You're reading: State spending moves further into shadows with new law

Ukrainian President Viktor Yanukovych on Aug. 1 signed a controversial public procurement law that will shield from public oversight tens of billions of dollars in government spending each year.

Pro-presidential lawmakers say the legislation will make government-owned companies more competitive, while critics say the bill will fuel corruption, cronyism and insider dealing.

The bill exempts state-owned companies and taxpayer-financed enterprises from holding competitive bids. It furthermore excuses them from having to publish the dollar amounts of their orders or the winning bidder.

Citing official statistics, procurement watchdog Nashi Hroshi (our money), stated that in 2011 the state made Hr 325 billion ($40.6 billion) worth of purchases, of which $31.25 billion, or 76 percent, went through state-owned companies and other entities. In the first six months of this year alone, the state spent Hr 307 billion ($38 billion) on public procurement, the group reported.

According to z.texty.org.ua, which evaluates state procurement spending, the share of such expenditures as a proportion of gross domestic product is much higher in Ukraine than in any European country.

Watchdogs say bribery and kickbacks eat away at the state’s budget. in which insider rackets exist for government contracts. Nearly three-quarters of Ukraine’s budget spending goes toward public procurement, according to official data.

Yanukovych on June 8, 2011 acknowledged at a government anti-corruption meeting that crooked deals amount to 10 to 15 percent of the state budget, ending up in the pockets of corrupt officials. “That is, $7.4 billion,” Yanukovych said. “That’s why in the last 15 months we have worked hard on eradicating corruption.”

U.S. think tank Brookings Institution stated in an April report that Ukraine in 2010 had a higher procurement bribery score than Russia, Poland, Estonia and Chile.

Pro-presidential lawmaker Oleksandr Yefremov of the Party of Regions defended the law. Yefremov told the Kyiv Post that the procurement bill will allow state-owned companies to compete with the private sector on equal footing since the private sector is not required to conduct competitive bids.

“Privately-owned companies don’t have to conduct tenders, so this bill levels the playing field for government enterprises. This will help improve the performance of our (government-owned) companies,” said Yefremov in a phone conversation.

The law, however, is not likely to help Ukraine’s relations with the European Union, which is not happy about the imprisonment of ex-Prime Minister Yulia Tymoshenko and other democratic rollbacks under President Viktor Yanukovych.

“We are carefully monitoring the situation around the procurement law,” said David Stulik, press attache at the EU delegation in Kyiv. According to EU-Ukraine association agenda, Ukraine’s procurement legislation should be in line with EU standards to qualify for closer ties with Brussels.

Opposition lawmaker Lesya Orobets, however, said in July that the law will allow officials to funnel slush money to help finance the political campaign of the pro-presidential Party of Regions leading up to the Oct. 28 parliamentary election.

“I’m talking about the unconstrained theft of Hr 250 billion of government money which won’t be published in the (government’s) Journal of Public Procurement,” she said.

Yefremov dismissed the campaign finance allegation as “complete nonsense.”

Nevertheless, such companies as gas monopoly Naftogaz Ukrainy, rail monopoly Ukrzaliznytsia and road builder Ukravtodor, to name a few – state-owned, money-losing enterprises that are heavily reliant on billions of dollars of taxpayers’ money to stay financially afloat – can now choose with which companies they want to do business on a no-bid basis and not disclose their financial transactions.

A parliamentary department that analyzes bills submitted to the legislature foresaw this potential caveat in their assessment of the bill: “… (The) implementation of such proposals could lead to inefficient use of budget funds.”

Overspending

In December 2010, a Naftogaz subsidiary overpaid $150 million for an offshore oil rig, according to investigative news reports, a charge denied by government officials.

Taxpayers also now won’t know that a Naftogaz subsidiary pays some $2 million a year to fly, rent and service a helicopter for Ukraine’s president, according to a Nashi Hroshi investigation.

The same company also recently purchased three housing booths for construction workers worth Hr 934,000 ($116,750) each. This implies a price per square meter of $5,600, a figure close to the average square-meter price for an apartment in Moscow, one of the world’s most expensive capitals.
In June, the State Affairs Department bought imported raspberries worth $84 per kilogram at more than twice the market value.

“I do not expect much more money to be ‘siphoned’ as a result of this law,” said Vasyl Yurchyshyn, economic analyst at the Kyiv-based Razumkov Center. “The tenders will be open only to a chosen few.”
He added that the public will lose out the most from low competition, because consumers will end up with products that have low quality and high prices.

The law was adopted in parliament on July 4, the same day a controversial language law elevating the status of the Russian language was passed. The ensuing protests and international attention over the language law meant the procurement law’s passage went almost unnoticed, fueling criticism that the language law was a smokescreen to divert public attention.

In fact the procurement bill was signed by Speaker Volodymyr Lytvyn so quietly that journalists didn’t notice it until a week later.

Lawmakers in the Party of Regions faction, speaker Volodymyr Lytvyn’s People’s Party faction and the Communist Party voted in favor. The Communists, ironically, are campaigning on the slogans of “returning the country to the people” and punishing those who steal.

Nashi Hroshi stated that last year companies owned by Rinat Akhmetov, Ukraine’s richest billionaire and a Party of Regions lawmaker, received 11 percent of all state procurement orders.

According to Nashi Hroshi, other politicians and businesses that make money on providing goods and services to public entities include: Yuriy Ivaniushchenko, a Party of Regions lawmaker; companies affiliated with the family of Yanukovych; Oleksandr Yefremov, head of the Regions’ party faction in parliament; Dmytro Firtash, the billionaire co-owner of RosUkrEnergo; Viktor Pinchuk, son-in-law of Ex-President Leonid Kuchma; Petro Poroshenko, economy minister, and Serhiy Tigipko, deputy prime minister and minister for social affairs.

Kyiv Post staff writers Yuriy Onyshkiv and Mark Rachkevych can be reached at [email protected] and [email protected].