We’ve lost Ukraine… Or have we? A pivotal moment for investors

1. We’ve lost Ukraine…Or have we?A pivotal moment for investors ViraNanivska Kyiv March 2011

2. 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?

3. 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: http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf

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

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

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

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

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). 8

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

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

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

12. 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.

13. What’s the cure? 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

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

15. 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.