Efficiency of Political Parties In Ukraine: Problems and Prospects Agency for Legislative Initiatives Donetsk,

1. Parties, Election System and Political Responsibility

1.1. Main Preconditions to Strengthen the Role of Parties in the Exercise of Power Introduction of the proportional representation system with closed party lists for parliamentary and local elections Enactment of the Constitutional Amendments of , extension of staffing and control powers of the Parliament in relation to the executive branch, strengthened role of the Cabinet of Ministers in the exercise of the executive power Introduction of public funding of political parties (Law of )

1.2. Unfavourable Factors for Further Strengthening of the Role of Political Parties in the Exercise of Power and Political Responsibility of Political Parties Unfinished separation of powers between the head of state and the government (preservation of the presidential power to appoint heads of local state administrations, individual members of the Cabinet of Ministers, functions of administrations in the areas of foreign policy, national security and defence), absence of the Cabinet of Ministers Act Weakness of the regional self- governance bodies, lack of executive authorities of rayon and oblast councils Peculiar formation of lists of candidates for parliamentary and local elections and special features of the proportional representation system applied at the elections (sole multi-mandate constituency, closed lists, one-stage nomination of candidates which strengthens positions of party leadership and does not promote development of local party organisations) Actual equalisation of rights of election blocs and political parties (which helps smaller political parties united into blocs to overcome the election threshold) Financial weakness of the majority of political parties, their dependence of industrial and financial groups Lack of clear differences in the ideology of the majority of political parties and weak staff reserves (level of support of the majority of political parties depends on the personal rating of their leadership) Unclear powers of the Ministry of Justice as concerns oversight of political parties, actual lack of constant control of how political parties respect the law

1.3. Main Steps to Strengthen the Role of Political Parties in the Exercise of Power Step 1. Completion of redistribution of powers in the centre and regions (redistribution of powers between the head of state and the government, improvement and adoption of Bill No before the next local elections) Step 2. Amendment of election legislation (further improvement of the proportional representation system of elections, revision of the procedure set for the formation of election lists, increase of the election barrier for election blocs etc) Step 3. Strengthening of financial capacity of political parties (extension of the list of funding sources, implementation of the Political Parties Act as concerns funding of charter activities of political parties) Step 4. Strengthening of public oversight of political parties

1.4. Step 1 – Completion of redistribution of powers at the central and local levels Definition of the status of the Cabinet of Ministers, ministries and other central public executive authorities, separation of presidential and governmental powers in the area of competition of their authorities (foreign policy, national security and defence) Improvement, preliminary approval and adoption of Constitutional Amendments No (elimination of rayon state administrations, establishment of executive committees of rayon and oblast councils, introduction of elections of oblast and rayon heads, separation of powers between oblast state administrations and executive committees of oblast councils) Approval of new versions of the Local Self-Governance Act, the Local State Administration Act, and amendment of the Budget Code of Ukraine Implementation of the reform of administrative and territorial system

1.5. Step 2 – Amendment of Election Legislation Increase of the number of election constituencies where the mandates for parliamentary, oblast, and rayon elections are redistributed. In the future, it seems expedient to introduce voting for semi-open lists (preferential voting) Increase of election thresholds for election blocs Transition to two-stage nomination of candidates in accordance with the upward principle (local party organisations shall be have a priority right to nominate candidates for elections)

1.6. Description of Proportional Representation System of Elections in EU Member States PARLIAMENTARY ELECTIONS Proportional representation system of elections is sued in 18 of 25 EU MSs (excluding UK, Ireland, Lithuania, Malta, Germany, Hungary, and France) Only 2 of 25 EU MSs organise parliamentary elections in the sole multi-mandate constituency (the Netherlands, Slovakia) Closed lists are practiced only in 4 of 25 EU MSs (Austria, Spain, Italy, Portugal), while other countries practice preferential voting (voters can influence the order of distribution of mandates between the candidates from a party) In many countries where their election system envisages election barriers for election blocs, such barriers are higher than for political parties (Italy – 4% for parties, 10% for blocs and 2% for each party in the bloc; Lithuania – 5% and 7% respectively, Poland – 3% and 5% respectively, the Czech Republic – 5% for parties and 5% multiplied by the number of parties in the bloc for blocs LOCAL ELECTIONS At local elections, EU MSs apply election systems similar to those that are used at parliamentary elections 19 of 25 EU MSs organise elections in accordance with the proportional or mixed (so called “combined”) system In the majority of EU MSs, local elections are personified (in 16 of 25 countries preferential voting or other means of election personification are applied (voting in single-mandate constituencies, the system of the single transferred vote etc) In 17 of 25 EU MSs mayors are elected through indirect elections. The system of relative majority applied at elections of mayors of small and big villages, as well as towns and cities in Ukraine is practiced only in 4 countries.

1.7. Step 3 – Strengthening Financial Capacity of Political Parties Extension of the list of permitted kinds of business activities, entitling political parties to establish companies Introduction of stimuli to support charter activities of political parties by individuals and corporations Lifting profit tax on membership fees Implementation of the Political Parties Act as concerns public funding of charter activities of political parties

2. Ways to Strengthen Financial Capacity and Transparency of Political Parties in Ukraine

2.1. Untaxed Sources of Funding of Political Parties in Ukraine Irretrievable financial aid and voluntary contributions of individuals (excluding foreigners, apatrides, and anonymous individuals) and corporations (excluding charter, religious, and international organisations, other political parties, companies partially owned by the state or a community, non-resident companies), the state (Articles 15, 17-1 – 17-9 of the Political parties Act, Article of the Corporate Profit Taxation Act) Incomes from the main activates – incomes from the sale of political and other promotion materials, products with party symbols, organisation of festivals, celebrations, exhibitions, lectures, and other social and political events (Article 24 of the Civil Associations Act, Article of the Corporate Profit Taxation Act) Passive incomes (interest, dividends, insurance payments, royalty) (Articles and of the Corporate Profit Taxation Act)

2.2. Main Reasons of Weak Financial Capacity of Political Parties in Ukraine Lack of clear ideology, electorate, stable and active party members Insufficient legislative momentums for financial support by individuals and corporations Legislative restrictions of source of funding of party and business activities Lack of public funding to the party charter activities as it is envisaged by the Political Parties Act Low party activities to attract funds to support its charter activities

2.3. Negative Influence of Legislation on Party Finance Restrictions on business activities, prohibition to establish companies (Article 24.2 of the Civil Associations Act) Lack of protection of allocations for public funding of charter activities of political parties (the proposed 2007 National Budget Act suspends the provisions of the Political Parties Act that concern funding of charter activities of political parties in 2007) Taxation of membership fees (Article of the Corporate Profit Taxation Act) Prohibition to corporations transfer money to election funds Lack of efficient stimuli for financial support of political parties by corporations (only 2-5% of the taxed profit received in the previous period under report that may be transferred to political parties may be attributed to gross expenses (Article of the Corporate Profit Taxation Act). Any amounts above that threshold are not attributed to the gross expenses of the corporate sponsor Lack of efficient stimuli for financial support of political parties by individuals (only 2-5% of the money transferred to political parties over the period under report may be attributed into the tax loan (Article of the Private Income Tax Act). Any amounts above that threshold are not attributed to the gross expenses of the individual sponsors.

2.4. Main Consequences of Weak Financial Capacity of Political Parties in Ukraine Weak staff resources, inability to be efficient in performance of charter objectives or institutional development Active operation only in the election period Financial dependence of the majority of political parties on financial and industrial groups and individual financiers; merger of business and politics Shadow funding and political corruption Faction instability, low level of faction discipline

2.5. Legal Regulation of Funding of Political Parties Aboard: Statistics (Sample – 111 countries) CEC oversight of funding of political parties – 63% of countries Obligation to public financial statements – 53% of countries No restrictions on the maximal contribution from one contributor – 73 % of countries Foreign funding of political parties – 64% of countries Funding of political parties by legal entities (corporate funding) – 80% of countries Funding of political parties by legal entities with partial public ownership or by corporate suppliers of works, goods, and services for public purposes – 74% of countries Funding of political parties by trade unions – 85% of countries No restrictions on cap size of election funds – 76% of countries Direct budget funding of political parties – 59% of countries Pre- and post election public funding – 58% of countries Public funding of parties that a) nominate candidates for parliamentary elections – 29% of countries, and b) are represented in the current parliament – 38% of countries Public funding is provided for the purpose of а) election campaign – 69% of countries, and b) performance of charter objectives – 45% of countries No tax bonanzas for political parties – 72% of countries; no tax bonanzas for donors of political parties – 82% of countries

2.6. Regulation of Nonpublic Funding of Political Parties: Examples of the Counties of Europe Direct public funding of political parties: Austria, Albania, Belgium, Bulgaria, Bosnia, UK, Denmark, Estonia, Ireland, Iceland, Spain, Italy, Lithuania, the Netherlands, Germany, Norway, Poland, Portugal, Romania, Slovakia, Hungary, Finland, France, Czech Republic, Switzerland, Sweden Funding of political parties by resident companies allowed: Austria, Albania, Andorra, Bulgaria, Bosnia, UK, Denmark, Ireland, Iceland, Spain, Italy, Cyprus, Latvia, Lithuania, Malta, Moldova, the Netherlands, Germany, Norway, Slovakia, Finland, Switzerland, Sweden Funding of political parties by resident companies allowed not allowed: Belgium, Estonia, Poland, Portugal, Romania, Hungary France, Czech Republic Tax bonanzas for political parties: Iceland, Spain, Italy, Lithuania (tax loans), Malta, Germany, Portugal, Romania, Hungary, Czech Republic No tax bonanzas for political parties: Austria, Albania, Belgium, Bosnia, Bulgaria, UK, Denmark, Estonia, Ireland, Cyprus, Latvia, Moldova, the Netherlands, Norway, Poland, Slovakia, Finland, France, Switzerland, Sweden

2.7. Transparency of Party Finances: Foreign Experience (Sample – 111 countries) Obligation of public disclosure of the sources of funds – 53% of countries Obligation of public disclosure of funding targets – 48% of countries Countries of Europe where political parties are not obliged to disclose annually their funding targets: Belgium, Bulgaria, UK, Bosnia, Denmark, Estonia, Ireland, Spain, Italy, Latvia, Lithuania, Moldova, Germany, Poland, Portugal, Russia, Hungary, Finland, France, Czech Republic Countries of Europe where political parties are obliged to disclose annually their funding sources: Albania, Belgium, Bulgaria, Bosnia, Estonia, Denmark, Ireland, Spain, Italy, Latvia, Lithuania, Moldova, the Netherlands, Norway, Germany, Poland, Portugal, Romania, Hungary, France, the Czech Republic, Switzerland (certain cantons)

2.8. Ways to Strengthen Financial Capacity of Political Parties in Ukraine Extension of the list of permitted business activities of political parties, provision of the right to set up companies (by analogy with NGOs) Increase of the share of expenses used to support charter activities of political parties that are included into the tax loan/gross expenses of the contributor No application of profit tax to membership fees Introduction of no moratorium on the funding of charter activities of political parties (proposed 2007 National Budget Act) Conduct of fund raising campaigns by political parties, primarily among individuals

2.9. Priorities to Ensure Transparency in the Use of Funds by Political Parties in Ukraine Establishment of deadlines for the publication of financial statements on the incomes and expenses of political parties; clear definition of the media where such statements shall be published Introduction of independent (non-public) audit of political parties, adoption of the Accounting Chamber Act Obliging political parties to disclose in their financial statements information on their contributors (if the amount of a voluntary contribution exceeds certain amount) Extension of CEC powers in terms of financial oversight of political parties Introduction of legal responsibility of political parties for the failure to publish (delay in the publication) of annual income-expense statements, publication of false statements, violations, related to the submission of financial statements