Ensuring Openness and Transparency of Selling Public Assets and Property (UA0072)

Oleksii Sobolev and Khrystyna Zelinska share reflections about Ukraine’s Prozorro.Sale, an innovative e-trade system created in the aftermath of the Revolution on Dignity that allows the government to sell or lease state and municipal property in a fully transparent and open way.
22nd June 2021

Ensuring openness and transparency of selling public assets and property A number of problems are observed in the field of selling public assets and property as follows: • Lack the unified transparent and efficient system of selling public assets, public property is sold by various auction organizers each having its own rules; • A lot of illiquid and non-core assets are accumulated in public sector, significant money is spent to maintain these assets, state-run enterprises are unable to update their technical resources; • The auction organizers lack technical and professional opportunities to effectively run online auctions and optimize income from selling public assets and property (as a result, the community and investors do not trust to the transparency, integrity and efficiency of such sales); • Current process of public assets and property sale is inefficient. In particular, it is featured by asymmetry of information, technical issues with access to auctions, unequal access to specific auctions where mostly the clients of specific organizer take part; • Slowness of processes associated with selling public assets and property due to strong institutional memory of market players and resistance of the existing system to expanded range of players and increased number of sales; • Limited access of foreign investors to public property and assets auctions and for development of the national economy; • Lack of efficient control and monitoring of the results of auctions – thus, their efficiency is not analysed. Launch of transparent procedure of selling property of state-run enterprises, small privatization targets, and leaseholds of public property will help address these issues. 7 Actions Responsible Timeframe Partners Indicator 1. Launch of online auctions to sell non-core assets of state-run enterprises MoE Ministry of Finance State Property Fund Private Persons Deposit Guarantee Fund (upon consent) National Bank of Ukraine (upon consent) local self-government bodies (upon their consent) December 2018 – May 2019 Government-Civic Initiative “Together against Corruption,” Transparency International Ukraine, other CSOs and international organizations (upon their consent) Ordinance of the CMU on mandatory use of online auctions to sell non-core assets of state-run enterprises adopted 2. Launching online auctions on leasehold of public assets (pilot project) MoE Ministry of Finance State Property Fund Private Persons Deposit Guarantee Fund (upon consent) National Bank of Ukraine (upon consent) local self-government bodies (upon their consent) December 2018 – March 2019 Government-Civic Initiative “Together against Corruption,” Transparency International Ukraine, other CSOs and international organizations (upon their consent) Ordinance of the CMU on a pilot project on mandatory online auctions on leasehold of public assets adopted 3. Launching online auctions on leasehold of public assets of public sales market actors -//- December 2019 – December 2019 -//- Draft law on amending the Law of Ukraine “On Lease of Public and Community Property” in terms of mandatory use of two-layer system of transparent online auctions tabled with the Parliament Expected results of this activity are reducing opportunity for corruption abuse; simplification of the procedure of participation in sales by unification of the procedures and rules of various sales; engaging private business into looking for the participants of sales, increasing competition and budget revenues at all levels; simplification of the procedures and significant expansion of potential participants of sales – both Ukrainians and foreign nationals.

3. Ensure transparency of selling public assets

Language of the commitment as it appears in the action plan: [19] Ensuring openness and transparency of selling public assets and property

A number of problems are observed in the field of selling public assets and property as follows:

Lack the unified transparent and efficient system of selling public assets, public property is sold by various auction organizers each having its own rules;

A lot of illiquid and non-core assets are accumulated in public sector, significant money is spent to maintain these assets, state-run enterprises are unable to update their technical resources;

The auction organizers lack technical and professional opportunities to effectively run online auctions and optimize income from selling public assets and property (as a result, the community and investors do not trust to the transparency, integrity and efficiency of such sales);

Current process of public assets and property sale is inefficient. In particular, it is featured by asymmetry of information, technical issues with access to auctions, unequal access to specific auctions where mostly the clients of specific organizer take part;

Slowness of processes associated with selling public assets and property due to strong institutional memory of market players and resistance of the existing system to expanded range of players and increased number of sales;

Limited access of foreign investors to public property and assets auctions and for development of the national economy;

Lack of efficient control and monitoring of the results of auctions – thus, their efficiency is not analysed.

Launch of transparent procedure of selling property of state-run enterprises, small privatization targets, and leaseholds of public property will help address these issues.

Milestones:

1. Launch of online auctions to sell non-core assets of state-run enterprises
2. Launching online auctions on leasehold of public assets (pilot project)
3. Launching online auctions on leasehold of public assets of public sales market actors

Start Date: December 2018

End Date: December 2019

Context and objectives

Ukraine has many state-owned enterprises, the privatization of which has historically not been a transparent process. [20] The government has acknowledged a number of problems related to selling public assets, including the lack of a unified transparent and efficient system for such sales. [21] This commitment aims to set up clear procedures for the sale and leasehold of public assets on a single online system. The commitment includes concrete indicators for each activity, in particular the adoption of ordinances and submission of a draft law amending the Law of Ukraine On Lease of Public and Community Property. However, milestones two and three rely on significant progress outside the scope of the commitment; the submission of a draft law to Parliament neither guarantees its adoption nor implementation.

The commitment’s implementation started prior to the adoption of this OGP action plan:

• On 18 January 2018, the Ukrainian Parliament adopted law #2269-VIII, [22] which makes selling public assets and property on electronic platforms mandatory.
• On 10 May 2018, the government adopted decree #432, which introduced procedures for conducting electronic auctions for selling public assets. [23]
• From March 2017, to December 2018, ProZorro.Sale adopted multiple regulations for the electronic trade system for public auctions of assets. [24]

According to the commitment, the expected results are reducing corruption risks, simplifying the rules and procedure for asset sales, and the expansion of potential bidders of sales, which would ultimately increase competition and budget revenues. Previously, public property in Ukraine was sold by various agencies and action organizers and each had their own rules. There was a lack of efficient oversight and monitoring of sales. The launch of a transparent system for selling state property, especially under Ukraine’s recent large-scale privatization initiative, is a significant undertaking that will have major effects on the development of the national economy. This commitment involves the launch of online auctions for three types: sales of non-core assets of state-owned enterprises, leaseholds of public assets (pilot project), and leaseholds of public assets of public sales market actors.

This commitment does not explicitly mention how these activities are related to ProZorro.Sale, Ukraine’s electronic system designed to sell state property. However, the potential impact could be transformative considering the possible benefits of centralizing all auctions and the improved transparency of the procedure of sales.

Next steps

Taking into account the current action plan, country context, and best practices, the IRM researcher recommends the following:

• The government can set up implementation indicators (for example, a pilot online auction on leaseholds of public assets is launched on the ProZorro.Sale online platform), in addition to legislative indicators, for similar commitments in future action plans. The technical activities that are within the Cabinet’s power to implement are as necessary as normative legal acts, which are not sufficient by themselves.

3. Ensure transparency of selling public assets

Aim of the commitment

The commitment aspired to establish and implement clear procedures, via a single online system, to ensure the transparency of the privatization and leasing of state-owned property and enterprises. ^[1] Previously, the privatization and leasing procedures were decentralized on the different official web-resources of local city councils. There was little information about the varying procedures for privatization and leasing and a lack of trust in the efficiency of the “paper procedures” of selling state and municipal property. Authorities published auction announcements on their local official websites, which meant there was a limited audience and, therefore, little competition among bidders.

Did it open government?

Outstanding

The government completed the three milestones of this commitment through legislation and by mandating, by decree, the use of Prozorro.Sale. ^[2] The platform must be used to sell and lease public assets or property. ^[3] According to Transparency International (TI) Ukraine (one of the original co-developers of Prozorro and Prozorro.Sale) and state-owned-enterprise Prozorro.Sale, the collaboration between the government, business and TI Ukraine helped to ensure successful implementation of this commitment. ^[4]. They also said that ministerial leadership helped advance changes. ^[5]

On Prozorro.Sale, public officials now publish online auction announcements, full sets of documents about sellers and lots, auction protocols and contracts, and auction organizer decisions. ^[6] This constituted a step forward, because, previously, bidders would have to look at individual local council websites for auction information about the privatization or leasing of state-owned property and enterprises. As noted by a civil society expert, previously, no information was available at the local government level about the number of objects, their price, or the entities to which they were leased. ^[7]

Items available for auction include state-owned enterprises, mining licenses, vehicles, buildings, and small-scale assets, such as cars and computers. ^[8] The largest privatization revenue stream (approximately a third of all revenue) now comes from the sale of real estate. ^[9] Also, the government expanded the mandatory use of the portal to all leasing of gas distribution systems (the largest gas distribution company had voluntarily used Prozorro.Sale since 2017). ^[10]

The successful implementation of this commitment has provided outstanding early results from opening government processes on the sale and leasing of state property via Prozorro.Sale.

The introduction of easily accessible and transparent auctions reduced the opportunity for uncompetitive tenders and corruption. ^[11] For instance, the privatization of the Dnipro hotel in 2020 featured a processes not limited to those capable of bribery, but transparent and open for anyone. ^[12] TI Ukraine also said that the Prozorro.Sale online system created a more open and competitive process. Information is available for all participants, thereby minimizing economic and corruption risks. ^[13]

Statistically, there has been a year-on-year increase in the number of bidders and, therefore, an increase in open competition. A Prozorro.Sale representative stated in communication with the IRM researcher that small-scale privatizations saw an increase from 2.54 bidders per auction in 2019 to 3.05 bidders in 2020. [14] They also said that with the new disclosure principles and improved processes, the biggest improvement in competition was in state property privatization auctions. (According to statistics on Prozorro.Sale, bidders rose from 2.25 in 2019 to 3.25 in 2020. [15]) According to the State Property Fund of Ukraine, there is a significant increase in the number of bidders per auction on small privatization of state property overall: 3.84 in June 2020 versus 1.82 in June 2019. This rise ensured an average price increase of 208 percent on the original starting price (versus 3.56 percent in June 2019). ^[16]

The selling of public assets and the leasing of publicly owned property via

Prozorro.Sale have also improved the transparency of the sale and leasing process and increased final sale and leasing prices. [17] The lease of public and communal property via Prozorro.Sale started in February 2020. From then until November 2020, the online system hosted 814 successful auctions with 839 unique bidders. These auctions saw final sales that were, on average, 70 percent higher than the original starting price (equaling revenue of US$167 thousand per month). ^[18] The sale of oil and gas fields by Geonadra (which began in March 2019) saw final sale prices 63 percent higher than the original starting price, bringing in US$18 million in public funds. ^[19]

As the use of the auctions spreads, it will be important to monitor whether the increased number of bidders is sustained and whether there is a diversity of auction winners. Furthermore, it will be important to monitor whether those who win turn out to be reliable leasers or managers of the properties. Monitoring and controls by government and civil society organizations will be important factors in sustaining the success of the overall sale and leasing processes.