SOE Governance Reform in Ukraine Under Risk


By April 1, state officials and certain other individuals were required to submit 2017 property and income e-declarations. While many people criticized the new requirement for the anti-corruption activists to submit e-declarations, members of supervisory boards at state-owned enterprises (SOE) were also required to submit such declarations in 2018. As a result, several members of SOE supervisory boards announced plans to resign. This puts under a risk the SOE governance reform, which is one of the Government policy priorities.

Originally, the obligation to submit electronic declarations of assets and income was introduced for persons authorized to perform functions of the central or local government as part of anti-corruption reforms. However, one year ago this obligation was extended to anti-corruption activists and members of supervisory boards of SOE. International organizations including the IMF, the World Bank, the European Commission, and the Venice Commission of the Council of Europe, as well as civil society representatives criticized this requirement and proposed its removal. However, by the end of March the Parliament failed to amend the law.

Therefore, since April 1, members of SOE supervisory boards are obliged to submit e-declarations in Ukraine on all earnings they have not only in Ukraine, but also abroad, but also on all assets. This puts under a risk the SOE governance reform, according to which all SOE should have supervisory boards with professional independent members both Ukraine and from abroad. Therefore, several foreign independent directors have already announced their possible resignation if e-declaration requirement would remain.

SOE Governance ReformThe creation of the supervisory boards at the SOE with the majority of independent directors was one of the essential measures in the framework of the SOE governance reform. Overall, Ukraine had 3392 SOE with aggregated assets at UAH 1.6 trillion in September 2017 (for the comparison, there are 301 SOE in Poland and 371 SOE in Hungary). According to the data of the Ministry of Economic Development and Trade (MEDT), only 1611 SOE were in operation in the first nine months of 2017. 1051 SOE reported profits, while other were loss making. The MEDT assessed positively the management efficiency of only 22 out of 84 entities that manage SOE. The SOEs also receive bulk of the state aid. Inefficient governance of the SOEs contributed to the IMF-estimated state aid to SOE (including subsidies and privileges) at 5% of GDP in 2017.

To reduce the fiscal losses and improve efficiency of the SOE the Government started to corporate governance reform in 2016. The implementation of this reform is expected to prevent political interference and corruption, separate the roles of the regulator and the owner, and introduce globally recognized corporate governance standards.

Three major pillars of the corporate governance reform can be defined. First, the Government should introduce strategic planning, which would define key performance indicators for each SOE. This pillar also envisages increase in the transparency of SOE governance. Second, independent supervisory boards are to be set up on each SOE. This element of the reform is crucial as it would contribute to the higher efficiency of the SOE due to the elimination of the corruption schemes and state capture. In particular, supervisory boards will be responsible for the hiring managers, evaluation of SOE performance, and the selection of auditors. Third, members of supervisory boards and managers of SOE are to receive competitive wages, which would create incentives for their efficient work. Necessary regulations for the second and third pillars were introduced, but selection of independent directors was delayed.

Several SOE received supervisory boards, some members of which were foreigners; however, independent supervisory boards are still to be appointed on most large state-owned companies. Now, there is a high risk that the Government will not be able to attract professional managers from abroad to become members of supervisory boards at SOE as they would then have to submit e-declarations of all assets and earning they have not only in Ukraine, but also abroad, which is highly unusual. The risk also relates to private and public companies that are considered as those conducting anti-corruption activities: the members of their supervisory boards also have to submit e-declarations.

Therefore, the Parliament is better to eliminate the vague requirement for the submission of e-declarations by members of supervisory boards as well as by anti-corruption activists. In turn, the Government should continue the scheduled corporate governance reform. This includes the large-scale privatization of SOE. The State Property Fund of Ukraine plans to privatize 100 companies this year, which are expected to bring UAH 22.5 bn to the budget. The small SOEs (with assets below UAH 250 m) are to be sold through the ProZorro.Sales platform, which is already used for the sale of assets of liquidated banks by the Deposit Guaranteed Fund. Therefore, instead of creating additional barriers to efficient corporate governance at SOE, the Government should increase efforts for the continuation of the reform.

Monthly Economic Monitor Ukraine, No.4 (210), April 2018

Oleksandra Betliy
The Institute for Economic Research and Policy Consulting - Kyiv