Opinion

Lease and Sale of Ukroboronprom Property: Schemes or Means of Filling the Budget?

Ukroboronprom Ukraine

The process of state property management in Ukraine has often been accompanied by high-profile scandals. Fraudulent schemes, complex and lengthy procedures for the sale and lease of property not only did not bring the expected revenues to the state budget but also caused irreparable losses, contributed to the development of bureaucracy and corruption.

Such negative aspects also took place with regard to the property of Ukroboronprom (hereinafter referred to as the Concern) and its subordinate enterprises and plants. As the Concern is a strategic manufacturer of armaments and military equipment, which is especially important in a state of war, property management processes needed urgent resuscitation.

 Fraudulent Schemes of Property Acquisition

 For a long time, taking advantage of the lack of proper control, a favourable corruption climate, and gaps in legislation, those wishing to own or lease state property for nothing resorted to the following schemes:

1) bringing the enterprise to insolvency due to artificially obtained loans, terminated contracts, accrual of fines, as a result of which the property was subject to seizure and sale through the executive service or in bankruptcy proceedings. The result of the application of such a scheme is the difficult financial condition of the “Mayak,” “Generator” and Kharkiv State Aviation Production Enterprises;

2) concluding investment agreements under which the company not only does not receive a profit but also loses a significant part of its premises and land. Such a scheme was used for the “Radar” plant, and similar “investment agreements” were also concluded with the “Artem” and “Burevisnyk” plants;

3) concluding, instead of lease agreements, fictitious storage agreements, on the basis of which, paying the minimum storage fee, a person or company had the opportunity to place equipment on the territory of the Concern’s enterprises and create products;

4) concluding long-term lease agreements without any economic competition at a low price with the impossibility of its further revision.

Thus, according to research by the expert organisation Statewatch, in 81% of “old” leases, the fee is much lower than the market. In particular, the concern lost UAH 3.7 million a month at only three places (“Artem”, “Mayak” and “Radar”).

For example, it is established that the rent for some objects of the Concern fluctuates at the level of UAH 7.5 up to UAH 20 per sq.m., which clearly does not correspond to the realities of the modern real estate market.

Measures to Protect Property

 Of course, the procedure for managing state-owned property, especially with regard to defense enterprises, must be under special state protection.

At the same time, procedures for the sale and lease of state property must comply with the principles of equality, competitiveness, and economic feasibility.

A kind of balance can be achieved through the following measures introduced in Ukraine:

1) establishing cooperation with law enforcement and other state bodies (SSU, National Police, Prosecutor’s Office, SBI, NABU, State Tax Service) for rapid and effective detection and investigation of illegal actions and schemes in the management of state property, as well as prosecution of perpetrators;

2) proper control over the selection and activities of top managers, in particular, by restricting decisions on particularly important objects of state property;

3) sale and lease of property at open auctions using the ProZorro platform. Sales, including:

 – conducting an independent evaluation to determine the current price;

 – dissemination of information on public websites for the sale and rental of real estate, in social networks;

 – gradual slight decrease in the cost of rent, if the auction did not take place (only 15% after the first and second auctions);

 – carrying out a thorough analysis of the business reputation of bidders and possible risks;

 – publication of a list of potential lease and sale objects, which will allow more participants to prepare for the auction and participate in it.

The implementation of these measures primarily depended on the legal basis. It was the adoption of a new version of the Law of Ukraine “On Lease of State and Municipal Property”, which came into force on 1 February, 2020.

However, the implementation mechanism of legislative innovations depended on the adoption of a number of bylaws, which took place only six months after the entry into force of the Law.

It is the adoption of the latest bylaws that allow state-owned enterprises to enter the market of transparent property lease.

The introduction of the legal environment and the use of the ProZorro.The sales platform creates the preconditions for the gradual extinction of shadow schemes and opportunities for filling the state budget.

Thus, according to the official website of Ukroboronprom, in 2020 the efficiency of leasing the Concern’s property increased by 24%, and enterprises received UAH 2.7 million per year more revenue. At the same time, in the first eight months of 2020, the Concern’s enterprises held 476 auctions for the sale of property (mainly scrap metal and written-off cars) and four lease auctions, as a result of which the state received UAH 21.6 million profit, and by the end of 2020 it is planned to increase profits to UAH 150 million.

International Experience

Sofiya Kikish expertThe success of foreign countries in the field of state property management is primarily due to effective regulation and market criteria for determining prices (UK, France); openness and publicity of procedures for the sale of state property (France, Poland, Germany); preliminary analysis of the competitiveness of the enterprise and the strategic importance of the object for the interests of the state (Germany).

This international experience further confirms the need to adhere to the principles of openness and publicity in the management of the property of Ukroboronprom. We will be able to fully evaluate their result only later.

It is the identification and accounting of state property that is not used or used irrationally, and its implementation or lease through electronic bidding on a competitive basis will ensure that the state receives adequate profits at real market prices.

 Sofia Kykish, Lawyer of LU “Matviyiv & Partners” 

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