School Buses, Oil Rigs, and Raspberries: Corruption in Ukraine

With a new law that allows state companies to award no-bid contracts, the crooked political class gives itself a gift. From openDemocracy.

by Natalia Sedletska 12 September 2012

Government procurement is perhaps the most corrupt of all areas of activity in Ukraine. Each government department has its own budget, access to which is often the main reason for a politician coming to power. Lining one’s pockets from public money is something that unites many officials and there would be plenty enough instances of suspicious, dubious, or outright corrupt expenditure of public funds for a regular supply of material for my weekly program on TVi.

 

The systems chosen by officials are fairly similar, differing only in the particular area that those in power select for their self-enrichment. The Ministry of Fuel and Energy and the government corporation NAK Naftogaz, for instance, ran a scam through a British shell company relating to the purchase of a drilling platform for more than double what it would have cost on the world market. Ministerial catering departments buy raspberries for $100 per kilogram ($45 per pound), which is 10 times as much as they would cost in the market.

 

 

Another typical way for an official to make a pile out of government procurement is by granting a contract to “his man,” which involves turning down rival proposals at the tender stage ruthlessly and arbitrarily. It is no secret that the biggest government contracts in financial spheres such as the coal industry are distributed among firms with direct links to high-ranking personages in the presidential Party of the Regions.

 

THE NEW LAW

 

But now there’s not even any need to be particularly cunning about it, because all the rules and regulations have simply been removed from the officials’ favorite game, which has been christened the “carve-up.”

 

President Viktor Yanukovych signed scandalous law No. 9634, passed by the Rada [Parliament], which places all state enterprises outside the law on tenders. Put more simply, state enterprises now no longer have to organize any tenders: they dole out state funds at their own discretion when ordering goods or services. There is no competition to establish the best or cheapest proposal, nor will officials be accountable for their disbursements, which are published in the official Government Procurement Bulletin. Tenders now have to be held only for money spent from the state budget or local authority budgets, which account for less than one-third of all disbursements of Ukrainian public money. Experts have calculated that approximately $45 billion of the $65 billion a year will be disbursed non-transparently i.e. without tenders or publication of information.

 

Take NAK Naftogaz, for instance. The company sells gas to the national grid; it also has affiliated state companies with access to state subsoil resources, which fact they attempt to exploit to make money, or manufacture some kinds of essential goods or products.

 

Chernomorneftegaz [Black Sea Oil and Gas] is exploring the offshore for oil and gas. This area is state property and, therefore, belongs to each and every Ukrainian.

 

Officials might decide gas production should be moved to a new level, for which purpose a new state-of-the-art oil rig is needed. Previously this would have had to go out to tender: the winner would have been selected and accounts rendered for the money spent. Now that the law has been passed, it can all be done with no tender and no public announcement about who won the contract.

 

In other words, previously journalists could discover from their reading of the official bulletin that the final purchase price of $400 million included an extra $150 million. Now officials can do what they like with monies earned from exploiting the offshore, even to the extent of paying them all over to a British shell company. It will at the very least not be reflected in documents accessible to the public and the press.

 

How this law of obfuscation got through parliament is another story. Campaigners for transparency of government procurement had actively opposed it for five months, but the pro-presidential majority got it through on a nod on the day the Rada passed the outrageous language law confirming the status of Russian in Ukraine. At that time the attention of the public and the press was entirely focused on the language question and the mass confrontations between those who disagreed and the siloviki [the men in uniform]. The passing of the tender law in Ukraine has been described without exaggeration as the achievement of corrupt Ukrainian officials' wildest dreams.

 

THE PARADOX OF UKRAINIAN JUSTICE

 

It is no secret that in Ukraine the role of the justice system in dealing with the problem of corruption is totally selective. Take the case the interior minister in Yulia Tymoshenko's government, Yury Lutsenko. He is in prison for four years for embezzlement and abuse of office during the financial crisis. The minister's department arranged celebrations for the Day of the Police at the taxpayers' expense, though a cabinet of ministers' resolution had banned this from the onset of the world financial crisis.

 

This same resolution forbids state organizations from buying new cars. But the Government Procurement Bulletin is awash with announcements about the organs of state updating their car pools at the taxpayers' expense. It recently emerged that parliament has acquired a new (2011) armor-plated Mercedes S-600, though the ban on the purchase of new cars has been in force since 2008. The National Bank recently acquired 15 new (expensive) Toyotas.

 

When Lutsenko broke the law in a similar way, the prosecutor-general investigated the case and managed to get the opposition politician punished through the courts. Today the his office isn't interested in any of Yanukovych's similar infringements of the law and, what's more, the office itself actually acquired 8 Toyota Camry saloon cars of the most expensive premium range!

 

The prosecutor-general's office is one of the so-called “power departments,” whose function it is to identify cases of corruption in the authorities. Yet it broke the same rule which put the former minister, now member of the opposition, Lutsenko in prison. When it's the prosecutor-general's office itself that commits the crime, then the burden of investigation falls to the Security Service. But nothing will happen.

 

KICKBACKS ON CHILDREN’S SAFETY

 

Recently I completed a journalistic investigation that unexpectedly turned up a big scam at the Education Ministry. But of that more anon.

 

In 2010 the Ministry of Education and Science announced a tender for the purchase of school buses, apparently knowing in advance that the winner would be the Kherson Motor Works, AntoRus. Other submissions were thrown out, including one from the Borispol Motor Works, whose price was $3 million lower. The official reason was that its documents didn't include a statement to the effect that the factory representative had a clean police record.

 

A year later this refusal to accept a cheaper price provoked an inspection by the Audit Office. We happen to have a copy of the chief Audit Office inspector’s conclusion: “The failure to provide a certificate from the Ministry of the Interior’s Information Department does not furnish sufficient grounds for refusing the tender proposal submitted by the Borispol Motor Works. The Ministry procedures for purchasing school buses for an overall total sum of 33 million hryvnia were, therefore, in contravention of the law relating to procurement.”

 

But the people responsible for organizing the deal have, according to our information, creamed off at least three times as much. We managed to uncover exclusive details pointing to a kickback of 10 million hryvnia ($1.25 million).

 

At the end of October 2010, the Ministry of Education transmitted from the state budget to the account of the tender winner, the AntoRus Works, a sum of 33 million hryvnia (approximately $4 million), for the buses. A few days later the AntoRus Works transmitted a sum of 10 million hryvnia to the accounts of six shell companies. We have documentary evidence of these deals: in the job completion reports the sums are described as payment for “consultation” and “software services,” etc.

 

Before the arrival of this considerable tranche of money from the state budget, the accounts of AntoRus had not had any such large sums, because they had no large orders – except from the ministry. So the government money went through the Kherson Motor Works in transit to companies existing only on paper. I checked all the companies and can say with confidence that they are front organizations, and, moreover, that they’re all interlinked.

 

One of the firms receiving the funds is called Languedoc and was founded by one Valery Atamanenko. At the firm’s registered address in a settlement near Kyiv we met his mother, who lives in a small, modest house. She told us that her son was only nominally head of the firm, that is, his signatory authority had been bought by other people.

 

Another firm is called Mivant. It is allegedly a partner of AntoRus for the school bus contract and was established by a 25-year-old Kyivan “businessman,” Aleksandr Shapoval. His signature is on the payment orders, though in all probability he knows nothing about it. His neighbor told us that Aleksandr had gotten into debt, sold his flat, and taken to drink.

 

Among other people who have set up companies, which served as transit vehicles for the government funds, there are two relatives and several people from the same village. All the firms have bank accounts in one bank, Bank Boguslav. There is a simple explanation for this number of coincidences: all the firms are shell companies and belong to one conversion center. This was the instrument used by the organizers of the deal to siphon, as it were, $1.25 million from the budget for the purchase of school buses.

 

THE CONSEQUENCES

 

It would appear that, in their quest for illicit profit, the officials sacrificed the safety of schoolchildren. The Kherson Motor Works, AntoRus, build their “Anton” model using a Chinese chassis. But the buses for Ukrainian schoolchildren had the 2007 model of chassis, rather than a new one: the purchase price in China was obviously cheaper for AntoRus. Secondly, when the apparently new buses were distributed across various regions in Ukraine, it quickly became apparent that many of them had significant defects.

 

The Audit Office report for various district state administrations included various defects: non-functioning speedometers and air pressure sensors in the brakes, bald spare tires, broken heating systems, to name but a few.

 

When the guardians of the law realized that the children were supposed to travel in buses of unbelievably poor quality, they picked one bus at random and sent it for expert analysis. The official Consumer Standards Office concluded that the “bus does not meet the requirements for vehicles to transport children, and puts the lives of the passengers at risk.” For some this may just be a formula of words, but certainly not for the schoolchildren from Ivankov village, who only managed by a miracle to get out of their bus when it caught fire.

 

Nadezhda Stepanenko, a teacher, was travelling on that bus with the children. She told us, ‘It was a completely new bus. We hadn’t gone far before we noticed thick smoke seeping into the interior. The driver stopped and we quickly got out: within eight minutes there was nothing left of the bus and, indeed, of our things, which we had left behind, so keen were we to evacuate the children.’

 

THE OFFICIAL VERSION

 

The other day Education Minister Dmitry Tabachnik stated at a press conference that the blaze had been the fault of the driver. “To put it bluntly, the driver disconnected the clutch and didn’t insulate the ends of the wires. The alternator wire shorted. It could have been faulty as a result of unwarranted meddling with the electrics of the bus.”

 

To avoid having to provide the school with a new bus, the minister read out the experts’ conclusions, which had been paid for by the AntoRus Works. But the local prosecutors carried out their own checks and refused to accept the incrimination of the driver, as they found nothing reprehensible in any of his actions.

 

As for the $10 million kickback, the minister refused to comment.

 

The Security Service of Ukraine is already in possession of all these facts and, what’s more, the files of the criminal case in respect of disbursements of state assets by ministry officials are gathering dust on its shelves. But without the political will at the very highest level, there is no chance that these cases will go to court and the criminals be punished. In this case there is no such political will.

 

WHAT NEXT?

 

Other such revelations of corruption are increasingly frequently the result of investigations by journalists, rather than investigators. But Ukrainians are so used to the rampant corruption of their politicians that they are no longer surprised by anything. The new law will mean that journalists and public organizations will find it much harder to track where public funds are going.

 

Nevertheless, Ukrainians do hang on to hope. They believe that however long the current government manages to hang on, sooner or later these exploratory investigations will form the basis for criminal cases that will be satisfactorily and successfully resolved in court.