The specialized committee recommended the parliament to adopt two draft laws related to state-owned enterprises and the State Property Fund in the second reading and in general — 8205 “On the Features of Termination of State-Owned Enterprises” and 8250 “On the Optimization of the Structure of the SPFU.”

Today, the SPFU manages more than 1,300 economically inactive state-owned enterprises. But due to the imperfection of legal regulation, the state cannot ensure an effective process of their liquidation. This generates corruption, which is associated with the illegal use and alienation of the property of these enterprises without proper control by the state.

Draft law 8205 is to change that. It will make the procedure of termination of state-owned enterprises self-sustaining and allow attracting qualified specialists with relevant experience to conduct it. The sale of seized property of state-owned enterprises, whose ban has been in force since 2007, will also be unblocked. Such property will be sold through electronic auctions on Prozorro.Sale. 

With the new procedure, it will be possible to sell the assets of idle state enterprises for at least UAH 140 mln and repay their debts to the state budget.

TI Ukraine joined the working group on the preparation of proposals to the draft law to minimize corruption risks, in particular during the selection of managers of SOEs termination.

Draft law No. 8250 provides for a change in the organizational structure of the SPFU through the centralization of the agency’s management. It also gives the head of the Fund the authority to appoint and dismiss their deputies and heads of regional offices.

The State Property Fund itself stressed the need to finalize the draft law to ensure the continuity of powers during the reorganization.

At the meeting, the committee was informed that before the second reading, the document also included provisions on:

• management of confiscated, including russian, assets of sanctioned persons;
• unblocking of large-scale privatization;
• providing additional guarantees for buyers of privatization objects.

It is not yet known which amendments and proposals to this draft law the committee considered. However, TI Ukraine experts will definitely prepare a detailed analysis of all changes as soon as they are published.

This publication was prepared with the financial support of Sweden.

For almost 2 months, Ukraine has been resisting russia’s armed aggression. While the Armed Forces courageously defend our territories from the invaders, life continues in the rear. Government structures work, although they partially reorient their activities. Let us tell you how the State Property Fund of Ukraine lives and helps the country during the war.

Before the war, the SPFU was responsible for:

• preparation for privatization of state-owned objects: shares of state-owned companies, single property complexes or separate property;
• management of state-owned enterprises subordinated to it;
• lease of public property;
• appraisal activities.

In peacetime, the Fund maintained a firm policy of attracting investors to Ukraine through privatization. The war prompted it to change the vector to providing assistance to Ukrainian business with relocation to safer settlements of Ukraine and the development of legislative changes for new realities of life.

One of the most important areas of the SPFU’s work during the war is helping businesses with relocation. Together with the Ministry of Economy and Prozorro.Sale, they launched a special program. The Fund provides the premises under its management for the relocation of enterprises from combat zones. It also looks for state objects in registers for the specific needs of businesses. For example, the production of one of the leading pharmaceutical companies was relocated to Zakarpattia. And the enterprise, which was evacuated to one of the objects of the Fund from Irpin, has already manufactured and sent the AFU the first 500 class 4 bulletproof jackets.

Regional state administrations cooperate with the Fund and are ready to help the business choose premises and relocate. To do this, businesses that require premises when relocating can fill out a special form and leave an application.

By the way, the objects managed by the Fund provide shelter not only for businesses, but also for internally displaced persons. For example, one of the enterprises in Zaporizhzhia hosts evacuees from Mariupol. In total, more than 30 SPFU enterprises were involved in such assistance. Approximately a thousand women and children are sheltering in them.

The Fund also worked on data security: transferred and protected servers and databases of corporate rights registers, state property and property valuation reports.

Another important area of the Fund’s work is the restoration of public property lease. On April 6, the Verkhovna Rada adopted a draft law developed by the SPFU, according to which the government will determine the procedure for leasing during martial law. The next step is the adoption of a resolution that will simplify the leasing procedure during the war and provide some benefits to lessees.

Equally important, 150 enterprises managed by the SPFU continue to operate. These are also energy companies, industrial bakeries, and other enterprises that are critical for the country — all are committed to their tasks and provide the country with the necessary resources. In addition, they continue to pay taxes. State-owned enterprises and joint-stock companies managed by the Fund have paid more than UAH 640 mln to the national budget since the beginning of the year. UAH 75 mln of it accounts for advance payments.

Agrarian enterprises continue to operate under the management of the Fund in regions where there are no active hostilities. As of the end of March, they had cultivated 7,000 hectares of area sown.

In addition, the SPFU is involved in the preparation for the second reading of draft law 7198 on Compensation for Damage and Destruction of Immovable Property as a Result of the Russian Federation’s Aggression. This draft law will determine how the country will compensate and rebuild the housing destroyed by russia. To this end, the Fund, together with ministries, the Kyiv School of Economics, and the community of appraisers, is developing a methodology for calculating losses and damage caused by the russian military aggression.

Unfortunately, due to the war, the privatization movement in Ukraine has been significantly suspended. According to the public analytics module of Prozorro.Sale, from March to mid-April 2022, there was no auction held for small privatization. In comparison, income from small-scale privatization in the same months of 2021 amounted to more than UAH 325 mln. The SPFU also prepared objects of large-scale privatization for sale. In particular, in February 2022, a new date for the sale of the UMCC was to be announced.

Now, the authorities have focused on the challenges of wartime, they help Ukrainian business, support state-owned objects, keep records of damage to public property, and protect data. However, it is crucial that after the victory of Ukraine, we do not forget to continue important reforms in the sector of the national economy, which have already been launched!

This year’s Open Government Award is held on the occasion of the 10th anniversary of the Open Government Partnership Initiative, in which Ukraine has been participating since the beginning of its work.

In the category OGP Impact Awards, our country is represented by ProZorro.Sale — an online auction system that ensures openness and transparency of the sale and lease of public assets and property: https://prozorro.sale/

Prozorro.Sale helps the state and communities earn money from privatization and lease through competition at auctions. As of September 2021, property was sold through the Prozorro.Sale system in excess of UAH 54 bln.

An open API of the system, a modern auction portal, a detailed analytics module, and access for everyone to the information about the disposal of public property increase transparency and trust in the markets, as well as strengthen public oversight.

 

Support Ukraine! Cast your vote for ProZorro.Sale until October 22 at the link: https://bit.ly/3BNobZc

How to do this:

1. In the list of countries, select Ukraine.
2. Enter your email address.
3. Click “vote.”

The winners will be awarded at the Global Summit in December 2021.

That’s a fact that public oversight is one of the attributes of a democratic society. If citizens monitor the implementation of the declared goals and obligations by the authorities, then the management of the country’s resources will be more effective.

In 2016, we at Transparency International Ukraine joined the reforms of public procurement and the effective sale of public assets. We helped create such electronic systems as Prozorro and Prozorro.Sale. Now, now, these are highly efficient systems. Prozorro helps save billions on procurement, and Prozorro.Sale helps the state and communities earn billions from privatization and leases.

Nevertheless, we understand that the presence of good innovative systems alone is not enough for the reforms to be implemented fairly and without corruption. As they say, Prozorro itself will not write complaints, and even more so will not convict. That is why in the same year 2016, we created the DOZORRO project, bringing together a network of civil society organizations that systematically control the spending of funds on public procurement.

From January 2017 to July 2021, our community monitored more than 41,000 procurement transactions, sent more than 37,000 requests, and received more than 23,000 responses. In the end, we managed to correct violations in more than 6,000 tenders.

The management of state and municipal property, that is, our property, deserves the same independent and effective control from the public. Taxpayers, like no one else, should be interested in the effective sale and lease of property. 

Just imagine the scale: as of September 2021, property worth more than UAH 54 bln was sold through the Prozorro.Sale system. And all this is connected with public assets — those that belong to Ukrainians.

Prozorro.Sale has become an effective tool for businesses and the public to monitor and control the state and municipal property market. This is a significant step to combat possible abuses in the privatization and lease procedures. So, today, we are launching a similar monitoring community of civil society organizations that will stand guard over the fair rules of the game in auctions for the sale and lease of state and municipal property.

We will be able to teach you different mechanics of how to influence the situation. TI Ukraine provides a kind of suitcase of tools that will help you learn how to control the management of public property. Subsequently, you will be able to spread your influence by finding partners, friends, and followers.

 

What do we offer?

 

To join the community that we are forming.

To fill out a form as a CSO representative and be ready to work on changes. For us, the community is about like-minded people who are united by a common idea and desire to make positive changes for their community and country.

 

To learn from us.

We have already developed a unique methodology of monitoring auctions of small-scale privatization and lease of state and municipal property using the Prozorro.Sale system.

We have a training plan and know exactly how to convey the most important things in simple language. We will explain to you in simple terms what public property is, how much it costs, and how much of our taxes is spent on its maintenance, as well as show you how to control whether local or national authorities manage this property. 

We have created a detailed guide for those who are ready to carry the load. Furthermore, we will also teach you how to train the organizers of auctions of small-scale privatization and lease of state and municipal property.

 

To track and analyze.

With a step-by-step description, you can find out what your community owns, what and how to check at all stages of auctions, what violations may occur, and where to look for them.

 

To monitor and appeal.

In case of violations found in the privatization and lease procedures, we have prepared templates for contacting the auction organizers or supervisory authorities. You will have a full range of opportunities to influence processes and save money for your community.

 

To make tangible changes in communities.

 

Ready? Register.

The beginning of 2021 turned out to be full of fateful decisions and stormy events. The world’s media attention was focused on the Capitol attack and the attempt to impeach Donald Trump. In Ukraine, the Law on language, the lack of vaccines against COVID-19, and the introduction of a new national lockdown were mostly discussed. There was also an aftermath of the constitutional crisis.

After such events, the emergence of a “privatization package” of draft laws in the Verkhovna Rada was noticed only by a narrow circle of experts. However, their adoption may become one of the key events of the year, at least in the economic sphere. Because it will bring us one step closer to overcoming the chronic problem of inefficient and, usually, negligent management of state and municipal property.

In total, the “privatization package” includes 4 draft laws. They concern changes in the work of the State Property Fund, writing-off the accumulated tax debt of state and municipal enterprises, distribution of proceeds to the state and local budgets from privatization, and establishment of administrative liability in the field of property management.

Change in the management structure of the State Property Fund

As of now, the head of the Fund does not have clearly defined powers, and gives his deputies functional responsibilities at his discretion. Draft Law No. 4572 not only specifies the powers of the head of the Fund, but also forms a new body — the Board of the State Property Fund of Ukraine — for collective decision-making of particularly important decisions.

The Board will approve lists of small-scale privatization objects, make decisions on the privatization of large-scale privatization objects, as well as on the creation, reorganization, and liquidation of state-owned enterprises, approval of their charters, and appointment of managers.

At the same time, it is proposed to create the Patronage Service of the Head, that will be engaged in advising its manager, preparing materials necessary for the implementation of the Fund’s tasks, organizing meetings and public and media relations. A position of the chief of staff is formed to organize work with the personnel of a state body.

In general, the change in the Fund’s management structure is an ideological continuation of the civil service reform that was implemented in Ukraine during 2015-2018. Then there was a division of senior positions in ministries into political (ministers and their deputies) and administrative (state secretary and heads of departments).

However, there is a big spoon of tar in a barrel of honey in the form of numerous controversies. For example, the formation of such bodies and positions is inconsistent with the content of the Law “On Central Executive Authorities,” which provides for the activity of only the patronage services of a minister, and such a body as the Board does not exist at all. The powers of these bodies will neither be envisaged by Article 7 of the Law of Ukraine “On Management of Objects of State-Owned Property,” which also defines the powers of the State Property Fund. Therefore, the draft law needs to be finalized in terms of these issues.

As far as the creation of the SPFU’s Board is concerned, the experience of state institutions in Ukraine shows that the introduction of collegiality in a certain body creates the foundation for many conflicts and slows down the pace of decision-making. As a result, the responsibility may turn out to be collective and, consequently, not personal. The experience of the National Agency on Corruption Prevention (NACP) in the period from 2015 to 2018 is quite illustrative in this context.

Prevention of seizure of state property

It is no secret that there is a widespread practice of stopping privatization processes due to abuse of procedural rights in Ukraine, for example, by applying to the courts with motions on the seizure of property in respect of which a decision on privatization has already been made. Therefore, long-term legal disputes begin because otherwise it is impossible to counteract the abuse of procedural rights.

As a result, we have a reduced pace of privatization and a shortfall in budget funds.

In draft laws No. 4572 and 4573, amendments to the procedural codes are envisaged, which are aimed at offsetting possible abuses to halt privatization in the courts, including on the part of former interested parties.

These changes will also contribute to reducing costs for payment of court fees. For example, the annual need of the SPFU in 2020 to pay the court fee amounted to UAH 19,915 mln, but only UAH 5,730 mln was provided from the state budget.

In our opinion, the initiative to ban the seizure of the property of SEs that are being privatized will neither cover all possible abuses of procedural rights, nor prevent interference in the privatization process. Therefore, this article should be removed from the draft law.

Liability for violations in the procedures for the sale and lease of property

The same draft law No. 4573 proposes to amend the Code of Ukraine on Administrative Offenses and establish liability for authorized management bodies and balance holders of state property for negligent management and inefficient use of state property.

MPs initiate amendments to the Administrative Code so that officials of the State Property Fund have the right to draw up protocols.

The amount of fines is expected to be quite low and will range from 250 (UAH 4,250) to 2,000 (UAH 34,000) non-taxable minimum incomes of citizens.

We agree that the establishment of administrative liability can partially prevent abuse on the part of balance holders, landlords, and authorized property management bodies. After all, as of today, there is not a single person responsible for negligent management of public property.

In addition to setting fines, it is important to determine the effective mechanism of prosecution. The draft law gives the State Property Fund an additional and still not inherent function — drawing up protocols on administrative offenses. At the same time, there is no mechanism for the Fund to get the necessary information for drawing up protocols. Therefore, the matter of the effectiveness of such a tool is questionable.

Percentage distribution of proceeds from the privatization of state-owned objects between budgets of different levels

Currently, funds from the privatization of state property are credited to the state budget, and from municipal property — to local budgets.

Draft law No. 4575 defines percentage distribution of proceeds from the privatization of state-owned objects between budgets of different levels.

MPs initiated the following distribution of proceeds from privatization:

• 3%from the sale of small-scale privatization objects and 2% from the sale of large-scale privatization objects — to the State Property Fund for preparing objects for privatization and salaries for SPFU employees;
• 20%from the sale of small-scale privatization objects and 10%from the sale of large-scale privatization objects — to the management body, that is, to the previous owner.
• 67%from the sale of small-scale privatization objects and 88%from the sale of large-scale privatization objects — to the state budget;
• 10%from the sale of small-scale privatization objects — to local government budgets;

The proposal to allocate part of the funds to the “payment of remuneration to employees of the State Property Fund of Ukraine” (Article 30, part 4, clause 24 of the Budget Code) is risky, since the text of the draft law does not envisage the establishment of limits on the amount of such remuneration. Therefore, we propose to remove this provision.

In general, these changes can have a positive impact on life in the regions because there will be an additional source of income. However, this percentage distribution does not contain a proper economic justification (including on compliance with the provisions of the Rules of Procedure of the Verkhovna Rada and the Budget Code), which creates a high risk of returning the draft law.

Cancellation of tax debt to state and municipal enterprises

And finally, the most controversial document. Draft law No. 4574 “On Amendments to the Tax Code of Ukraine” is designed to solve the problems of selling state or municipal property encumbered with tax lien and accumulated tax debt by state and municipal enterprises before privatization.

According to the current legislation, a taxpayer can alienate their property in tax lien only with the consent of the supervisory body,

MPs propose to supplement clause 92.1. of Article 92 of the Tax Code with a provision that clarifies the terms of sale of state and municipal property objects held in tax lien. The sale of such objects through privatization is proposed to be conducted without the consent of the supervisory body.

The document also provides for writing-off tax debt of state and municipal enterprises, joint-stock companies, created in the process of corporatization (100% of the shares/stakes are owned by the state), in respect of which the privatization body has made a decision on their privatization. We are talking about debts accumulated before January 1, 2021 (including those established by court decisions and restructured).

On the one hand, the proposed changes will help to activate the process of transferring objects for privatization. On the other hand, this will significantly encumber the state budget, which raises the question of the expediency of such changes.

Although the “privatization package” of draft laws introduces several positive changes in the field of state property management, there is something to criticize it for. However, it is important not to throw the baby out with the bath water.

Provisions that give rise to corruption risks and controversies in legislation should be eliminated during the discussion of amendments at the committee on economic development. To paraphrase Neil Armstrong’s legendary statement, this will be a small step for the legislature, but a giant leap for the Ukrainian economy.

The article was co-authored with Kyrylo Sydorchuk, advocacy manager of TI Ukraine.

The United Mining and Chemical Company has a critical mission — to successfully open a new chapter in the history of large-scale privatization in Ukraine after 16 years of waiting. 

The auction for the sale of the country’s flagship in mining industry is scheduled for the end of August this year. Special attention is focused on the privatization of the UMCC, including that of the international community, because the competition will be a test for the country’s readiness to work for results — to overcome corruption at state-owned enterprises, conduct open and transparent auctions, engage international investors, and ensure that the projected amounts are received by the state budget. 

UMCC: titanium Klondike of Ukraine

Ukraine ranks 1st in Europe and is one of the leading places in the world for the extraction of titanium ores (4% of world production). AT United Mining and Chemical Company, which was established in 2014, is the largest miner of titanium ores in Ukraine. The company includes Vilnohirsk Mining and Metallurgical Plant and Irshansk Mining and Processing Plant.

The company is the largest one in Europe for the extraction of titanium ores (ilmenite, rutile) and zirconium of the highest quality. The total volume of deposits is estimated at 12 million tons. The enterprise exports its products to 35 countries around the world. In 2020, UMCC’s net revenue amounted to USD 116 mln.

Starting price for the sale of Ukraine’s extractive industry’s giant is estimated at UAH 3.7 bln. Prime Minister Denys Shmyhal states that such an attractive object already has more than 10 potential buyers from different countries.

However, a logical question arises: if the object is so profitable and unique, why is the country selling it?

UMCC, held captive by oligarchs

In our previous material using the example of another most important state-owned enterprise put up for privatization — PAT Centrenergo — we proved that large companies in the hands of the state are a corruption risk and a tool for enriching oligarchic groups. The UMCC is no exception.

Since 2004, the Vilnohirsk and Irshansk UMCC plants have been of great interest to oligarch Dmytro Firtash and providing raw material needs for his company PrAT Crimean Titan in Armiansk, Crimea. After the Revolution of Dignity, the SPFU terminated the lease agreements with Group DF (DF — abbreviation Dmytro Firtash) for the supply of raw materials for the Firtash plant in Crimea.

In 2014, Ruslan Zhurylo was appointed general director of the UMCC, who, according to media reports, was a member of the entourage of ex-MP Mykola Martynenko, who was accused of embezzlement of funds at other state enterprises — NNEGC Energoatom and Eastern Mining and Processing Plant.

In January 2017, Ruslan Zhurylo was detained by the NABU under the so-called UMCC case. As a result of organizing a scheme to resell the extracted ore through shell companies controlled by the UMCC management, the company caused damage to the state amounting to almost USD 13 mln.  By the way, one of the companies through which ore was exported from the UMCC is now trying to sue the latter for almost UAH 5 mln. Let us remind you that all court costs of state-owned enterprises are covered by taxpayers’ funds.

It should be noted that the dismissal of Ruslan Zhurylo from the post of the UMCC head in 2017 did not reduce his influence over the company — his first deputy Oleksandr Hladushko took over the business. The scheme for selling titanium ore at reduced prices to shell companies continued functioning until 2020, when Hladushko was replaced by Peter Davis, British financier and acting head of Board. However, with the appointment of a foreigner, the situation in the UMCC has not changed.  

Raider attacks, website hijacking, and pressure on financial top management.

In April 2020, the SPFU reported attempts of hostile takeover of the company by the former management. At the same time, the control was gained over the official website of the UMCC. The control over the page was obviously never restored, since the latest publications in the section “News” are dated 2020 and are full of negativity towards the new management of the company and the head of the SPFU. Now the UMCC has a new website.

Also in May 2020, the media published reports of criminal actions against top management of the company’s financial sector. First, unknown people broke into the apartment of a board member, who was responsible for the financial direction, and stole a laptop and work documents. A few days after the incident, the car of the head of the department of economics and finance of the enterprise was set on fire.

In January 2021, the SPFU again reported searches at the company’s central office and linked this to attempts to disrupt the privatization of the object.

UMCC and trade with the occupied territories

During the investigation of ore resale schemes in 2017, the NABU published recording of a phone call of one of the suspects. This audio showed that the UMCC company was supplying titanium ore to the temporarily occupied territories of Donetsk and Luhansk regions through intermediaries. And in May of this year, a new scandal broke out — the UMCC was accused of ilmenite concentrate shipment through a shell company to Firtash’s plant in the occupied Crimea. It is Firtash who can act as the main beneficiary of this scandal, the purpose of which is to scare off competitors at the auction for the privatization of the UMCC and keep the company, de facto, in his sphere of influence. 

UMCC and land seizure

Mining activity of heavy industry enterprises always carry environmental risks. The UMCC is only a sad confirmation of this.

At the moment, materials of the pre-trial investigation on the grounds of a crime under Article 239, part 1 of the Criminal Code of Ukraine, are in the proceedings of the Verkhnodniprovsk Police Department on the fact of contamination and damage to land as a result of industrial activity of the Vilnohirsk combine of the UMCC.

According to the content of the judicial decision, the fact is that the enterprise uses agricultural land plots without registration of title deeds for the placement of power lines and the technological process of mining, as well as contaminates state and municipal property lands with industrial waters.

In addition, the UMCC arbitrarily occupied 5 land plots with a total area of 217.4 hectares, which is equal to the territory of 217 football fields!

Privatization of UMCC — a panacea for oligarchic influence? 

The chances of losing oligarchic control over the enterprise are growing because on June 24, the President of Ukraine put into effect the decision of the National Security and Defense Council which imposed sanctions on Dmytro Firtash, in particular, banning him from taking part in privatization and cancellation of permits for the use of mineral resources. It is also possible that before the auction, the Verkhovna Rada will have time to vote in the second reading for the new so-called “law on oligarchs” and Dmytro Firtash (and not only him) will be included in the corresponding list. Despite different views on the quality and viability of this law, its draft also contains provisions on the prohibition of procurement of large-scale privatization objects by a person who is recognized as an oligarch, or by a company whose beneficiary is such a person.

If the new owner of the UMCC becomes an effective manager, then the company is expected to be developed, including in environmental policy. The State Property Fund announced mandatory modernization, environmental, and social guarantees for the enterprise; compliance with them is a condition for potential buyers. In particular, it is required to make at least UAH 400 mln of investments for re-equipment and providing employees with social guarantees. Moreover, strict compliance with the requirements of environmental legislation, including regarding soil and water pollution, is spelled out. Time will tell whether this will help resolve the above-mentioned criminal case on land damage, and whether the new owner of the company will be interested in compensating for the losses caused by the “predecessors” if the guilt is proved. It is important that for a new investor, the company’s controversial past does not become an unexpected unpleasant bonus. 

Of course, there are high hopes that the privatization of the UMCC will become a panacea for all the long-term corruption schemes in which the company is featured, and the NABU will cease to play the role of a “watchdog,” which, from time to time, suppresses attempts to illegally ship titanium ore worth tens of millions of hryvnias in the port of Odesa.

According to the privatization schedule, the auction for the UMCC sale was expected in July 2021. However, the decision of the Cabinet of Ministers to approve the terms of privatization of this object was made only on June 16. Let us remind you that in accordance with the legislation, auctions can be held within 30 to 60 days from the date of publication of the informational notice on privatization with the approved starting price of the object and the terms of its sale.
It should also be noted that in the process of preparing the object for privatization, efforts were made to stabilize the company’s financial condition, which affected the growth of net profit.

Thus, the most realistic option for holding an auction was August. And so it happened — on June 22, the SPFU announced that the auction will be held on August 31.

We hope that the privatization of the UMCC will no longer be postponed, and hopes for an efficient, profitable enterprise, devoid of the influence of oligarchs, will not remain just hopes.

Prozorro.Sale has become an effective tool for controlling the state and municipal property market for businesses and the public. How did the platform for transparent privatization appear in Ukraine, and what changes are expected in the future?

Preventing corruption and involving citizens in the fight against it are the strategic goals of TI Ukraine. We focus on innovative solutions that help minimize corruption risks in the public sector of the economy. Such the first important anti-corruption IT solution was the electronic public procurement system Prozorro, to whose creation we contributed.

In 2016, TI Ukraine joined the development of another revolutionary system, which today is the largest platform for the sale and lease of state property —Prozorro.Sale. It is also called “eBay for the government.” Thanks to this platform, it was possible to open “hard-to-reach” data, translate all procedures into the “online” mode, and show the process of how officials make decisions regarding the sale or lease of state and municipal property.

The key result is that these decisions are no longer related to the human factor, but depend on the results of an open and transparent electronic auction, where businesses compete to buy assets. In 5 years of the platform’s existence, more than 350,000 auctions were held, which replenished the state treasury by UAH 38 bln.

It is also important that Prozorro.Sale has become an effective tool for businesses and the public to monitor and control the state and municipal property market, which is already a significant step to combat possible abuses in privatization and lease procedures.

For the first 2 years, the project was implemented entirely under the leadership of TI Ukraine, and in 2018 it was transformed into the state enterprise “ProZorro.Sale.” We continued to administer two central databases of the system until the summer of 2019. All the time we were working closely with the Ministry of Economy and the Deposit Guarantee Fund (DGF).

It was important not only to technically support and develop the system, but also to control the auction procedures for the sale of property. In order for participants to report cases of injustice or violations of their rights, 2 commissions were created to consider complaints — under the DGF and the state enterprise “ProZorro.Sale.” Representatives of TI Ukraine were also members of these commissions.

After TI Ukraine transferred all the rights to databases of the electronic trading system to the state enterprise “ProZorro.Sale,” we continued to cooperate with government agencies to improve the system and translate new markets to the format of electronic auctions. Therefore, in the autumn of 2019, we announced that the sale of property of bankrupt companies, as well as the lease of state and municipal property, should take place in the Prozorro.Sale system. This opened up even more data and therefore reduced corruption risks in previously closed procedures.

Gradually, the functionality of the service was expanded and opportunities were created for the sale of property of state-owned joint-stock companies, subsurface and unprocessed wood use rights. The option for renting land plots will be added soon.

TI Ukraine is interested in sustainable anti-corruption changes, so we continue to delve into the development of state property management reform.

Today, our team has developed a methodology for effective monitoring of privatization and lease procedures. We are also starting to work on creating a monitoring network. This will encourage the sale of non-core assets and increase the ability of the state to conduct procedures professionally and without violations.

If our colleagues from other countries are interested in using our experience in implementing this reform, we recommend that you tune in to the “long game.” The experience of Ukraine shows that the “windows of opportunity” are not open for a long time. Reforms require not only political will, but also determination, perseverance, and mobilization of influential stakeholders.

At the same time, it is important not to aim exclusively for the opposition struggle, but to learn how to cooperate with various stakeholders and be able to find compromises. After all, the viability of anti-corruption changes is an equally important result of our work.

 

TI Ukraine experts identified the most common mistakes in the privatization and lease of state property and offered their recommendations for improvement.

The “Auction Revolution,” caused by the adoption of two new laws “On Privatization of State and Municipal Property” in 2018 and “On Lease of State-Owned and Municipal Property” in 2019, has radically changed the rules of the game in the field of state property management. From now on, government property can only be bought or sold through e-auctions in the Prozorro.Sale system.

The goal of the reform was not only to attract additional budget resources, but also to increase transparency and efficiency of state property management. The reform continues, and there is still a public demand to ensure its effective monitoring.

Based on the results of the first attempt to analyze the privatization and lease procedures under the new legislation, we are ready to share the most common mistakes that have occurred. We have also prepared recommendations for improving the procedural steps in privatization and lease of public property.

The most common mistakes in the procedures of privatization and lease of state and municipal property that we have encountered can be divided into 3 categories:

• marketing ones — prevent the attractiveness and effective promotion of an object among potential tenants or buyers;
• procedural ones — violate the legal requirements regarding the lease or small-scale privatization procedure.
• those related to paperwork — concerning the shortcomings of the package of documents that accompany the object.

We offer the following recommendations for tender organizers to conduct procedures with fewer errors.

For small-scale privatization:

• Pay attention to the incompleteness of the submitted information about objects (land plots, information about the single property complex, etc.) and take measures to supplement it. Consider the possibility of issuing a separate order of the SPFU, according to which the organizers will be required to detail the composition of the SPC property, if such complexes do not have real estate.
• In the information notice and in the contract, outline an inventory of the property in accordance with the ownership documents and/or technical passports.
• Refrain from alienating objects that include property located in the temporarily occupied territories.

For lease: 

• Take a more careful approach to creating an object’s image and upload high-quality photos.
• Carefully check the information specified in the lot description and documents published as part of the procedure in the Prozorro.Sale system. Quite often, we noticed differences in the description of the object’s intended purpose. For example, according to the announcement, there are no restrictions in the intended purpose, but the attached draft agreement contains the intended purpose in accordance with the current lease agreement.
• Take a more careful approach to determining the amount of the guarantee fee because in case of under-accrual of the amount and in case of disqualification of the participant, the budget will not receive enough funds. At the same time, charging too high a guarantee fee can scare off potential participants.

A good example in disclosing information is the publication of information about small-scale privatization objects by the State Property Fund of Ukraine.  The SPFU has taken a big step towards potential buyers by launching a specialized website for privatization  and lease and by disclosing information about objects. On the portals, you can find special teasers in the form of brochures or videos, and documents can be viewed in virtual data rooms by pre-registering on the portals.

This material was prepared by Transparency International Ukraine with the support of the USAID project Economic Development, Management and Growth of Entrepreneurship (EDGE) and State-Owned Enterprises Rapid Response Activity (SOERR). The authors’ views expressed in this article do not necessarily reflect those of the United States Agency for International Development or the United States government.