Kamasutra of reforms

13-06-2016

реформи

Together with Denis Malyuska

What do reforms and sex have in common? The first thing that comes to mind is, of course, that there is a focus on the process while the result has a minor role in the Ukrainian realities. However, these phenomena have another less noticeable thing in common: we implemented reforms mostly in a random way, in a hurry and without a proper theoretical framework while the methods have been improved with time, the hard way and not all.  

However, if humans have been solving problems of a systematic and scientific approach in intimacy for thousands of years (and Kamasutra is a good example here), we start to use the analogical approach in reforming the Ukrainian legislation just now and it is not always done in a proper way.

Undoubtedly, the Ukrainian legal framework needs to be fully refined, because in fact, now it is a kind of a kitsch of totalitarian USSR’s laws, legislative technique’s ‘masterpieces’ of the early 1990s and work results of a ‘mad printer’ of the early 2000s to meet some regular ‘urgent’ and ‘vital’ tactical needs (credits, non-visa regime, elections, appointment of the Prosecutor General, etc.). However, the results of such a rule-making activity are assessed not before but after the adoption of the law in a best-case scenario. In most cases – they are not assessed at all.

Let’s try to see how to turn the Ukrainian legislation system into a clear, transparent and effective system of rules of conduct in a systematic and consistent manner. Fortunately, we are not the first people on this planet facing with this problem and there are certain benchmarks worked out in worldwide practice.

How IT is done in the world

The worldwide practice knows a number of ways to review the outdated and flawed legislation systematically. One of the most common ways is to use the standard costs model (SCM) designed to measure the administrative burden that falls on business due to the implementation of rules. This method involves counting the number of parties that have to perform certain actions (submit reports, register, get inspected, etc.) and their financial costs associated with the implementation of rules (including costs of staff salaries and the need to engage and pay for third-party services). The result of using this method is identifying the most burdensome laws, with, accordingly, should be reviewed with the highest priority. In addition, an array of information created by the state allows it to establish measurable goals (for example, reduce bureaucratic costs of business owners by 30%) and control the progress.

Guillotine method is used when there is a need to review a large array of laws for compliance with certain criteria. In this case, as a rule, an approach, which is loyal to the business community, is applied – the presumption of uselessness of regulation, when business owners don’t need to prove the regulation burden. Instead, each government body has to prove the need of each existing regulation for a special commission, and if it fails to do that, this regulation should be abolished. The guillotine method is mostly used to review the system of permits and licenses (Kenya) and the business regulation (Croatia, Mexico). However, for example, Sweden used the guillotine method to abolish all regulations, which were not registered in a special procedure, in the 1980s. This led to abolishing a considerable amount of laws (for example, about 90% of regulations have been automatically abolished in education). At the same time, it should be also kept in mind that the guillotine method isn’t usually a self-sufficient mechanism. As a rule, it is just an initial reform stage – refining the legislation and creating conditions for using other mechanisms to improve the legal system. Ukraine made the first attempt to use the ‘guillotine’ in 2005.

A bulldozer approach, by contrast, encourages the business to identify the most problematic laws and initiate their abolition. This approach is called the bulldozer, because it allows to abolish the rules the government wouldn’t dare to abolish by joint efforts of many private sector representatives. It is not used for the rolling and comprehensive legislation review. This may concern rather targeted changes in regulatory requirements, and in this case, mostly the experience and impressions of entrepreneurs are used as benchmark. An example of applying this method is creating the ‘Bulldozer Committee’ in Bosnia and Herzegovina that has developed and monitored the implementation of a package of 50 different reformative initiatives. The analogue of applying this approach in Ukraine is the creation of “deregulation plans” composed of the wishes of business communities.

There is a focus on optimizing the procedures during the re-engineering process. First, existing procedures are described and analyzed and then – improved by abolishing unnecessary steps, reducing the list of documents as well as by further introducing the IT technologies. A typical re-engineering example is a ‘single window’ principle and almost every civilized country (including Ukraine) has examples of its implementation, but this approach is also not self-sufficient.

Sometimes a ‘scrap-and-build’ approach is used during the comprehensive transformation of the governance model – that is a full review of the regulatory system, including its basic principles and approaches to interaction between the government and the business community. Typically, the model is used for radical changes in legislation (the whole legislation or a separate package) and to work it out “from scratch”. The result of using this approach is often large codified regulations. The ‘scrap-and-build’ approach is usually the result of reframing the approach to regulation, which is typical for countries changing ideological approaches to the evaluation of economic processes (for example, moving from the planned economy to the market one). This approach requires significant resources to be implemented and it is difficult to implement it in developing countries. Therefore, examples when this principle was successfully applied are often associated with significant foreign expert and resource support for the reform process. The implementation of European directives can be considered as an example in Ukraine.

The staged repeal or automatic revocation implies the scheduling, by which the legislation is either revised or repealed, based on the date of its adoption. The goal of this process is to abolish or amend the outdated legislation for its modernization. This method was typically used in developed countries of the Anglo-Saxon legal system (Australia, Canada, New Zealand).

Special attention should be paid to methods introducing reviewclauses and sunsetclauses. The reviewclause implies that when an act is adopted, it initially includes the clause that it will be reviewed (with possible full abolition) after a certain period of time or event.

The sunsetclause is a bit radical as it implies setting the date, on which a regulation will automatically become invalid. The only chance to ‘save’ this regulation after the expected date of termination is to amend it. In fact, the ‘sunsetclause’ moves the burden of proof from ‘reformers’ to ‘conservators’: those who wish to remain things as they are should prove the effectiveness of the law and convince a majority in parliament. The ‘sunsetclause’ can be applied not only to laws, but also to state agencies or programs. For example, in Texas, institutions (except universities, courts and bodies established by the Constitution) should be automatically liquidated after 12 years of their existence unless the parliament decides to continue their activity. A special commission designed to examine activities of institutions and make recommendations for the parliament to extend the period of their activity for the next 12 years (as a rule, assuming that there will be certain improvements) or liquidate, merge with another bodies or change certain functions (for example, those ones duplicating other bodies’ functions) was established to ensure the proper functioning of this system. A clunky example of applying this method in Ukraine is a ban on the alienation of agricultural land, the abolition of which has a specific date but the legislator always postpones it.

It is more exotic to introduce ‘OneIn – OneOut’ or ‘OneIn – TwoOut’ methods, according to which the regulation imposing an additional financial burden on business can’t be adopted without abolishing the existing one that imposes the same (or even twice as much) burden on business. This principle is currently used in the UK.

How we used to do IT

The idea of a rolling review of legislation is attractive in terms of a ‘reformer’s’ public image and therefore, it have been already used by Ukrainian authorities for several times. The first attempt of this review was made immediately after the Orange Revolution to implement the decrees of the President of Ukraine “On liberalization of entrepreneurial activities and state support of entrepreneurship” and “On some measures to secure implementation of state regulatory policy”. This review was often called ‘regulatory guillotine’, although it has very little things in common with the real guillotine method known in the world practice. As a result: (1) the ‘guillotine’ was actually conducted by every government body (or local government body) issuing the relevant regulation instead of an independent institution; (2) no one proved either the viability or unviability of each act; (3) the review was conducted on vague criteria of ‘compliance with state regulatory policy principles’; (4) the review was conducted simultaneously at all state vertical levels: i.e. lower levels inspected the compliance of their acts with higher level’s acts while having no idea whether this higher level’s act will be abolished as well. As you might guess, this ‘regulatory guillotine’ has virtually no impact on the real life, although it was reported about a huge number of abolished regulations in keeping with the best bureaucratic traditions. Since then, the tradition to measure the effectiveness of regulatory policy by quantitative indicators instead of the quality ones has become an essential part of the Ukrainian state’s life.

They tried to solve the problem after the next presidential rotation in the same way (and with the same results). At the end of 2010, the Law of Ukraine “On accelerated review of regulatory acts adopted by local government bodies and officials”, according to which it was expected once again that a non-commissioned officer’s widow would give herself a spanking and local government bodies were instructed to review own regulatory acts to ensure compliance with state regulatory policy principles, was drafted and adopted. The authorities were surprised to learn that not all local government bodies understood these principles and even fewer understood what a ‘regulatory act’ is. No wonder that no one except those who carried out the regular ‘guillotine’ noticed real changes, and there were no assessments of the reform impact conducted.

Theoretically, the current assessment of the effectiveness of regulations and their review should be conducted now in Ukraine according to the Law of Ukraine “On basic principles of state regulatory policy in the sphere of economic activity”. However, generally speaking, the implementation of this law, at least in terms of its review, comes to empty formalities performed by government officials without any result.

A lack of an effective mechanism for rolling review of regulatory legislation has led to numerous initiatives on applying various legislative review methods occurred chaotically. For example, it is traditional for Ukraine to work out already mentioned regular deregulation plans of the government providing for abolishing a specified percentage of regulations set by legislation. Such a goal was established both at the time of Yanukovych (to abolish 50% of economic activity types that should be licensed) and in the relatively recent past (Strategy of 2020, Deregulation plan). What consequences does such a goal have? The answer is obvious: as the state apparatus is always taking the path of least resistance, the implementation of government plans comes to searching and abolishing the permits existing only on paper, but are not issued in real life or abolishing the permits, which are the least problematic for business.

Another favorite method of lawmakers is not to abolish a licensing procedure but to rename it that allows to declare the reduced number of permits or licenses without mentioning the fact that they were simply renamed, for example, as certificates. Therefore, there is a paradox, which is widespread in our country: many permits were abolished – but the business didn’t feel any ‘improvements’.

Some attempts to approach the legislation review systematically have been made over the last year. Thus, the ‘scrap-and-build’ concept with ‘sunsetclause’ elements was supported by a certain amount of people. They registered the draft law #3766 “On changing the system of economic regulation”, according to which it is proposed to abolish provisions of 90 laws concerning the economic activity, in the Verkhovna Rada. At the same time, the Cabinet of Ministers is invited to work out and submit draft laws that would introduce a new regulation to the Parliament.

However, the abolition of a large number of existing laws to replace them with new ones will hardly be a panacea. The state simply doesn’t have resources to work out a huge amount of new quality laws and learn to use it in a very short time.

A certain kind of the above mentioned concept is the draft law #4650 “On amendments to the Law of Ukraine “On Legal Succession of Ukraine” regarding the abolition of the USSR acts on the territory of Ukraine” offering to remove some laws (the Soviet ones) as new laws have been already developed and brought into force.

Calls for conducting the ‘guillotine’ were very loud again. Even the President of Ukraine regretted that the ‘deregulation guillotine’ hasn’t fell on the heads of bureaucrats when he named the cabinet. We are not sure whether the president really had in mind a concrete way of the rolling review of legislation or just chose a good metaphor to emphasize his desire to reduce the regulatory burden that falls on business.

Anyway, now we have the following results of the chaotic regulation in the context of the ineffective regulatory system:

– extremely poor regulatory framework, the effectiveness of which can’t be estimated, and where we can see ‘regulatory mirages’ (when even institutions exist only on paper and not in real life, or when the state regulates relations that don’t exist in reality) and ‘regulatory werewolves’ (when there are several different regulations existing as a single regulation);

– regulators often suffering from the ‘regulatory schizophrenia’ (when the state / regulator doesn’t understand its role and, as a rule, serves both as a regulator, an asset owner and a market player entering into relations with itself);

– the system suffering from chronic ‘regulatory tachycardia’ (the system operates constantly accelerating the pace, but the ‘patient’ feels worse because of this).

The worst thing in this situation is that more than one ‘generation’ of young public servants have been brought in this partially fake regulatory system, so its conditional and artificial nature is taken for granted. The real meaning of the system – effective regulation – is actually lost and replaced with ‘deregulation’, the model of which measures the effectiveness by the number of abolished documents or permits.

Using the SCM methodology and setting a goal to reduce business costs in bureaucratic procedures (compliance costs) would be much more effective step in this case. Although it is much more difficult to use this criterion (as any other criterion assessing the quality of regulation) and requires significant state capacity.

How IT should be done

Despite the weak points of domestic reforms described above, a certain positive point is that the leadership of the Ministry of Economic Development and Trade and the State Regulatory Service understands the need to restart the regulatory system. A number of important steps taken last fall confirms this fact:

– the above mentioned institution – the Better Regulation Delivery Office (www.brdo.com.ua) entrusted with the task to strengthen the state capacity in the process of regulatory system’s transformation have been created with the support of the government of Canada, the World Bank Group and the European Commission;

– the procedure of draft regulations assessment (the SME-test method was approved) in terms of implemented regulation costs was improved. But the most important thing that happened is a change in discourse. The ideology of effective regulation – focus on quality indicators instead of quantity ones – is returning to the state leadership’s agenda slowly but surely.

What to do next

  1. First of all, we need to be aware of a ‘future picture’, that is an answer to the question: what system do we want to build? For this purpose, the BRDO is working on the Better Regulation Delivery Concept that will be submitted to the government leadership in the near future. When the Concept is approved within the coming months, it should be worked out in detail as measurable operational plans for the next 3 years. This will help eliminate the need to make annual deregulation plans.

The gradual shift from the ‘deregulation’ to the ‘better regulation’ model (for example, see Regulatory Policies in OECD Countries. From Interventionism to Regulatory Governance, OECD, 2002) will allow to make the system more stable and predictable.

  1. It is necessary to ensure the state’s ability to measure the qualitative indicators of regulation as soon as possible. To achieve this, for example, procedures for assessment of regulation costs (SME-test) that have been already implemented should work and the regulatory impact assessment of both government’s acts and draft laws should be conducted. This task is not simple, but we can achieve the awareness of regulation goals and clearly define the problems the regulation aimed at only this way. This will significantly reduce the area of obviously populist and lobbying initiatives and provide an opportunity to apply tools such as ‘openin – twoout’ or ‘sunsetclause’ for system adjustment.
  2. The government should quickly approve a combined rolling review program for existing regulations based on the presumption of uselessness of regulation and the need to measure it. The review should be made as an open and inclusive process, the intermediate results of which would be seen as soon as possible.

The European REFIT could be a good example of this combined program.

  1. The attitude to the state should be finally changed from a narrow (the state machine as such) to a wider view (the well-ordered relations system, in which the state machine is just one of the parties along with civic and business associations). It should be started with creating a common information field of the state and business. At a time, when every government body (subject of legislative initiative) implements the regulation based on different figures, effective regulation is impossible. The example of a special Kafka online platform in Belgium, which would allow the society to participate in the reforming process of bureaucratic procedures and suggest ways to simplify economic activities and abolish unnecessary rules and regulations, can be useful in this case.

Of course, all possible initiatives are not limited to the aforementioned ones, and it may seem that their implementation could lead to ‘slowing the reforms’ in Ukraine. However, if these initiatives are properly implemented, they will give us confidence that such ‘reforms’ are not another type of ‘improvements’ and allow to create the conscious regulation and this, in turn, will help increase its effectiveness every year and build trust as the basis for doing business in Ukraine.

Original publication: “Dzerkalo Tyzhnia”

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