Doing Business: illusion or reason for real changes

30-05-2016

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Now it is difficult to imagine the development of national economies without foreign investments. Therefore, the struggle for investors is virtually a main point of interstate competition and an important driver to modernize economic systems. However, those ones who want to invest resources in a particular country do this not by intuition, but on the basis of a comprehensive monitoring reflected in reputable international ratings, indicators, forecasts, etc. One of the most recognized rankings, which determines the ease of doing business in the country, and hence – its investment prospects is the World Bank’s Doing Business ranking. It have been calculated for 189 countries since 2004. 

While assessing the regulatory environment, which is a key focus of attention for potential investors, Doing Business not only identify the points of increased investment attractiveness in the world economic map, but also shows the effectiveness of government’s reforms. Therefore, progress in the ranking is both an objective necessity and a matter of the government’s image in any country that increases its credibility as a reliable partner.

According to the World Bank’s statistics, countries, which are in the top ten of the Doing Business ranking, receive 50 times more foreign direct investments than countries achieving the last ten positions. At the same time, high-ranking positions serve not only as a kind of investment magnet: the national economic situation largely depends on successful reforms in terms of the relevant criteria.

Singapore has occupied leading positions in the ranking for many years. According to the Doing Business 2016 research findings (covering the results of the second half of 2014 – the first half of 2015), Ukraine has placed in the middle of the ranking – 83 of 189 positions, being between Brunei and Saudi Arabia. However, it is important not only to have a certain position in the ranking, but also to show the dynamics of progress.

For example, our position in the ranking is growing for the second consecutive year: last year Ukraine rose by 16 points and this year – by 13 (or by 4 points considering the changes in the calculation methodology). Progress in the ranking is considered to be a key indicator that assesses the implementation of reforms and programs under the Strategy of Sustainable Development “Ukraine – 2020” while being one the goals declared in the coalition agreement. In addition, the Cabinet of Ministers approved the Action Plan on implementation of the best practices of quality and effective regulation as reflected in the World Bank Group’s methodology of the Doing Business 2016 ranking.

A number of laws designed to help increase Ukraine’s position in the ranking have been drafted and adopted during the second half of 2015 – the first half of 2016. Thus, we resolved the issue of protecting the rights of minority shareholders. Last February, the Verkhovna Rada finally made amendments to the Law on joint stock companies, which significantly expanded rights and opportunities of minority shareholders and established additional liability for company directors. In addition, it introduced a derivative action mechanism allowing minority shareholders to initiate legal proceedings on behalf of a company against its director if his actions cause harm to the business. This is a positive signal to investors and, accordingly, increasing Ukraine’s positions in terms of the ‘Protection of investor’s rights’. It is expected that we can move from the 88th position to the second ten or even the top ten of leaders by this indicator.

There were also changes in the area related to registration of property rights. According to this indicator, Ukraine was ranked just the 61st. The Cabinet of Ministers approved a resolution on state registration of immovable property rights and encumbrances. In addition, a new Law of Ukraine on state registration of property rights to immovable property came into force on January 1. There are following achievements among innovations: the time for state registration of property rights to immovable property was reduced, a cabinet of electronic services was created and the State Register of Property Rights to Immovable Property was established.

Progress was achieved in other areas as well. For example, mandatory certification procedures for automobile parts were abolished. Moreover, the following processes are currently implemented: creating the ‘single window’, introducing authorized economic operators and reducing the number of customs clearance procedures. This creates a favorable business environment in Ukraine. So, there is a chance to move from the 109th position to the most successful countries by the ‘International trade’ indicator in the Doing Business ranking.

A tax reform, including reducing rates and time to administer Unified Social Tax (introducing a single rate of 22% for all sectors), cancelling the Unified Social Tax payment in the amount of 3.6% of salary and simplifying the income tax administration, will also allow to significantly improve the Ukraine’s position in the World Bank’s ranking. Considering that Ukraine ranked only the 107th last year, adopted changes may allow it to rise up to the 50-60th positions.

Simplified land transactions by providing notaries with access to the land cadaster, ensured public (but paid) access to the information on land owners and reduced period of registration of legal entities are among other steps that have been already implemented and will have a direct effect on the ranking.

Ukraine has good chances to enter the first 50 and even top 20 of countries in the ranking in the future, but only if it systematically works on implementing the necessary reforms. In general, the steps that have been already implemented will probably allow Ukraine to rise by 17 points (according to the World Bank’s methodology) next year. Moreover, the methodology’s specifics in calculating the ranking may lead to the fact that our tax reform will be included to the next year. This means minus four points. Therefore, it is more realistic to expect that Ukraine will rise by a maximum of 10-13 positions. However, it is difficult to make an accurate forecast, because the ranking calculation depends on the efforts of all countries, which are also highly motivated to improve their positions and don’t delay their reforms.

We had to adopt more than a dozen draft laws by June 1 to achieve more. For example, draft laws to improve connecting to electricity supply networks, make amendments to certain Laws of Ukraine on bankruptcy, on regulation of urban development, on mediation, on enforcement proceedings, on simplifying the registration of newly established entities by single tax and VAT payers and others are currently waiting to be considered by the Verkhovna Rada. These changes would allow Ukraine to occupy an honorable place in the top 50 of this prestigious ranking.

Of course, progress in Doing Business can’t be a goal in itself to introduce reforms, but even its very existence as an artificial tool is an important guide to reform the system of doing business rules. This is particularly important with the annual government rotation, when the ranking is actually one of the few stable and measuring “pictures of the future” that everyone desired to build.

Source: Novoye Vremia

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