Review of priority areas of reform Eirik Svindland BMF/OECD/GTZ Workshop on “Governance of state owned enterprises in Ukraine” 6 July 2005 in Kyiv

My references A. Ukraine Government’s program: “Property of the people” Henceforth: the Program I am referring to a draft discussed in the Government meeting on 27 May 2005 Draft Law “On the management of state owned objects” I am referring to the draft Nr. 6027 of 10. August 2004, which has been adopted in a first vote. Svindland/GTZ Kyiv 6 July 2005

In the first instance the aim of the Program is To establish the register of public property In each case to name the owner of assets (State, or a regional government, or a combination of state and/or regional government and/or private) Resume appropriate governance by the respective public owner Svindland/GTZ Kyiv 6 July 2005

Remark: A register is useful Since 1997 the UK has a National Asset Register (NAR), a comprehensive list of assets owned by every Government department and their sponsored bodies. This Register has proved to be a landmark in transparency and accountability in Government.  Updates of the Register include the value of every asset listed in it, and each department’s entry gives a comprehensive description of all significant changes since 1997. Svindland/GTZ Kyiv 6 July 2005

With respect to governance the program is to Improve the ability to steer the public sector Optimize the structure of public property Increase the efficiency of asset management ►In order to get better social and economic results out of people’s property. Svindland/GTZ Kyiv 6 July 2005

My references are, however, basically describing assignments of The Cabinet of Ministers The State Property Fund Agents of these institutions They say little about the required Guiding principles of activities like governance and supervision Reforms I therefore want to draw your attention to the following problems: Svindland/GTZ Kyiv 6 July 2005

1. Commercial activities 2. Functions of the government First of all, it is important to observe the specific problems of 1. Commercial activities 2. Functions of the government The Program is not sufficient distinct on this and other lines of reasoning. It seems to be useful first to design solutions to unsettled issues. The second step is to create and assign required institutions. Svindland/GTZ Kyiv 6 July 2005

1. It is important to supply missing explanations. Why is an asset in public ownership ? Will this asset remain public or not? Common arguments, for instance in the Norwegian government, are related to: Requirements of a public function Industrial policy Regional and development policy Demand for national control by public ownership Competition policy Svindland/GTZ Kyiv 6 July 2005

Basic Options are: Liquidate Continue current practice Enterprise Reform Adopt a PPP model Complete Privatization A consistent, transparent policy and corresponding decision criteria are required The related, resulting problem is to plan the timing, scope, and method of future privatizations Svindland/GTZ Kyiv 6 July 2005

2. A concept combining economic policy with economic interests of public ownership is needed Proposal: separate asset management from influence on politics – i.e. proceed as follows: Decision on branch related politics; also about public monopoly – yes or not? If a sector is not a public monopoly: Establishment of sector regulations, if appropriate – e.g. banking Decision on direct public participation by the means of active ownership – why and how? Management of the public assets (firms) which respects the regulations (a) applying to the respective branch of the economy Svindland/GTZ Kyiv 6 July 2005

Experience and discussions in other countries, e. g Experience and discussions in other countries, e.g. Norway, show the validity of this approach to state-owned enterprises. This approach would, moreover, help solving some problems of Ukraine economic policy: To enforce the validity of the anti-trust legislation To come in accord with the conditions for WTO membership To fulfil agreements with the EU To diminish the need for “golden shares” Svindland/GTZ Kyiv 6 July 2005

The alternative management by the means of industrial holding companies brings about Contradictions to the purpose of anti-trust legislation A political influence of appointed managers – i.e. a semi-independence of state-owned companies Problems with respect to the realization of a privatization program – e.g. an adverse selection of objects for divestiture. Svindland/GTZ Kyiv 6 July 2005

► Observe principles of organizational efficiency 3. An efficient organization of the ownership function within the administration is required ► Observe principles of organizational efficiency Avoid the overlapping responsibilities Avoid unnecessary costly and time consuming bureaucratic procedures The Program is not clear on these issues. Svindland/GTZ Kyiv 6 July 2005

The program seems to contradict these guidelines ►Observe the Guidelines for best practice of public expenditure management A key issue is to organize the budget planning and budget implementation as an efficient, controllable process supporting departmental investment strategies. To combine responsibility for investments with responsibility for management is a part of the solution The program seems to contradict these guidelines Svindland/GTZ Kyiv 6 July 2005

The program assigns the State Property Fund with functions regarding registering, governance and management of all state assets except state enterprises. The mentioned criteria indicate assignment and organization of governance and management according to The functions of assets (e.g. hospital) The source of supporting funds (e.g. Ministry of Health) Svindland/GTZ Kyiv 6 July 2005

A corresponding assignment of the State Property Fund may include the following responsibilities: State asset registration Ownership function/financial responsibility for state ownership to enterprises Privatization Svindland/GTZ Kyiv 6 July 2005

A Guideline of best-practice would be useful if it takes account of 4. Each assignment of ownership function implies a confrontation with the need for a convenient solution to the problem of governance and supervision – i.e. The “owner” shall handle principal-agent problems related to the management and use of assets A Guideline of best-practice would be useful if it takes account of Specific problems of types of assets - e.g.: Listed corporations are exceptions, not the bulk of the public assets Svindland/GTZ Kyiv 6 July 2005

These problems should have a common solution 5. It is important to develop and adhere to a rule with respect to the protection of the interests of minority owners There are two cases private co-owner hold a minority stake private co-owners hold the majority. And there are problems related to some of the current management contracts with private minority co-owners private affiliated firms These problems should have a common solution Svindland/GTZ Kyiv 6 July 2005

My Proposal: Adhere to the rules of company law My knowledge of Ukraine corporate law indicate: It is required to Improve the quality of corporate law Eliminate differences between private companies and state-owned companies – e.g. with respect to bankruptcy procedures Svindland/GTZ Kyiv 6 July 2005

The problem is to induce similar efficient solutions in cases of 6. The governance of public property is also a matter of regional policy and administrative reform The problem is to induce similar efficient solutions in cases of Regional public ownership Mixed state and regional public ownership Clear and efficient solutions are on demand which respect the assignment of the regional government. Svindland/GTZ Kyiv 6 July 2005

Inside the public sector (governance) I have reviewed priority areas of a public sector reform, which will have consequences Inside the public sector (governance) Outside the public sector (participation of state owned companies) In practice also with respect to the size and scope of the public sector Svindland/GTZ Kyiv 6 July 2005

The Program seems to require second thoughts on this strategy. Final Observation The realization of such a reform is characterized by a strategic problem: Path dependencies and lock-in effects are likely. ►The completion of the reform agenda will depend on the design and implementation of a strategy for the sequencing and timing of required reforms My impression: The Program seems to require second thoughts on this strategy. Svindland/GTZ Kyiv 6 July 2005