When members of Ukraine's newly-appointed government walked into their offices just over a month ago, on top of a military invasion, a looming economic collapse and other external challenges, they discovered the mess in their own back yard is almost as massive a problem.
Most of the civil service turned out to be completely dysfunctional, highly corrupt and disruptive, turning every step and every decision almost into an act of heroism.
“We have worked for just 34 days, but we feel as if we have worked for more than two years,” Ostap Semerak, minister of the Cabinet, told a room full of investors at the Dragon conference on April 2. Semerak's job is to coordinate the work of the government and its staffing policies.
The government has made a decision to dismiss 10 percent of civil servants, or 24,000 people. However, some ministers confess in private that it would probably be fair to keep 10 percent of the existing staff, but they cannot do this because they are constrained by legislation and potential lawsuits that would drain time and energy.
The problems run the gamut. Igor Bilous, deputy finance minister who oversees the work of the tax system, says he inherited 60,000 tax personnel whose “thinking grew in the wrong environment.”
With salaries hovering around Hr 1,500, corruption within the department previously was presumed. As a result, regular tax inspectors who came to audit businesses, offered to “solve their problems” at a small cost. But the bigger fish dealt with bigger money and more complex schemes, such as VAT return schemes. Bilous said he and the new staff he brought in three weeks ago have already identified 16 inspectors who specialized in facilitating the return of fake VAT claims.
“Still, Hr 2 billion worth of wrong VAT declarations are in the system” out of the total of Hr 30 billion VAT arrears to business, Bilous says. And they take a long time to clean up.
Bilous says that Ukraine lost Hr 150 billion in VAT tax optimization each year alone. The revenues to the 2014 budget are planned at Hr 372 billion.
“A lot of people are saying there is a new government in place, and old schemes are still working. Yes, they're working because that train was traveling at 150 kilometers per hour, and it's impossible to stop in three days,” Bilous says.
Semerak is also trying to clean his house. He says when he first came to work, he was offered to use a taxpayer-sponsored Mercedes bought in 2007 that had run 754,000 kilometers, according to its odometer. He could not understand how the car of an office clerk could travel such an accumulative distance.
He found that the Cabinet drivers tampered with odometers to increase the mileage and sell the free fuel they received to cover it. “So, if the drivers of those ministers were doing that, imagine what the ministers did,” Semerak concludes. Now, the government is preparing to sell off 71 of its 142 cars through an auction in June.
Indeed, corruption at the top ran far and wide, affecting many markets and industries in Ukraine. Prime Minister Arseniy Yatsenyuk said in a recent speech that from financial system alone some $70 billion had been siphoned off by the former government. National Bank Governor Stepan Kubiv says some of the money was taken out via government bail outs of nearly-bankrupt banks, which then swiftly disappeared into the pockets of their beneficiaries, many of them closely linked to the government.
Many banks used to be financial branches of oligarchic business, which will no longer happen in Ukraine, Kubiv said. “We won’t have ‘dear friends,’ I am saying this as the National Bank Governor,” he said.
Volodymyr Lavrenchuk, Chief Executive Officer of Raiffeisen Bank Aval, said that according to the banking community information, between 10 and 48 banks of Ukraine’s 180 belonged to “the family,” or close circle of former President Viktor Yanukovych, which hugely distorted the market.
“This was not equal competition, the market was not equally competitive,” he concludes.
As if corruption itself was not enough for the Cabinet, there is internal sabotage through attempts to change the system. Semerak says in one case, after the government took a decision to clean up the sector of evaluation services, the first phone call from a vested party requesting a meeting came just three hours after the first paper was signed. This indicates that there are plenty of agents still hovering around.
Another problem is staff incompetence. Acting Foreign Minister Andriy Deshchytsia said that ambassadors-at-large, who represent a substantial chunk of his ministry of some 400 people, are not used to doing much work and when they produce strategy papers, they tend to be long, boring and lacking on specific recommendations and actions.
Bilous estimates that it would take him up to nine months to make real, deep and visible changes to the tax system. Much of this cleanup can be facilitated or sped up with the help of technical assistance from the European Union. But the dialog between Ukraine and the EU is yet to be started, ministers and diplomats in Kyiv say.
In the meantime, the government appealed to businesses for help. “If you see we have made a mistake in staffing, please let us know,” Semerak said.