We’ve lost Ukraine…Or have we?

A pivotal moment for investors

Vira NanivskaKyiv

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 naturalresources, 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.

5

District partyExecutive committee

Totalitarian political system

Regional partyExecutive 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 Party Center Parties Right Party

Private Property

Private Property

Private Property

Regional State Administration Executive committee

District State AdministrationExecutive 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 Party Centre Parties Right Party

Private property Private property Private property

Regional State AdministrationExecutive 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 Programs Office 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

Reportwww

Ministry of Budget

Permanent Inspector of the Ministry

Reportwww

Ministry of Finance

Internal audit

Reportwww

Reportwww

External audit expert

External reviews private companies

Reportwww

Branch Inspections

Reportwww

Financial Inspection

Administrative Inspection Reportwww

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 ofEvaluation

and Training

Monitoring and

Inspection Body

Arbitration

Body of Statistics

Arbitration

Inspection and

ControlBody

SupervisionBody

11

Democratic executive branch

EmployerPolicy-

Making Body

Body ofEvaluation

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?

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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

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.