In 2014 alone, state enterprises officially lost Hr 115 billion – more than $5 billion, fueled by theft through one corrupt scheme after another.
“Every single company continues to be run in the interests of private individuals, unfortunately,” Economy Minister Aivaras Abromavicius said in a video prepared for the Yalta European Strategy conference in September. “Almost every single state-owned enterprise sells goods through all kinds of middlemen companies registered in offshore zones. They also purchase a lot of inputs through companies controlled by them at inflated prices.”
An estimated 3,000 state-owned enterprises – from idle silk producing farms to ports, transport and energy-providing monopolies abusing their positions – are managed by Ukraine’s army of bureaucrats. They are not the only ones who feed off corrupt schemes. So do intermediary merchants and, in some cases, oligarchs and tycoons who stand behind them.
If many of these enterprises became privately owned, they would bring tax revenues instead of financial losses and allow Ukraine’s government to shed up to 50 percent of its total workforce of more than 1 million employees.
Removing these cesspools of corruption and bad management from the taxpayers’ shoulders has proven to be difficult.
One of the holdups is a new privatization law moving through parliament aimed at ensuring transparency and competition, as well as protecting the rights of the state and investor.
Those who benefit from the status quo are putting up fierce resistance.
“Sabotage comes from the bureaucrats and merchants who feed from the schemes,” Oleksiy Zubrytsky, an adviser to Agriculture Minister Oleksiy Pavlenko, told the Kyiv Post.
More than 150 appeals sent to law enforcement agencies from the Agriculture Ministry are in different stages: pre-court investigations, indictments sent to court, other types of consideration.
“We haven’t received any response yet. The often asked question is why nobody of those who were shooting the Maidan is imprisoned? So this is our Maidan, nobody is imprisoned either” for embezzlement, Zubrytsky said.
Privatization is seen as the only viable solution for many state enterprises, where corruption permeates all levels, from department directors to engineers and accountants. Officially, workers are underpaid and overprotected, a contributing factor to the flourishing corruption schemes.
Apart from that, powerful business clans who stand behind some state enterprises resort to threatening any new technocratic manager who attempts to clean up the mess, Zubrytsky said.
Several draft laws will establish new rules on privatization to ban unfriendly buyers from the auction and cancel requirement to sell 5-10 percent stakes before the state can offer a controlling stake in an asset.
Other problems in the current law should also be addressed to make privatization more attractive to foreign investors. “There is almost no room for negotiations between an acquirer and the fund,” Sayenko Kharenko senior associate Oleksandr Nikolaichyk told the Kyiv Post. “In addition, investors lack information on the target since there is no effective way to perform a proper due diligence.”
Additionally, the guarantees that an investor receives are non-enforceable under Ukrainian law. “The acquirer will simply be unable to benefit from such protection in post-acquisition litigation,” Nikolaichyk said.
The State Property Fund is responsible for due diligence and preparing the state assets for sale. Privatization could go more smoothly if every government body did their part, fund director Ihor Bilous, said in a Sept. 7 briefing.
Out of 302 state enterprises designated for privatization, 174 are controlled by ministries, of which only seven have been already transferred to the fund for actual sale.
“The ministries should transfer the assets to the fund and we will try to sell those under transparent procedures. Currently it’s moving quite slow,” Bilous said.
The Agriculture Ministry is ready to transfer all 101 enterprises designated for privatization to the fund, but many companies are “stuck in the procedures.” Some 50 are still waiting for approvals from the Cabinet and parliament, others are in delay due to paperwork, often also sabotaged by officials on lower levels.
“One can work for years in an unregistered field, use unregistered buildings, but as soon as privatization is in question, property issues step forward,” Zubrytsky said at a press briefing on Sept. 29. “Without changes to the legislation, privatization will not be conducted even next year. We believe it’s necessary to radically simplify the procedure of privatization of the smallest and most loss-making enterprises.”
NEWS ITEM: The nation’s 3,000 state-owned enterprises cost taxpayers $5 billion last year. Often, according to the ministers who oversee the enterprises, the state firms are run by corrupt directors with powerful individual interests behind them. Corrupt schemes include buying goods through intermediaries at inflated prices and outright theft. Thus far, the forces resisting change have stalled a wholesale privatization drive that many think is the solution.
The Kyiv Post analyzed common and devastating scams in state enterprises and grouped them according to patterns. There are, however, many more to study.
Fake partners and shady intermediaries
From just one contract alone, the management of Elektrovazhmash, a heavy equipment producer in Kharkiv, stole about three quarters of the annual profit, Economy Minister Aivaras Abromavicius said in a video prepared for the Yalta European Strategy conference in September. On Sept. 9, RBK Ukraina news agency published a contract purportedly between Elektrovazhmash and an offshore entity called Conor Trading L.P. The offshore then resold the equipment to a customer, showing that the heavy machinery producer lost $1.6 million from the deal.
State Food and Grain Corporation and state alcohol monopoly Ukrspyrt are two of the biggest in assets and losing money under the Agriculture Ministry.
The grain corporation worth $1 billion could be bringing $100 million annually in private hands, according to Oleksiy Zubrytsky, an adviser to the Agriculture Ministy. Instead, its losses amounted to Hr 3.5 billion, or $220 million, last year. The audit shows $300 million stolen from the company since the establishment of the state enterprise in 2010, including $130 million last year through selling grain to four offshore companies that no longer exist. The state never received the payment.
It also used to be a normal practice for the state firm to buy grain from “dead” companies or individuals with advance payments, with neither grain or money received when the contract is due, Zubrytsky said. Now advanced payments are banned as well as contracts with unknown offshore companies.
Tenders
“Procurement is a scheme for washing out the funds. Thanks to being monopolies they have a possibility to accumulate more than other companies, and then launder the money via overpriced tenders,” Olena Shcherban, attorney at the Anticorruption Action Center watchdog told the Kyiv Post.
Shcherban said that, unlike other entities that they selectively monitor, Energoatom, the state energy producer accounting for 50 percent of all Ukrainian electricity, is a winner in tender corruption. “We dispute 6-7 of their procurement deals a year. There are a lot of criminal cases opened, particularly upon our appeals,” Shcherban said.
Energoatom constantly overprices its procurement offers from two to six times, losing hundreds of millions of hryvnias while buying pipes, protective clothes and equipment. The Anticorruption Action Center has spotted cases for Hr 481.6 million worth of non-transparent tenders over the last three years with involvement of Viktor Chebrov, head of competitive bidding committee. Chebrov is still working in the company and no criminal cases have ever been opened against him, Energoatom’s spokeswoman Ilona Zaiets told the Kyiv Post.
Ukrzaliznytsia, the unprofitable state railway monopoly, has Hr 245 billion in assets. Prydniprovska Railway, a branch of Ukrzaliznytsia, alone lost Hr 239.8 million on buying electricity in 2012-2014. Deputy Infrastructure Minister Vladimir Shulmeister estimates the total state losses from such schemes to be in the billions of hryvnias.
Corporatization and change in management will contribute to more efficient and honest procurement, Shulmeister told the Kyiv Post. Privatization is not currently an option for the state railways, he said, noting the bad experience of other countries that have tried.
Shadow privatization
“It’s happening already, either we want it or not,” Zubrytsky of the Agriculture Ministry said.
Workers of state entities illegally rent out land registered at the enterprise.
In other cases, a state company establishes a joint venture with a private entity and later fails to comply with obligations. The private company sues the state entity and wins assets as compensation. All that is left from the state entity is a bunch of papers in an official’s office. There are around 150 state enterprises under the Agriculture Ministry that used such schemes and slated for liquidation by the ministry.
Nashi Groshi, a TV news show, investigated the construction of a private luxury sport club on 11 hectares of Ukrzaliznytsia-owned land by ex-head of South-Western railway branch, Olexiy Kryvopishyn, with state money and materials. A pre-trial investigation is under way.
Kyiv Post staff writer Olena Gordiienko can be reached at [email protected].
