The economic and political conditions created after the Revolution of Dignity and the Ukraine’s assumption of obligations under the Association Agreement with the EU and the IMF program, create huge space for the economic reforms. It is necessary to reform all the regulatory burden that was acting since the days of the former USSR.
Excessive regulation is one of the biggest problems for investors in Ukraine. According to a survey of the American Chamber of Commerce, 97% of business people consider corruption as the biggest problem, another 92% – an inefficient judicial system. Along with this, top 5 investors’ problems include taxes, excessive regulation, and bureaucracy. And according to a survey by Dragon Capital and the European Business Association, the top 10 obstacles to investment in Ukraine include complex tax administration and unmanageable and unstable legislation.
According to the data provided in the Deregulation Concept, developed by the Ministry of Economic Development and Trade in 2015, Ukraine annually loses up to USD 30 billion of investments due to the unfavorable regulatory environment. However, these complex losses are caused by unfavorable investment climate, and not because of regulatory norms in particular.
Deregulation is a very broad concept. It provides for removing obstacles to business development, eliminating inefficient regulatory procedures, obsolete legislation, abolishing unnecessary licensing, facilitating the administration of business procedures, etc.
Deregulation is related to the introduction of changes to sectoral legislation. Among other things, the reform involves liberalization of mobile towers installation, simplifying the rules in the oil and gas industry, lifting the ban on blending grain types and obligatory obtaining a quarantine certificate for domestic grain transportation, etc. Working groups in 4 ministries are working on changes to the sectoral regulatory field: the Ministry of Agrarian Policy, the Ministry of Regional Development, Construction and Housing, the Ministry of Infrastructure and the Ministry of Energy. In total, in 2017 it is scheduled to review the regulations of about 70 markets.
The business development is closely related, but not limited to deregulation. The simplification of the regulatory environment, the reduction of state control over business and the elimination of corruption are integral components of the business and investment climate in the country.
The government believes that the criterion of deregulation is Ukraine’s entry into the international ease of Doing Business index, which is being prepared by the World Bank. Thus, in the medium-term plan of priority actions for the Government until 2020 in the field of “Economic Growth”, the key performance indicators of achieving this goal are as follows: rank among top-30 of Doing Business index and the top-50 of the global economic competitiveness index. According to the World Bank experts, one point in the Doing Business rating brings the state about USD 500-600 million investments.
There is still room for improvement of Ukraine’s rating. In “Doing Business 2017” Ukraine ranked 80th among 190 countries of the world, which is three positions higher compared to the previous study. Compared to 2016, Ukraine also improved its position by the following indicators: the registration of enterprises (from the 30th to the 20th place), the connection to the electricity grids (from 137th to the 130th), taxation (from the 107th to the 84th). But some indicators have deteriorated or remained unchanged: dealing with insolvency problems (from 141st to 150th place), international trade (from 109th to 115th), registration of property (from 61st to 63rd), access to loans (from the 19th to the 20th) and obtaining construction permits (unchanged).
Comparison with the neighboring countries also shows that Ukraine has the potential to improve its position. Thus, in “Doing Business 2017” Romania is at 36th place, Belarus at 37th, Moldova at 44th, Russia at 40th, Turkey at 69th.
The Ministry of Economic Development and Trade believes that in 2018 Ukraine will enter the top-50 of “Doing Business” providing the adoption of 15 bills, simplifying the business activities in the country. In particular, in terms of simplifying the connection to the electricity grids, registration of VAT and Single Tax payers, introducing an application principle of obtaining building permits, abolishing the mandatory use of seals, simplifying the use of the residential property as commercial real estate, and abolishing developer’s share participation in infrastructure development. Some of the above-mentioned decisions have already been adopted: the seals have been canceled, state price regulation for socially important food products has been eliminated, etc.
The Cabinet of Ministers of Ukraine is the highest body in the system of executive power of Ukraine.
The Ministry of Economic Development and Trade of Ukraine is the successor of the Ministry of Economy established in May 1991 by the law of the Ukrainian SSR. After a series of renaming, the current title was issued by Presidential Decree in December 2010.
The State Regulatory Service of Ukraine was established in December 2014 through reorganization of the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development.
The current situation
Deregulation and entrepreneurship development is one of the most important reforms (62 of them in total), which implementation is described in the Strategy for Sustainable Development “Ukraine-2020”. This direction is selected as one of the 10 priority.
According to the plan of the Ministry of Economic Development, the strategic goals of the reform are as follows:
• reduce the number of regulatory procedures, inspections, and reasons for contact between business and government, as well as their cost;
• to strengthen the barriers ahead of creating new, excessive and economically unjustified rules;
• to create and ensure the functioning of an efficient regulatory environment.
According to the government, the medium-term goal of reforms in this area is to create a favorable environment for doing business, developing small and medium-sized businesses (SMEs), attracting investments, facilitating international trade and improving labor market efficiency. It is necessary to reduce the number of permissive documents in the area of economic activity and types of economic activity which are subject to licensing; to abolish regulatory acts, complicating business activity; to reduce the number of state supervision (control) bodies; to provide services for citizens and business in electronic form.
As part of the development of SMEs and competition, the government plans to achieve the following quantitative indicators by 2020:
• Number of employees in SMEs: in 2017 – 6.7 million people, in 2020 – 7 million people.
• The ratio of enterprises operating in markets with a competitive environment: in 2017 – 50% of total production realization, in 2020 – 55%.
• The ratio of SMEs in value added (in terms of production costs): in 2017 – 60%, in 2020 – 70%.
In order to expand and simplify the access of Ukrainian goods to the markets of the EU member states, it is necessary to bring the system of technical regulation in line with European requirements and to complete the reformation of the system of state control over the safety and quality of food products.
In order to support investment activity and protect the rights of investors, it is necessary to ensure effective protection of the private property rights, including through judicial authorities; to harmonize the Ukrainian legislation on the protection of the rights of domestic and foreign investors and creditors, and the protection of economic competition with the EU legislation; to introduce incentive mechanisms of investment activity, relying on a successful world’s experience.
It should be noted that deregulation proceeds at a lower pressure from Western partners and the IMF than, for example, pension and land reform. Moreover, the authorities themselves are interested in creating a favorable investment climate.
In 2016, as a result of deregulation, more than 360 acts were canceled. None of them have been replaced with new ones. Already this year more than 100 normative acts, which do not meet the requirements of the current legislation or have lost their relevance, were canceled.
In April 2017, the Ministry of Justice proposed a rather radical measure. According to a document already approved by the Cabinet of Ministers and to be considered by the Verkhovna Rada, all by-laws should be terminated within 6 months, all laws of the Ukrainian SSR and the USSR, which are currently in force in Ukraine, expire within 1 year, and all codified acts of Soviet times should be canceled within 3 years. At the same time, the implementation periods provide sufficient opportunities for the development of a regulatory framework that should replace the abolished legislation.
As for changing the business climate, recent developments include adopting amendments to the law on inspections in order to increase transparency and effectiveness of companies’ inspections; abolishing mandatory registration of foreign investments; simplifying registration of medicines and export of services; introducing a “single window” system in customs clearance of goods and vehicles, control over 30% of declarations is carried out electronically; creating the institution of private executors; adopting a number of laws on the reform of supervisory (control) bodies. In addition, recently the Cabinet of Ministers has adopted a series of decisions, abolishing a large number of regulatory acts, in particular in telecommunications and agricultural areas.
It should be noted that the IMF lending conditions, on the one hand, involve deregulation, and on the other hand – limit the opportunities for business development and increase the pressure on it. Thus, the government promises to the IMF to accelerate the reform of tax administration, including strengthening the requirements for the simplified taxation regime and lifting the moratorium on tax audits and labor inspections of small businesses; increasing fines for off-the-book employment and improving the quality of inspections. More changes to the legislation on deregulation of the economy should be adopted soon.
At the same time, the significance of already conducted deregulation should not be exaggerated. Part of the abolished norms was obsolete, that is, it was not executed and controlled by no one. The abolition of such standards does not lead to a significant improvement in current business conditions. For example, until recently, some documents regulated sales, volumes, and prices for hay, regulated supervision over compliance with Soviet standards that had already been abolished a long time ago, and others.
There are also some pitfalls in operating the policy of deregulation. The main problem is the necessity to coordinate drafts of normative legal acts with state authorities, including those whose interests are affected by deregulation innovations. They are not always aimed at the proposed innovations. At the same time, there are delays in consideration of bills already submitted to the Verkhovna Rada (several dozens are registered). The main reason for delaying the adoption of certain amendments to the legislation in the part of deregulation is the disorganized work of the Cabinet of Ministers and the Verkhovna Rada.
In addition, it’s still impossible to convince business people of the true achievements of deregulation. According to USAID’s annual business climate assessment (ABCA), a major challenge for small and medium-sized businesses in Ukraine remain high tax rates and complex administration, as well as frequent changes in economic legislation. More than 73% of surveyed company executives did not feel any effects of deregulation activities that took place in 2016. It becomes clear that it takes some time for the business to see the actual effects of deregulation. On the other hand, experts say that it is not about the real result, but the expectations of entrepreneurs. Although the effect of deregulation did not meet their expectations, actually there are following results: the time of most regulatory procedures has been reduced, their cost has decreased. Challenges remain in simplification of tax regulation and accounting. According to polls, the most expected change is the reduction of the number of documents they have to work with; then – simplification of tax administration. At the same time, absolute measures have increased, which means that deregulation is badly communicated with business.
The biggest difficulties among the 15 reviewed scopes of regulation for the medium-sized business are currency regulation, land use, price regulation, customs clearance and connection to electricity networks, to a lesser extent – registration. Here, after 2014, Ukraine has made visible progress – both at the legislative level and in practice.
For small and medium-sized businesses to experience deregulation, this should primarily concern tax administration and accounting. This also concerns labor legislation: the labor code of 1971 has many excessive bureaucratic demands.
In order to introduce e-governance, the procedures should be as clear and precise as possible. The cooperation of infrastructure is also needed for data transfer. It is impossible to provide all services electronically if there is no access for everyone. It is necessary to teach those who provide these services and those who receive them, paying attention to the part of the population that does not have enough technical skills. For a period of time, the paper-based processes should remain alongside with electronic form of governance. E-governance to become a way of life for all entrepreneurs in 10-15 years.
Overall, international experience shows that successful deregulation brings spectacular results. The effect for Ukraine as a country with a highly regulated economy can reach 10% of GDP by 2020 and bring billions of dollars of foreign direct investment. The overall effect of the deregulation strategy will be around USD 25 billion by 2020.
This is not only about deregulation, but also about the best practices of regulation. New areas of activity and new professions will appear and would require regulation. It is necessary to create rules of the game, but not multiple new unnecessary obstacles.
The adoption of foreign ready solutions isn’t going to work. Firstly, each system describes certain laws and practices of a particular country. Secondly, there is an institutional difference, a difference in values, and public opinion.
The European Union. The provision of macro financial assistance in the amount of EUR 1.8 billion (signed in May 2015) in terms of deregulation envisages the reduction of the number of permits and licensing procedures and the simplification of their issuing based on a thorough analysis of their value for enterprises and benefits to society.
International Monetary Fund. Ukraine’s commitments to the IMF (according to the latest memorandum) envisage approval of the law on the electricity market (approved in April 2017). The remaining items will be implemented following the commitments under the action plan. At the same time, the government periodically reviews regulatory burdens in energy, infrastructure, construction, and agriculture. The government planned to approve concrete proposals on reforming each of these areas by the end of April 2017. Also, it is planned to take all necessary steps to ensure that the Unified State Register of Legal Entities and Private Persons was fully operational by the end of June 2017.
Independent experts from different organizations closely monitor the implementation of the deregulation program, including the following:
Center for Social and Economic Research CASE-Ukraine – case-ukraine.com.ua
Center for Economic Strategy – ces.org.ua
Independent analytical platform VoxUkraine – voxukraine.org
Non-profit organization EasyBusiness – easybusiness.in.ua
Center of Reform Support – csr.kiev.ua
Institute for Economic Research and Policy Consulting – ier.com.ua
Fighting corruption is useless as long as officials take bribes and entrepreneurs give them. According to the EY research (among 41 countries) on the level of corruption, Ukraine is at the lowest position: 88% of respondents believe that corruption is at an unacceptably high level. At the same time, in order to help the business survive, at least 37% of the respondents are ready to offer a cash reward in exchange for the conclusion or prolongation of the contract.
January 2015 – Strategy for Sustainable Development “Ukraine-2020” was adopted
January 2015 – Cabinet of Ministers resolution “On certain issues of deregulation of economic activity” was approved.
February 2015 – The Verkhovna Rada adopted the Law “On Amendments to Certain Legislative Acts on Facilitation of Business (Deregulation)”.
March 2015 – Cabinet of Ministers’ resolution “On Approval of the Action Plan for Deregulation of Economic Activities” was adopted (expired).
September 2015 – Better Regulation Delivery Office was created.
December 2015 – the Road Map for Deregulation was approved by the Cabinet of Ministers’ ordinance (The Cabinet’s Order “On Approval of the Plan of Action for the Implementation of Best Practices for Qualitative and Effective Regulation, reflected by the World Bank Group in the Doing Business Ranking Methodology”).
August 2016 – Cabinet of Ministers’ ordinance “On Approval of the Plan of Action for the Deregulation of Economic Activities and the Recognition of some Decisions of the Cabinet of Ministers of Ukraine as invalid” have been adopted.
August 2016 – The National Council of Reforms approved the Concept of Effective Regulation.
November 2016 – The road map of deregulation was updated (Cabinet of Ministers’ regulation “On Amendments to the Decree of the Cabinet of Ministers of Ukraine of December 16, 2015, No. 1406”).
March 2017 – a memorandum was signed with the IMF, where one of the commitments of Ukraine is further deregulation.