1. 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

2. 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 of 10. August 2004, which has been adopted in a first vote.
Svindland/GTZ
Kyiv 6 July 2005

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. ► 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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