Long-Awaited Reform: How Management of Municipal Enterprises is Changing

In contemporary Ukraine, a typical problem persists: municipal enterprises that provide services such as water supply have been in a state of financial loss for a long time. For instance, a water utility in your city may have failed to generate profit for the past five years. The director of this enterprise is appointed by the city mayor without any competition, and there is no supervisory board to oversee its operations. As a result, the city budget spends funds annually that could be allocated to other critical needs, such as roads or schools, to cover the losses of this enterprise, which is essentially mismanaged.

Ukraine has long recognized that its municipal sector poses a serious problem. However, awareness alone is insufficient; action must be taken to rectify the situation. To this end, a new draft law No. 15121 has been registered in the Verkhovna Rada, aimed at improving this scenario.

It is important to note that this draft law is not a local initiative aimed at restoring order in individual cities. It is part of a broader transformation, as Ukraine has committed to the European Union and the Organization for Economic Cooperation and Development (OECD) to align the management of public enterprises with international standards. Corporate governance in the municipal sector is one of the key elements of this course.

Municipal enterprises in Ukraine encompass a wide range of services: water utilities, heat and energy companies, waste management services, and public transportation. These enterprises are founded by territorial communities, district, and regional councils. Most of these enterprises are publicly owned, serve millions of people, and are directly dependent on local budgets.

However, the management of these enterprises often resembles that of private companies from the 1990s. Directors are appointed without competition, without qualification requirements, and without independent evaluation. Supervisory boards are virtually nonexistent: they currently exist only in select cities such as Kyiv, Lviv, Mykolaiv, and Zhytomyr. Even there, the situation appears quite absurd: in Zhytomyr, all members of the supervisory boards of municipal enterprises are local deputies, and some of them are also directors of these enterprises, creating a conflict of interest.

Public financial reporting for municipal enterprises is not mandatory. Only about 35% of them report on the E-Data platform, while 60% do not provide any public reporting at all. The lack of strategic planning leads to chronic losses that are covered by local budgets. This has become the norm rather than the exception.

Current legislation regulates the activities of municipal enterprises in a fragmented manner: partially from the Civil Code, partially from the law on local self-government, and also from local council decisions. The absence of uniform rules leads to confusion and inefficiency.

There is a temptation to perceive this problem as organizational, believing that it simply requires 'better management.' However, it is actually about structural distortions that lead to three types of systemic consequences.

In January 2025, Law No. 4196-IX came into effect, initiating the corporatization process of municipal enterprises, allowing them to transform into economic or non-commercial societies. This was an important step, as mandatory corporate governance requirements have already been established for non-commercial societies where the community is the sole founder. However, for enterprises that remain in the form of municipal entities, mandatory standards are insufficient.

The new draft law establishes an effective management model for legal entities of municipal ownership, based on elements of corporate governance. Formally, this aligns with Ukraine's commitments under the Association Agreement with the EU regarding gradual alignment with EU rules and recommendations in the field of corporate governance. Equally important is the OECD Guidelines on Corporate Governance of State-Owned Enterprises, which serve as an international benchmark in this area. The logic of these guidelines permeates the key mechanisms of the law: independent supervisory boards, competitive selection of executives, external audits, internal compliance, and transparent reporting.

The OECD explicitly states that public enterprises should not be used as channels for political financing, patronage, or personal enrichment. This requires not only calls for integrity but also structural safeguards that this draft law seeks to implement.

The central mechanism of the reform is the introduction of mandatory corporate governance elements for municipal enterprises, joint municipal enterprises, and economic societies with more than 50% municipal ownership. These enterprises must meet criteria approved by the relevant council. The criteria for large enterprises are defined by the Law on Accounting and Financial Reporting: an asset balance value of over 20 million euros, revenue exceeding 40 million euros, or more than 250 employees. Such enterprises will be required to implement four mandatory tools.

For communities, district, and regional councils that are founders of municipal enterprises or economic societies with more than 50% municipal ownership, a municipal ownership policy is being introduced. This strategic document outlines the purpose of maintaining a particular enterprise, its role, classification, and the expected outcomes. The policy is developed considering the community's development strategy, approved following public hearings, and reviewed at least once every three years.

Based on this policy, an annual owner’s expectations letter is approved—specific financial and non-financial goals for the year. These may include reducing losses, renewing a certain percentage of the network, decreasing the number of emergencies, or achieving operational break-even by a specified date. Without such a letter, the enterprise has no public obligations to the community, and there is nothing to evaluate at the end of the year.

One of the most important aspects of draft law No. 15121 is the clear distribution of powers among different levels of management. The city council, as the owner, approves the charter, the procedure for selecting executives and independent members of supervisory boards, which is critical for ensuring transparency and accountability in the management of municipal enterprises.