Anti-Corruption Reforms in Ukraine

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Anti-Corruption Reforms in Ukraine Fighting Corruption in Eastern Europe and Central Asia Anti-Corruption Reforms in Ukraine: Prevention and Prosecution of Corruption in State-Owned Enterprises 4th round of monitoring of the Istanbul Anti-Corruption Action Plan OECD ANTI-CORRUPTION NETWORK FOR EASTERN EUROPE AND CENTRAL ASIA Anti-Corruption Reforms in UKRAINE Prevention and Prosecution of Corruption in State-Owned Enterprises 4th Round of Monitoring of the Istanbul Anti-Corruption Action Plan About the OECD The OECD is a forum in which governments compare and exchange policy experiences, identify good practices in light of emerging challenges, and promote decisions and recommendations to produce better policies for better lives. The OECD’s mission is to promote policies that improve economic and social well-being of people around the world. Find out more at www.oecd.org. About the Anti-Corruption Network for Eastern Europe and Central Asia Established in 1998, the Anti-Corruption Network for Eastern Europe and Central Asia (ACN) supports its member countries in their efforts to prevent and fight corruption. It provides a regional forum for the promotion of anti-corruption activities, the exchange of information, elaboration of best practices and donor coordination via regional meetings and seminars, peer-learning programmes, and thematic projects. ACN also serves as the home for the Istanbul Anti-Corruption Action Plan (IAP). Find out more at www.oecd.org/corruption/acn/. About the Istanbul Anti-Corruption Action Plan The Istanbul Anti-Corruption Action Plan is a sub-regional peer-review programme launched in 2003 in the framework of the ACN. It supports anti-corruption reforms in Armenia, Azerbaijan, Georgia, Kyrgyzstan, Kazakhstan, Mongolia, Tajikistan, Ukraine and Uzbekistan through country reviews and continuous monitoring of participating countries’ implementation of recommendations to assist in the implementation of the UN Convention against Corruption and other international standards and best practice. Find out more at www.oecd.org/corruption/acn/istanbulactionplan/. This report was adopted at the ACN meeting on 4 July 2018 at the OECD in Paris. It completes the 4th round of IAP monitoring of Ukraine through a special follow-up procedure of bis- monitoring – with the adoption of an outstanding chapter on prevention and prosecution of corruption in state-owned enterprises (Chapter 4). This report is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD 2018 2 Table of Contents ACRONYMS .................................................................................................................................................. 4 EXECUTIVE SUMMARY ............................................................................................................................. 5 4.1. Introduction ......................................................................................................................................... 10 4.2. State’s Corporate Ownership .............................................................................................................. 17 4.3. Privatisation ........................................................................................................................................ 34 4.4. Anti-Corruption measures ................................................................................................................... 42 4.5. Case-study of “Naftogaz” ................................................................................................................... 59 4.6. Case-study of “Ukrenergo” ................................................................................................................. 70 4.7. Case-study of “Khmelnytskoblenergo” .............................................................................................. 81 4.8. Case-study of “Turboatom” ................................................................................................................ 88 3 ACRONYMS ACN Anti-Corruption Network for Eastern Europe and Central Asia AMC Anti-Monopoly Committee of Ukraine CEO Chief Executive Officer CoM Cabinet of Ministers of Ukraine CoST Construction Sector Transparency Initiative EBRD European Bank of Reconstruction and Development EU European Union IAP Istanbul Anti-Corruption Action Plan IMF International Monetary Fund IFRS International Financial Reporting Standards JSC Joint Stock Company LLC Limited Liability Company MECI Ministry of Energy and Coal Industry MEDT Ministry of Economic Development and Trade of Ukraine MLA Mutual Legal Assistance MoF Ministry of Finance MoJ Ministry of Justice of Ukraine MP Member of Parliament NABU National Anti-Corruption Bureau of Ukraine NACP National Agency on Prevention of Corruption of Ukraine NERC National Commission for Energy and Public Utilities Regulation NJSC National Joint Stock Company NGO Non-governmental organisation OECD Organisation for Economic Co-operation and Development PM Prime Minister RDO Reforms Delivery Office RSTs Reform Support Teams SAI Supreme Audit Institution SAS State Audit Service of Ukraine SAPO Specialized Anti-Corruption Prosecutor’s Office SFS State Fiscal Service of Ukraine SPFU State Property Fund of Ukraine SOE State-owned enterprise TI Transparency International UAH Ukrainian Hryvnia Verkhovna Rada Parliament of Ukraine WB World Bank 4 EXECUTIVE SUMMARY This report presents a general snap-shot of the situation in the State-owned enterprises (SOEs) sector in Ukraine and points out selected key issues and challenges that relate to the integrity of this sector together with a set of recommendations to address them. Each issue of SOEs governance is looked through the “lens of anti-corruption”. At the same time good governance of SOEs in Ukraine is number one pre- requisite for eliminating wide-spread corruption and closing loopholes which allow for it. Year 2014 was taken as a baseline, since that year corruption and vested interests have finally been identified by the government as significant factor in SOEs historical underperformance, and the government has announced its clear intention to clean it up. Sector overview In Ukraine SOEs comprise a substantial part of the economy, provide key public services, and represent the largest employer in the country. The number of SOEs in Ukraine is very high, with less than half of them estimated as functioning. However, no State agency in Ukraine holds up to date figures. Most of the functioning SOEs are not operating efficiently. Moreover many of them operate at a loss either due to corruption, mismanagement and/or onerous public policy objectives carried out by SOEs. Efforts to reduce their number through mergers, privatisation and liquidation have recently been started but met resistance. Unfortunately the names of the biggest SOEs are also mired in corruption and political graft scandals. Corruption clearly remains one of the main obstacles to the long-awaited reform of SOEs. Political capture of the SOEs is the overarching theme of corruption related allegations. The same general theme emerges from recent corruption related investigations and prosecutions. Even according to the top government officials SOEs have been used for decades to create corrupt schemes. SOEs are often quoted as the main price in the elections to be divided by quotas after the elections. Members of the SOEs’ management, officials of the relevant ownership entity or political elite members, which have control over the relevant sector, industry, ministry or enterprise, are often either affiliated to or own intermediary firms used in corrupt schemes or receive a part of the profits through kick-backs. State’s corporate ownership Currently Ukraine is lacking a strategic document which would identify its ownership rationale and direction of the SOEs sector reform. Ukraine announced its intention to develop such a policy document in 2014 and it was expected to be adopted in 2015. However, in 2018 its adoption was still pending. Ukraine is therefore urged to carefully evaluate and disclose the objectives that justify state ownership, adopt and make them public in a form of a State ownership policy, and subject this policy to a review at regular intervals. This will set the framework for the rest of the reform of the SOEs sector and ensure that it is consistent and serves best interests of the public. Currently the application of general laws on SOEs in Ukraine is unclear. Instead there is a vast amount of specific regulations, in various degrees of authority and importance, concerning specific enterprises or industries. Ukraine needs to streamline the legislative framework regulating the operations of SOEs, ensuring that SOEs can operate in market environment like private companies. In particular, due to high risk of corruption Ukraine is recommended to incorporate unitary enterprises - a special corporate form exclusively reserved to SOEs - most of which are still under no obligation to have supervisory boards and 5 do not undergo external independent audit, positioning them totally outside any independent external control) into commonly used corporate forms. Ukraine’s ownership structure of the Government
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