end of May this year. At the time of preparation of this material, it has not yet been published;
• implementation of the internal control system at state-owned enterprises, which includes the functions of compliance, risk management, and internal audit. The corresponding draft law should be developed by the Ministry of Economy no later than October this year.