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17 April, 2012  ▪  Serhiy Kubakh

Neither Give Nor Take

Six problems Ukraine needs to overcome to be viewed as a bona fide business partner by international financial organisations

One of the World Bank’s largest investment projects in its portfolio for Ukraine is “Rural Land Titling and Cadastre Development.” The Bank's eight-year marathon in implementation this portfolio shows that it is not easy to carry out any project in Ukraine. This case is a good illustration of the problems frustrating other international initiatives and the reasons why international institutions find it hard to see Ukraine as a bona fide business partner.

Project implementation requires the two sides, the borrower and the creditor, to agree on the project goals, interventions towards these goals and the terms for each stage. All of this is discussed and included in the loan agreement when each side commits while the details are worked out during the course of project implementation.

Obstacles often arise during the implementation stage which cause deadlines to be missed; this requires an explanation being given to the creditor. As a project manager tries to explain the reasons for lagging behind in numerous reports, he faces the obvious challenge of couching them in terms understandable to an international financial institution. For example, he needs to somehow convey such realities as: “There was a plan to create a unified registration system for immovable property rights, and a loan was taken out to this end, but while it was being used, the plan changed”; “No payment has been made within the framework of this project in three months, because no money was allocated for it in the budget”; “The issue of who would has the right of signature was being resolved”; and so on.

CONSTANTLY CHANGING STRATEGIES

The main reason behind most problems linked to the implementation of a new project in Ukraine is the instability of the original plans. More precisely, strategies are being constantly changed. There are no definite answers to the questions: Where are we going? What will have to be eventually built? Here is just one example.

In 2003, Ukraine took out a loan from the International Bank for Reconstruction and Development to create a unified registration system for immovable property rights and land titles, as is the customary international practice. In order to carry out project interventions, a law was required that would identify one government body in charge of the register. The Verkhovna Rada passed this law the following year, but it never entered into force, because the Cabinet of Ministers failed to issue the required resolution. As a result, the project was in danger of being closed, because its main goal was significantly changed. Fortunately, the project was only restructured; the tasks were modified and the loan was greatly reduced. A debate on this issue continued until 2011 and finally yielded a compromise: the system would be shared between two institutions – the Ministry of Justice and the State Agency for Land Resources – which would register immovable property rights and manage the State Land Cadastre, respectively.

In short, in the early 2000s, Ukraine defined a strategic goal of building a unified registration system for property rights and land titles and took out a loan for this purpose, but later changed its mind and returned to the idea of having a less convenient and less efficient system of registration which involves two government agencies.

Needless to say, this adversely affected the efficiency of using the loan as well as the country's reputation. Curiously, no one was held responsible for this. Plans may be revised at any point in time and on any level, even at the stage of specific measures or fulfilling contracts, up to their cancellation. Project management is virtually impossible, because it is simply very difficult to apply in Ukraine. The problems listed below are essentially derivatives of the one described above.

THE INSTABILITY OF GOVERNMENT STRUCTURES

In the eight years that the cadastre project has existed, the agency was reorganised three times (it is now the State Agency for Land Resources); the project was reassigned several times; and the people responsible for its implementation were replaced six times. What strategies or plans can be kept in conditions like these?

All of this has catastrophic consequences for a project like this one. Re-registration of legal persons, the replacement of responsible specialists and the replacement of persons with the right of signature, from central to territorial bodies – every time anything like this happens, it slows down project implementation or acceptance of the work done, if contracts are not suspended altogether. This means that payments to subcontractors are delayed, which leads to more missed deadlines and problems snowball from there. In the worst-case, a loan may be canceled, while in the best case, deadlines may be pushed back. However, delaying a project puts an additional burden on the state budget, because the credit line for the project will be used for a longer period of time.

DISJOINTED GOVERNMENT AGENCIES

Sometimes the impression emerges that the institutions a project manager deals with are not agencies of one and the same government intent on securing the fulfilment of previously defined tasks (such as those formulated by the World Bank for the cadastre development project) but “states within a state,” each following its own principles and pursuing its own autonomous goals.

Take the legislature as an example. Project interventions often require that legislation be drafted to facilitate project goals. In the case of the cadastre project, a law was needed on a unified register of immovable property rights and then, after this idea was scrapped, legislation was required to address the State Land Cadastre. But the Law “On the State Land Cadastre” was passed only in July 2011, that is, seven years after the launch of a project aimed at developing the cadastre. Moreover, there is actually no provision for a unified land cadastre in this document. (Kyiv currently has its own autonomous cadastre.) Furthermore, this law cannot be applied until bylaws are written, such as the procedure for maintaining the State Land Cadastre. This means that the state is failing to provide the legislative framework for the very product it hopes to obtain from the project.

Take the executive power as another example. As strange as it may sound, certain problems with financing this World Bank project stem from Ukraine’s state budget. A loan does not mean that money is automatically allocated in the budget every year for specific project interventions. Each new year begins with a so-called temporary budget which always limits the financing of project interventions. In other words, the norm is to have a parallel budget process which makes it impossible to predict what funds will really be allocated, when they will be disbursed and, hence, which of the interventions planned (and fulfilled by subcontractors) can be accepted and paid for.

The overall result depends on how project interventions are carried out in the regions. And here a lot depends on the distribution of functions among government agencies, particularly whether the ordering agency has a vertical structure. If government agencies are in conflict, project interventions are caught up in a conflicted environment not conducive to the project. There are no laws to oblige all government agencies involved in carrying out a project to do their jobs nor are their norms holding officials personally responsible for quality and the timely delivery of results.

PERSONNEL

Low salaries force specialists to migrate from government structures to the private sector. Meanwhile, projects typically require the involvement of high-quality specialists. High employee turnover in the ordering agency leads to frequent replacements of the staff responsible for the project in general and its individual components, which, of course, does not bode well for the project itself.

Government agencies as private businesses

International investment projects help form relationships between the state and private business, both Ukrainian and foreign. They make contact with each other through bidding procedures, accepting work and making payments. Problems include changes in plans (such as when a tender is announced and the winner is determined, but the contract is not signed because doubts suddenly arise whether it is at all needed), delays in accepting work (particularly because of personnel problems in the ordering party), and delayed payments (for example, because of budget planning issues) – all of these issues damage the country’s image as a reliable business partner.

NEGATIVE PERCEPTION OF LOANS IN SOCIETY

There are myths that loans from international financial institutions are “debts that our children will be paying off,” “a debt burden that is growing with each passing year,” etc. Some Ukrainian officials act based on such stereotypes as a rule. They propagate in society what they fail to understand themselves: loans for projects of socioeconomic development (not “consumption loans,” of course) are a tool with which to finance high-priority measures to secure systemic reforms in the state. Such measures require investments, because the Ukrainian budget is unable to sustain their financing for long periods. Therefore, as practice shows, projects of international financial organisations support precisely those measures which can never be achieved in Ukraine “on its own,” i.e., in some other way, no matter how urgent they may be. Moreover, no commercial bank offers such low rates for opening and using a credit line. For example, an annual rate may be a fraction of one percent. But neither the MPs who have passed laws on loans, nor the ordering agencies themselves are doing anything to explain how favourable these loans are.

Clearly, the negative perception of loans in society is increased because of the inefficient way in which this powerful financial instrument has sometimes been used by government structures themselves.

WHO RECOGNISES THESE PROBLEMS?

The World Bank cadastre project is an indicator of the problems facing other projects. Issues linked to changing plans and a lack of coordination between government agencies during project implementation were clearly identified by the Audit Chamber during the most recent audit of the project “Rural Land Titling and Cadastre Development” in late 2011. It reported that the current state of affairs jeopardised the entire project and threatened the ineffective use of the loan.

A HAPPY ENDING FOR AN INDIVIDUAL PROJECT?

Despite all of the above, the World Bank cadastre project proves that, even given such realities, results can still be achieved. It is a miracle that the project is close to the goal set after it was restructured: making a modern cartographic provision for the cadastre and building an automated cadastre management system.

It should be noted that the project is nearly the only measure of land reform that has operated since 2004 and for precisely this reason, it must produce results.

What does this demonstrate? First, the efficiency of a project-based approach and, second, the efficiency of cooperation with international financial institutions. Socioeconomic development projects are more stable than any other measures taken by the government. They trigger an action plan that is much more difficult to depart from than in other cases. They are a tool with which to secure reforms based on the best world practices. In fact, the involvement of international financial organisations in these projects forces Ukrainian government agencies to employ a strategic approach and adhere to the goals they have themselves defined.

However, these projects are also a testing ground for Ukraine as a business partner and clearly highlight its strengths and weaknesses, consequently affecting the way international financial institutions look at financing Ukrainian reforms and cooperation with the country in general.


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