We ve lost Ukraine Or have we A pivotal

We’ve lost Ukraine… Or have we? A pivotal moment for investors Vira Nanivska Kyiv March 2011

§ § § What’s happening in Ukraine? How deep is the problem? How does this affect investors? What’s the cure? What is the role of investors?

What’s happening in Ukraine? There is an incongruence between Ukraine’s current state and its obvious potential due to its range of natural resources, large domestic market, well educated population and strategic location. Ukraine is failing in most global ratings: § In 2009, GNI was $2, 800 per capita in Ukraine, compared to $9, 340 in Russia, and $42, 450 in Germany. § In the Index of Economic Freedom, Ukraine ranked 164 among 183 in 2011, below Belarus, Russia and Uzbekistan. § In the 2010 World Bank Doing Business report, Ukraine’s investment climate was rated below that of Russia and Tajikistan. In terms of corruption, investors perceived Ukraine to be on par with Nigeria. * Gross national income per capita 2009, World Bank. Source: http: //siteresources. worldbank. org/DATASTATISTICS/Resources/GNIPC. pdf

How deep is the problem? Democratic reforms are unfinished. The government machinery was not restructured to align with free market democratic principles.

How deep is the problem? Totalitarian political system Separation of 3 branches of power Unreformed executive branch One center of power legislative+ executive + judicial legislative All property in the hands of one p Ministry Government judicial Left Party One political party in power executive Center Parties Right Party Private Property Political leadership Administration Community council no Regional party executive office Executive committee Regional State Administration Executive committee Community council no District party executive office District State Administration Executive committee Town’s and Village’s community council, Executive Committee The community council of towns and villages 5

How deep is the problem? Fires Occur at All Levels, Between the Unreformed State Machine and Newly Established Institutions legislative executive judicial Left Party Centre Parties Right Party Private property Political leadership Central administrative machine Community council no executive committee Regional State Administration Executive committee District State Administration Executive committee The council community of towns and villages 6

Separation of Functions Among American Executive Authorities Legislative Branch - Congress Executive Branch - President Senate Administration of the President House of representatives General Accounting Office (GAO) Office of Management and Budget Office of Inspector General Judicial Branch Personnel department Office of Management and Budget Chief Human Capital Officers Council Office of Personnel Main Department of Management Public Service Merit System Protection Board (MSPB) Senior Executive Service Equal Employment Opportunity Commission The union of American government officials American Federal Government Employees Office of Government Ethics Cabinet Departments and Federal Agencies The system of educational institutions for training civil servants MPA, BPA University Programs Federal Bureau of Investigation (FBI) Office of Personnel Management Programs VETERANS PRIVATE SECTOR 7

Financial Control in the Ukrainian Government HEAD • The head of the government body is the sole arbiter of financial solutions regarding the budget and laws. • Ratification is by that same official’s subordinate(s). 8

Financial Control of Government Bodies in France Report www Ministry of Budget Branch Inspections Ministry of Finance Permanent accountant of the Ministry Permanent Inspector of the Ministry External audit expert Report www HEAD Internal audit Report www Financial Inspection Report www External reviews Report private companies www Admin istra Inspec tive tion Report www § Financial operations are controlled by permanent representative of the Ministry of Budget and of the Ministry of Finance on a daily basis; § Mandatory permanent internal audits and the supervision of independent state inspections and external private audits. 9

The Principle of Institutional Separation of Functions in Democratic Executive Bodies Supervisory Body of Statistics Policy. Making Body Monitoring and Inspection Body of Evaluation and Training Employer Arbitration 10

Ukraine has not yet separated functions in the Executive Branch Ukraine’s public service governing body • Supervision • Employer • Policy-making • Evaluation and training • Statistics • Inspection and control • Handling complaints Democratic executive branch Supervision Body Policy. Making Body of Statistics Inspection and Control Body of Evaluation and Training Employer Arbitration 11

How does this affect investors? The current state of public governance creates an uninviting investment climate. § The legal environment is unstable and constantly changing, making investment risky. § There is no protection for private property or fair competition. § The government does not adhere to the principles of rule of law, transparency, and public participation in decision-making. § Corruption is openly practiced, with no fear of punishment. § Decision making procedures allow any official, quite legitimately, to block resolutions without any responsibility for the consequences. § There is no fixed punishment for violating procedures.

What’s the cure? Apply European principles with effective legislation which: – exposes violations and determines punishment for them; – does not allow bureaucrats to make decisions at their discretion; – secures the independence of control and inspection bodies from their audit subjects; – is mandated to carry out regular control, auditing and monitoring of organizations, procedures, and standards; – is mandated to audit the effectiveness of rules and regulations on an ongoing basis; – is mandated to widely apply Deontological rules of professional conduct: what should and should not be done by a civil servant. * Support for Improvement in Governance and Management (SIGMA). Source: http: //www. oecd. org/dataoecd/4/58/829242. pdf 13

What’s the cure? REFORM CENTRALIZATION DECENTRALIZATION Oversee compliance with the Constitution, human rights, national interest, the national budget, territorial integrity and national security. Responsibility for the socioeconomic development of territorial communities lies with its local elected governments. Unifying legislation at the national level and bringing it in line with European standards. Executive capacity at the local level to plan and spend their budgets. Capacity in local communities to solve their most urgent problems.

What is the role of investors? Investors have great influence with their governments. § They can hold their governments accountable for making certain that technical assistance leads to concrete structural and institutional changes. § Today, USAID assistance provides funds for projects and for project leaders to evaluate their own project’s success. § They can continue strongly pressuring the Ukrainian government to follow through on promised reforms.