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:

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

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

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

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

8 HEAD Financial Control in the Ukrainian Government 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).

9 HEAD Permanent accountant of the Ministry Report www Ministry of Budget Permanent Inspector of the Ministry Report www Ministry of Finance Internal audit Report www Report www External audit expert External reviews private companies Report www Branch Inspections Report www Financial Inspection Administrative Inspection Report www Financial Control of Government Bodies in France  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.

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

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

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? 13 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:

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

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.