Transparent Government Asset Management
Ukraine has a large amount of state owned assets which are in most cases mismanaged or sold via corrupt procedures, meaning a large portion of funds never reaches local and state budgets. ProZorro.Sale developed an advanced electronic auction system, which introduced complete transparency and digitised the state asset management process. Through fair and innovative online auctions, coupled with open data, the system has replenished local and state budgets by $1 billion in 3 years.
The National state asset sales system in Ukraine has been claimed to be one of the most inefficient and corruption-prone areas due to limited data availability, restricted competition, unclear procedures and no public monitoring. These shortfalls caused restrictions of access to deals resulting in non-market transaction prices and lost revenue for local and state budgets. In order to solve these problems the ProZorro.Sale project was launched in 2016.
The project followed the footsteps of ProZorro, an electronic procurement system for government, which was launched in 2014. It saved millions of dollars by increasing competition and significantly reducing corruption in the sector. Because of its success, the government of Ukraine expressed a wish to implement a similar system for asset sales, as opposed to procurement. With support and direct supervision by the Ministry for Economic Development, Trade and Agriculture the project was first piloted on toxic assets (non-performing loans) of insolvent (bankrupt) banks. A special auction method was developed by the Kyiv School of Economics with the aim to reduce the effects of insider knowledge and increase the level of competition, while maximising the sale price. In comparison with other countries who have had similar issues, Ukraine outperformed most in multiple metrics, as can be seen in a white paper produced by thr Kyiv School of Economics (research materials attached).
At its core, the main innovation of ProZorro.Sale is the two-tier electronic trading system that holistically tackles the biggest problems with state asset management. The system consists of an administrator, ProZorro.Sale (level 1), and commercial marketplaces/brokers (level 2). The administrator never interacts with buyers or sellers, so the entirety of the buy-sell process is handled by the brokers. Once a broker is authorized to use the system, it has access to all of the information on the central database, just like every other broker connected to the system. This is opposed to the structure that was in place beforehand, where there was no centralised database and a single broker with exclusive rights for an asset could be bribed by one of the participants (who wanted to ensure he won the auction) and disqualify other participants, without any explanation or repercussion. Now, all brokers possess the same information on the same auction items, so if one engages in bad acting, any buyer or seller can just switch over to another one. Since the commission is paid only to the broker who attracted the winning bidder, brokers are incentivized to compete fairly between themselves and potential auction participants choose brokers solely by their competitive offering (rates, financing, customer service, integration services etc.), and not based on any other factors i.e. the broker having exclusive rights to conduct an auction, vested interests, insider information etc.
On the other hand, ProZorro.Sale is responsible for the system’s maintenance and support. It develops bespoke software solutions, makes sure the system is aligned with legal and regulatory frameworks, communicates with stakeholders, while gathering, storing and publishing auction data. All auction data including participant’s names and bids is published and available in machine readable format, compliant with the Open Contracting Data Standard, which serves as proof for every stage of the auction process. This is especially important because many auction results prior to ProZorro.Sale were disputed in courts because the entire process was extremely opaque, and the public had next to no trust in how state assets were managed.
The main goal of the project was to tackle the corruption problem that has persisted within the state asset sales sector for a very long time. This was only ever possible with the involvement and support from the public, business and government. The public initiated the drive for change, the government responded by adopting and amending legal and regulatory frameworks, and business provided services for buyers and sellers.
The use of a two-tier electronic trading system for sale and lease of many assets is now mandatory for certain assets in Ukraine. Since the results of the initiative have been very positive, it is expected that more assets will have to be disposed via open and transparent e-auctions. The ProZorro.Sale team is constantly monitoring markets and industries and establishes relationships with stakeholders in order to identify new opportunities for implementing the system, but what's equally important for the project’s long term sustainability is that the government, as well as the market players, initiate a dialogue for change themselves in many cases. Taking this into account, the team firmly believe that this innovation will install deep and comprehensive anti-corruption and transparency principles across many sectors in the future.
What Makes Your Project Innovative?
ProZorro.Sale is a one of a kind tool that, for purposes of asset disposal, clearly separates the responsibilities and interaction of government and business on such a scale. Implementation of electronic auctions was a huge leap considering the many drawbacks of selling government owned property via hammer auctions conducted at a physical site. Additionally, total information transparency is not a common principle for government procedures, both in Ukraine and in a number of other countries with loose monitoring and accountability frameworks. Lastly, the new auction design, “Hybrid Dutch”, that was developed by the Kyiv School of Economics is an innovation in itself, specifically structured so asset-specific risks are minimized, maximum sale price is achieved and state budget replenished appropriately.
What is the current status of your innovation?
Since the application of a two-tier auction system for each asset type is a project in and of itself, each of the statuses provided above can be applied to ProZorro.Sale. Sales for certain assets that were launched a few years ago can now be fully analysed, legal implementation process reviewed and impact measured. This is in contrast to other asset classes that are in the works now, where the project is generating ideas, communicating with stakeholders to design the most appropriate solution and developing proposals for action. Plus, the team constantly monitors the economic climate and specific markets to identify new opportunities.
Now, the project still has the "pilot" status officially, as mandated by the government. But, there is enough data to be able to comprehensively analyse the impact of the solutions that were implemented. Established cases can be thoroughly analysed in order to avoid delays with new projects, as is done constantly.
Collaborations & Partnerships
The public initiated the drive for change after the Maidan Revolution in 2014, and demanded full transparency and accountability from its government. In turn, the government launched numerous reforms, one of them concerning the sale and lease of state assets. International donor organizations provided funding for the ambitious initiative and businesses supported the process by providing the necessary infrastructure and services to buyers and sellers.
Users, Stakeholders & Beneficiaries
The public was given an opportunity to take on an active role in how state and communal assets are managed, and to familiarize itself with what resources their respective cities, regions, and the country as a whole have ownership of. Businesses are now able to fully concentrate on providing the best possible service, without being concerned about corruption and other issues affecting competition. The government increased its budget revenue and is assured that its assets are managed properly.
Results, Outcomes & Impacts
Objects with value under $10 million which are sold through the “Small Privatization” procedure generated around $5.5 million per annum beforehand, as opposed to $60 million generated during the first year via ProZorro.Sale. Leasing rights of soil plots used for mineral extraction generated $5 million in total over 8 years prior to the reform, as opposed $21 million within the first year via ProZorro.Sale. It is worth noting that Ukraine is one of the first countries in the world to allow subsoil rights to be auctioned off electronically. Lease of cargo rail cars owned by the state conglomerate “Ukrainian Railway” generated roughly $120k per year beforehand, as opposed $2.5 million via ProZorro.Sale in a single year. Plus, many asset types were sold without a contest (with only one bidder) before, while now there are 2.5 bidders on average across all asset types, with some auctions reaching 100 participants.
Challenges and Failures
First of all, even though the initiative enjoys significant support from the government, there is still pushback from corrupt industry players who are not in favour of increasing transparency and establishment of fair market pricing. In order to minimise this influence, sound regulatory and legislative frameworks were lobbied for and put in place to prevent interference. Secondly, the window of opportunity to implement a reform can be extremely narrow so the project had to be very agile, especially since the sale of each asset type is governed by its own legislation. This is further worsened by limited resources that a state enterprise has, so effective resource management has been absolutely key for the project's success. Lastly, each new piece of software developed for the system has to be then tested and implemented with the 50 brokers that are connected to the ProZorro.Sale system, which significantly increases both duration and difficulty of any new launch in the system.
Conditions for Success
In order for an initiative like ProZorro.Sale to be successful, there must be support from all of the major stakeholders involved in implementing the reform. The government must be willing to make changes and adopt laws that will result in actual change, while not being manipulated or influenced by powerful industry players. The public must not only initiate the drive for a reform, but persistently monitor and take on an active role in steering the dialogue. A team of a project like ProZorro.Sale has to be motivated and idealistic, ready to devote time and resources in order to reach the final goal. Last but not least, consistent support from international donors must be in place, both financial and political, since initiatives like these are often not financed by the country's own budget.
After the initial launch of the system with a pilot on assets of insolvent banks, the two-tier system approach was replicated onto numerous other asset types. First, the government asked to pilot the project further on non-core government and communal assets, i.e. scrap metal. After this showed great results, a leasing procedure was implemented into the system, with the state conglomerate “Ukrainian Post” leasing its vast property portfolio via e-auctions. Auctions for parking spaces, public advertising and other municipal property followed. Then, cargo rail cars' leases launched, followed by an introduction of mandatory e-auctions for “Small Privatization” objects. The system was then modified to accommodate auctions for assets of bankrupt entities, as well as subsoil exploration rights. Lastly, the government mandated that auctions for green energy quotas must be sold via a two-tier system, and with this, most of all major asset types are now able to be sold through e-auctions.
Whether it is an interaction with a partner, public or government, maximum transparency throughout the entire process must be ensured. Even if one's intentions are to do good, not everyone can perceive that unless it is clearly communicated, especially when dealing with reforms and government.
It is better to launch fast, with a product that is not technically perfect, but which will still show results and prove its worth. This is far better then striving for an ideal solution and not catching the opportunity to implement the reform at the right time.
Be ready to assist, and in some cases outright do the work of other partners if it is necessary for the project to move forward.
Be able to accurately forecast political changes so that technical changes to the system can be foreseen, and donor funding secured ahead of time in order to avoid delays.
The project has been supported by multiple donor organizations including the European Union Anti Corruption Initiative (EUACI), Transparency and Accountability in Public Administration and Services (TAPAS), Deutsche Gesellschaft für Internationale Zusammenarbeit (GiZ) , European Bank for Reconstruction and Development (EBRD), Western NIS Enterprise Fund (WNISEF), United States Agency for International Development (USAID), The Expert Deployment for Governance and Economic Growth (EDGE), Kyiv School of Economics (KSE), MATRA (Kingdom of Netherlands), Institute for War and Peace Reporting (IPWR) and Transparency International Ukraine (TUI).
ProZorro.Sale is also recognized globally and won multiple international awards, including the Anti-Corruption Startup Award from Citigroup (Citi T4I Challenge), The Shield in the Cloud Innovation Challenge by C5 Accelerate and USA Institute of Peace and Global Public Service Team of the Year by Apolitical (category - Doing More With Less).