How to implement fair reforms and maintain the results: the proven record of the State Property Fund of Ukraine
Dmytro Sennychenko, Chairman of the State Property Fund of Ukraine
The State Property Fund will soon celebrate two anniversaries. The first is the 30th anniversary of Ukraine's independence, the second is two years from the moment when the word "reforms" ceased to be a sham, but began to mean real transformations in the main spheres of the state's life.
The land market, the demonopolization of the alcohol industry, as well as a number of initiatives and actions on the reduction of the economic "weight" of the oligarchs - this is an incomplete list of difficult but necessary steps that have been implemented in Ukraine over the past two years. The reforms and the combating corruption are the choices made by the Ukrainians in the Maidan.
In fact, behind the loud word "reforms" there are quite definite, concrete daily tasks, for the result of which everyone is responsible. For us at the State Property Fund, the reforms are our daily hard work, and we have achieved significant progress recognized by our international partners. It instills optimism in us, and confirms that we are moving in the right direction. Although we still have a long way to go, we have no doubt that we will overcome it.
The secret of successful reforms is quite simple. The main thing is that they are based on the principle of justice. And then the most difficult and unpopular transformations receive support from society, opportunities for corruption are minimized, and changes provide a long-term positive effect. The State Property Fund of Ukraine successfully manages this.
New look at privatization
For almost 30 years of Ukraine's independence, the term “privatization” has been synonymous with the words “corruption” and “the fix”. With rare exceptions, such as the Kryvorizhstal case, the state property management was an unpresentable sight: assets, which had been exhausted by corrupt officials, various schemes, and outdated infrastructure. Obviously, there could be no fairness and transparency in such conjuncture. We decided to put an end to it.
By now, the form of privatization has been changed, and I am positive that it will remain that way from now on. The corruption practices that existed for decades were eliminated: the state's control over the most attractive objects was restored – sometimes with battles, and transparency of their work was ensured. The privatization ceased to be a “hobby for insiders”, but became available to any investor. Little less than two years ago, my team and I started to operate the part of our work where the transparency parameter was provided by 400 paper (and unavailable) copies of “the Privatization Reporter” and the alternative way to find out something was only to buy a flash drive with data from an employee of the fund.
Now the information about privatization objects by dozens of filters is available on the privatization.gov.ua portal, and whole report sets are uploaded to virtual data rooms. The principle of “only for insiders” was replaced by the opposite: “everyone knows everything”.
The financial result of such openness wasn’t long in coming: since the start of 2020, the State Property Fund of Ukraine has organized more than 2,990 auctions, with the successful ones providing budget revenues at the level of 4,5 billion UAH. Last year, the State Property Fund transferred UAH 2.25 billion to the treasury, which is 4 times higher than the result of a successful 2019 and 8 times higher than in 2018.
This year, the Fund will put its best foot forward in privatization to bring 12 billion UAH to the state budget, which is 44 times more than in 2018. This dynamic seems surprising and unrealistic even, but there is an explanation for it:
● No more stealing practices at the State Property Fund, and zero tolerance for corruption exercised now at all levels.
● We launched the Big Privatization project. The first super-large state-owned facility – The United Mining and Chemical Company – will go for auction at the end of summer.
I never get tired of repeating that the goal of privatizing objects of any scale is not just to sell at a higher price. I will say more, the main purpose of privatization is not even to fill the budget, although this is of course an important bonus, because the money for the country which restrains the aggressor and fights the pandemic is never superfluous. The main goal of privatization is to provide a new life for objects that, due to abandonment and poor management, dropped out of economic circulation, or on the contrary – continued to work successfully, not in favor of the state, but conditional financial and industry groups.
Just over a month ago, the State Property Fund sold into private ownership the abandoned penitentiary facility #48 in Lviv, located just a 10-minute drive from the city center. State budget replenishment amounted to UAH 407.5 million, but it is much more important that the abandoned facility with an ambiguous past got a chance for a new and much brighter future.
The new owner of the facility is the IT company that will turn a dilapidated prison into a creative campus – with main office and infrastructure facilities for education, talent development and recreation. This case is a kind of watershed of perception, values and thinking, which should be extended to the entire country. Abandoned facility that represents lack of freedom and old regime is to be replaced by a modern creative hub – the epicenter of freedom and new ideas.
Again, everything is fair: not a covert agreement, but an open auction, not an obvious winner plus a pocket rival, but a competitive struggle between 7 bidders.
Now that the effectiveness of the program is proven in practice, and the majority of processes are transparent and debugged, it is necessary to accelerate and scale up the privatization. We do have the key to this. The State Property Fund has developed a complex bill No. 4572, which will eliminate a variety of obstacles to privatization and will allow you to get through the thicket of bureaucracy to attract investment. Verkhovna Rada supported the bill by 257 votes on July 15, 2021, and it has passed through first reading.
The bill improves the processes of privatization and rent, introduces mechanisms to control the use of state property, and establishes clear criteria for the transfer of objects for privatization. It is an important innovation that 10% of funds from small-scale privatization will remain in local budgets to ensure the development of local administration.
The expected economic effect of the adoption of the bill for Ukraine is 200 billion UAH over several years. This is a plus to the GDP, which will attract investment in the development of privatized objects.
Rent from Ukraine
Not all investors are ready to buy state objects, and not all objects can be permanently transferred to private ownership. A significant part of the partners of Ukraine and the State Property Fund, as its authorized representative, are renters of the state property. In a sense, this is a more profitable format of cooperation, since it provides the budget with a long-term cash-flow.
Until recently, the situation here was not much better than in the field of privatization. The rent for 1 UAH per year or completely behind the scenes, “blurry” contracts, a lack of a proper list of areas – it was the rental reality we changed.
The State Property Fund has introduced a mechanism for online rental auctions, which ensures the transparency of the rent of state facilities and fair conditions for both renters and the state.
On the online marketplace orenda.gov.ua, which we launched from scratch in a short time, all current offers and vacant space are presented. There are more than 4000 objects for every taste and budget.
Recently, at an auction for the rent of 5 square meters at the Boryspil airport, the price rose up to 125,000 UAH. It was 16 times less according to the previous agreement (only 7,000 UAH). But that's not all. At the conclusion of the contract, the winner of the auction paid an advance payment for 6 months and a security deposit of two rental payments. Thus, the government immediately received 1 million UAH. That money would have been paid within the next 12 years under the previous agreement.
Anyone can become a renter – there is no need to wander through the corridors of the Fund or its enterprises and look for someone to “deal with”. The rules are the same for everyone: transparency, market price, fair competition.
The result is more than 1.2 billion UAH of budget income from rent since the beginning of this year.
While implementing the rent reforms, we once again made sure that digitalization is an effective tool that we use in the reforms. President Zelenskyi has emphasized the importance of digitalization in the development of Ukraine recently when speaking at the conference in Lithuania. We fully support this course in our work, because the transition of most state processes to digital actually neutralizes corruption.
The reform of the valuation sector is an ungrateful direction of activity, in the sense that this actually doesn`t mean anything for the people. Until they need to sell or buy an apartment, house, land plot etc. The State Property Fund made a breakthrough by literally removing from the market of companies profiting from optional and unreasonable services.
Here is a little reminder of how the valuation procedure looked until recently: a person had to pay 1,800 UAH out of nothing just for transferring the data into the Unified database of valuation answers by one of the four shell companies. We have eliminated these intermediary sites by launching free service for entering information into the Unified database. The net saving for Ukrainian citizens is more than 1 billion UAH within 18 months.
The second stage was the launch of an automatic electronic reference – the creation of a free service for electronic real estate valuation “SPFU Unified database of valuation”, which can be accessed at any time by anyone with Internet access and an electronic digital signature. No visits to government agencies needed, no spending on valuators, no variability in data considering the human factor. Now there are 18 types based on a complex of OLX parameters, notaries, historical data on the former deals are totaling in reliable results of object valuation. One has the right to address the private valuator if the state valuation result does not satisfy. That may occur in cases with unconventional types of property that require additional valuation.
25,000 citizens used the service during the first week of operation; notaries based on the received documents registered more than 10 thousand contracts. As they say – use it with pleasure.
The reform continues with two stages ahead. First, the elimination of fractional valuation – an outdated practice when the land and the premises were valuated separately. The corresponding bill is registered in the Verkhovna Rada, and we count on the assistance of MPs in passing it in parliament.
The final stage is the introduction of international standards for valuation, as the standards have not changed since 2003. The bill was developed by The State Property Fund in cooperation with the World Bank specialists on the ad hoc basis, and introduces transition to international standards of valuation and new approaches to professional training.
The caseload on the State Property Fund has increased dramatically since the end of 2019. We are not complaining, but this factor shall be taken into account when analyzing our progress in reforms.
The numbers are clear:
In 2019, the State Property Fund managed 348 state-owned enterprises, in 2020 – 724, in 2021 – 860. This caseload, which again we resignedly accepted, was not easy.
To understand the scale of the work and extremely poor condition of the enterprises transfered to the Fund, I will say that only 12 (!) from several hundred state-owned enterprises had strategic development plans approved at the time of the transfer, and there were contracts signed only with 92 managers. More than half (53%) of enterprises were totally unprofitable. The total debt has exceeded 4,2 billion UAH. The situation with the so-called second-tier enterprises was catastrophic, let alone the giants – potential blue chips. The various structures close to the oligarchy held on to them tight and perceived the government claims to their rights as some kind of an offense.
After almost two years of hard work, the State Property Fund of Ukraine restored justice by returning government control over 10 large enterprises that had been under control of various financial and industrial groups for years. This became possible due to the change in management, close cooperation with law enforcement agencies and strong nerves of the State Property Fund team, which were able to ignore both tempting financial offers and black PR in the media.
Successively, performance indicators, terrifying at the start of our work, have evened out: wage debts for 15,000 employees at 32 enterprises were paid off, the state-owned enterprises managed by the State Property Fund have doubled tax deductions – up to 8,4 billion UAH. Information on state property entered into a Unified database, and enterprises, having received realistic business planning, report on KPI weekly / quarterly.
Due to effective work, the state ceases to be a donor of its assets. On the contrary, the distributed profits of state-owned enterprises in Ukraine will grow 2,5 times this year – from 261 million UAH to more than 630 million UAH. The state assets are finally start working for the state’s benefit, rather than enriching corrupt officials.
These reforms related with privatization, valuation, corporate governance, rent are all parts of one big transformation that Ukraine is going through, parting with an oligarch-centric economy and building new market relations integrated into the global system. The State Property Fund is pleased to be a part of these transformations and supports them.
The Ukrainian people won the independence 30 years ago and rebelled twice, demonstrating their will for justice and constant course towards decent living. With such support, we feel confident and working effectively.