How to remove 12 regulatory defects in a Ukrainian way?


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This article was published on the Dzerkalo Tyzhnya website

Imagine a serious football game without any rules and referees. Normal game will continue till the first hard collision or serious violation. What’s next? The strongest will win…

Business is the same sport but with much more complicated rules. State is a referee in this game. However, it is not only a monopolist on the use of legal abuse at a playing field, but also a regulator – a creator, a source and guarantor of observance of rules. Avoiding these functions means that you agree with the law of jungles that doesn’t imply the favorable investment climate and economic growth.

Therefore, we need not to abolish the rules, but improve them to create a comfortable regulatory environment for business in Ukraine. Below you will find 12 system defects, the removal of which will fundamentally change the quality of regulation in Ukraine.

1. The defect of “small princelings”

Almost every institutional body has its own procedure for interaction with businesses in Ukraine. Quite frequently it is provided only by internal documents of this body. Some of them accept the documents by mail, while others – only by using a self-made wooden box. In some cases, it is possible to track the documents and, may be, improve them, but in other cases, documents can be returned by mail within 30 days because of misplaced commas.

Some of them invite you to working bodies’ meetings, while others even don’t notify about the discussion time and place. As a result, we got hundreds of procedures, traditions, nuances and features.

This mess actually gives each unprincipled head of public body a possibility to create unfair procedures for his own goals. The lack of standards for communication between the state and business is the first of the main prerequisites for corruption at the lowest level of the state apparatus. This problem can be eliminated by formalizing a civilized administrative procedure in legislation that would guarantee:

А) standard access to information for business;

B) business participation in making decisions affecting its interests;

C) the right to an administrative appeal.

Now there is an adequate draft law “On Administrative Procedure” developed by the Ministry of Justice of Ukraine. It can be adopted this autumn after some improvements. This will significantly reduce the possibility to manipulate in the regulation and the creation of corrupt schemes.

2. The defect of inefficient tools

Tools, by which the state regulates businesses, are divided into standard (provided by an appropriate functional law and used in a variety of cases) and non-standard (created specifically to regulate one case or a narrow circle of cases) tools. Officials in Ukraine are traditionally aiming at inventing non-standard regulation tools to have a monopoly on their use. As a result, the existence of hundreds of exotic pieces of paper gives a great space for manipulation and corruption.

The solution to this problem is to create a “panel” of modern standard tools for state regulation of business, each of which will have a clear procedure for their use provided by law. For this purpose, it is needed to amend the Law of Ukraine “On Principles of the State Regulatory Policy” by adding the chapter “Regulatory means, methods and tools” and bring Art.12-18 of the Commercial Code of Ukraine in line with this chapter.

Organizing a range of tools will simplify the regulation, make it easier to understand and more predictable for businesses and reduce the negative side effects of their use significantly. This will reduce the corruption and increase confidence in the state as a regulator.

3. The defect of “regulatory schizophrenia”

In addition to regulator’s functions (creating rules), the state acts as an owner (management of common resources). Awkward integration in implementing these functions creates a natural conflict of interests, which results in inefficiency and corruption. As a consequence, a lack of an adequate system of the common resource management – amber, sand, forest and other fevers. In fact, it is an open robbery of shared resources.

The solution lies in the self-awareness of the state as a civilized owner. This model doesn’t include “permits”, “orders” or “decisions” on access to common resources. Instead, a competitive procedure of the rational asset management based on civil-law contracts, where the state is an equal party of relations, is an organic model.

The implementation of the state function of being the owner should be built in such a way that independent of each other entities will 1) register and control used assets; 2) plan their rational management (including the creation of lots) and 3) ensure the management procedure. This requires adopting a special law that would establish general rules for the rational use of limited shared resources as soon as possible, combining inventories and databases on limited common resources and reforming the State Property Fund.

This will allow to reduce the corruption level significantly, which is particularly important considering our resource-based economy.

4. The defect of total control

Ukraine has retained the total control mind of the state-owner since Soviet times. If you look at the Constitution that guarantees us the state control over the quality and safety of products and ALL kinds of services and activities, you will find out this fact. Therefore, control and supervision are synonyms in Ukraine.

However, these functions should be divided. The control should be used only in cases, where the state acts as an owner or take a real responsibility for things it confirms as a result of this control. In all other cases, the supervision should be exercised.

At the same time, it is necessary to prohibit the integration of control/prosecution (tax police) functions; control/administrative services (Gosgeonedra); control/asset management (Gosgeokadastr) functions within one government body. It is also important to stop exercising the control functions by structures, which are not government bodies.

All these and a number of other important tasks can be solved by adopting the law on inspection activities. This will save businesses from unnecessary pressure in the areas, which could be just supervised, allow the state to save on its activity and reduce corruption among inspection bodies.

5. The defect of unclear consequences

In Ukraine, dozens of sanctions to be applied to businesses are included in more than 100 documents of different levels. Also, there is a mess in responsibilities (the criminal responsibility is already used in relation to legal persons, and the administrative one – not yet, but there are special types of responsibility (financial and economic). It creates different procedures for their use. Some penalties are not recognized as sanctions at all (for example, the authorization document cancellation or termination), although they are the sanctions by their nature.

To restore order, all the negative consequences used by the state in relation to businesses for violations (except criminal and civil law cases) should be identified as sanctions and listed in a single document – the Code of Administrative Violations. Application of serious sanctions (which can lead to breaking or causing a significant harm to business activities) should be carried out exclusively by court.

This approach will greatly reduce the corruption component in bringing the businesses to responsibility and simplify the protection of their rights.

6. The defect of legal uncertainty

“While making the Lenin’s ideas of building a communist society a reality…”. This is not a quote from the Stalin’s or Trotsky’s works, but the text from the legal act, which is still in force in Ukraine regulating the life of every Ukrainian citizen – the Housing Code of Ukraine adopted long ago in 1993. It is not the only one document of this type. There are hundreds of Soviet documents, which have been being in force for 25 years and containing still working rules for businesses.

Decommunization of the regulatory environment seems to be just in time. It was expected that Soviet acts had been valid only until the adoption of national ones regulating the same relations. In practice, the national documents do not normally specify the Soviet documents they replace when being adopted. This leads to the existence of thousands of documents, the legal status of which can’t be determined (valid/invalid/when no longer valid).

We’ve had a lot of opportunities to adopt all the important rules, so the principle should be completely reversed: only documents specifically kept by the decision of the authorized body are valid. This approach was included to the draft law on amendments to the Law of Ukraine “On legal succession of Ukraine” regarding the revocation of USSR acts on the territory of Ukraine, which has been already submitted to the Parliament by a group of people’s deputies.

The adoption of this law will allow to clear the regulatory environment from thousands of documents with unclear status and increase the legal certainty and, therefore, reduce risks for businesses.

7. The defect of “wild reforming”

Ukraine is a parliamentary-presidential republic. This power model, among other things, provides a clear logic of the state apparatus operation: the parliamentary coalition forms the Government – the Government implements the coalition program (implements reforms) – coalition supports the Government’s policy in Parliament. There are at least 3 centers of reforms, which are competing with each other for success, in Ukraine. As a result, the Government submitted only 7% of draft laws registered in the parliament, and more than 90% is the work of the deputies themselves (although a large number of them is prepared by certain ministries). It is unclear how the Government can be responsible for implementing reforms under such conditions and why it is needed with this “active” coalition at all.

Under normal conditions, the deputies, who are members of the coalition, would have to understand that consideration of Government’s draft laws should be a priority and focus on their processing. At the same time, the deputies of opposition factions should primarily perform the function of controlling the Government’s activity and preparing alternative draft laws.

To improve this situation, the Prime Minister would have to not allow the ministers a practice to register draft laws “through the deputies”, and make the process of independent registration of draft laws more complicated for deputies (at least for those who are members of the coalition). For example, one might amend the Procedure, Rules and Regulations of the Verkhovna Rada of Ukraine that would prohibit the registration of draft laws by a group of less than 10 deputies and introduce the preparation of documents describing the effects of the adoption of a certain draft law, their public presentation and public discussion as a mandatory condition for registration. This approach will allow to lessen the burden of unsystematic work for the Parliament and provide the Government with an opportunity to implement reforms in a more efficient way.

By the way, some NGOs and civil activists should be more responsible regarding organizing campaigns to promote their initiatives for the Verkhovna Rada and not offer documents without coordinating with the Government.

8. The defect of documentary orientation

The Minister and his deputies sign, on average, about hundreds of documents a day. Eventually, this huge amount of documents turns into arrears, in which there is almost no time to think, plan and make decisions. The meaning is lost, and ministers often do not remember what documents they signed and they are very surprised when learning about the consequences of their own decisions.

At the same time, even when ministries prepare a good draft law, they does not always run the risk of ‘submitting’ this document to the Cabinet of Ministers because of a complex and extremely senseless procedure of text approval. The reason for both these problems is the documentary orientation of the decision-making system in Ukraine.

Any civilized policy-making system should focus not on a document but on a regulatory case – a case of applying a regulation tool to a group of permanent legal relations (the market, the process) by the state in order to solve a particular problem. Just this case but not a document text should be a topic of discussion of politicians. Actually, just the documents that contain political decisions should be agreed by ministries, experts, the public, businesses and approved by the Government together with a technical requirement for lawyers to develop draft normative documents. The final text of documents should be prepared directly in a special department of the Government with the assistance of necessary specialists from ministries, the expert and the business environment.

It is possible to implement the mentioned changes by adopting the new Procedure, Rules and Regulations of the Cabinet of Ministers of Ukraine. This will not only enhance the effectiveness of the Cabinet of Ministers (the quantity and quality of made decisions), but also will allow to release resources to build an adequate system of preparing political decisions.

9. The defect of “regulatory tachycardia”

The regulatory system of Ukraine is sick of chronic tachycardia: the processes in the body are accelerated each time and the “body” is getting worse and worse. While constantly wanting to have “quick wins” here and now, they often forget that the business can not properly plan and is under constant stress facing with permanent reforms and thus, the unstable and unpredctable rules.

Businesses need predictability and the regulatory system needs a new treatment along with periodic rest. It is possible to achieve this goal by introducing the regulatory cyclicality:

–             from 1.02 to 31.06 – a “season of reforms”. It is time for new rules that will start working next year.

–             from  1.07 to 31.10 – Implementation of the adopted rules.

–             from 1.11 to 31.01 (of the new year) – Analysis of implementation and preparation for a new season of reforms.

After the end of the first half of the year, no new rules will be adopted any more and the ones that have been approved will take into effect from the January 1 of the following year (i.e. in six months). Similar provisions exist in many countries, for example, in accordance with The Code of Federal Regulations of the United States of America, the horizon of planning regulatory acts is 60 months for the federal governments, in fact, it means five years.

This approach can be implemented by amending the Procedure, Rules and Regulations of the Verkhovna Rada of Ukraine and the Cabinet of Ministers of Ukraine. It will allow the state transform from a risk factor into a factor of stability, and this will lead to cheaper resources and the increased economic growth.

10. The defect of field littering

The state should set the rules and limitations for business only in the cases when it is really important. Now the regulatory framework in Ukraine is strongly littered by illegal, irrelevant and properly not working documents and regulations. According to Better Regulation Delivery Office (BRDO) estimates, there are about 35% of these types. This increases business costs on regulatory activities, increases risks and reduces their legal certainty.

We need an unbiased (based on specific criteria), systematic (implemented under a clear procedure) and inclusive (implemented by the state and businesses supported by independent experts) process of reviewing the existing regulatory acts (Rolling Review). The model for building such a process could be a model used in the United States at the initiative of Barack Obama – Retrospective Review of Regulations. Based on review results, the decisions to keep, remove or improve should be taken for each document.

A draft instruction on conducting a system review of regulations is currently submitted for signature by the Prime Minister. If it is signed, the process can be started even before the end of the summer.

11. The defect of false targeting

In civilized countries, the regulatory reform starts with the identification of the problem and predicts the clear criteria for evaluation of the results of the decision. The process is cyclical.

 Ukraine made an attempt to create a similar system in 2003 with the adoption of the relevant Law “On Principles of the State Regulatory Policy”. This attempt was rather a cargo cult ritual, which gave rise to an absolutely fake system, where documents are multiplied for documents. As a result, the efficiency of about 97% of regulations can not be measured.

In order to find at least some measurability, they have found the “deregulation” receipt, the end goal of which was to reduce the number of documents (less frequently – “the barriers”). That is why the success of regulatory reforms is still measured by the amount of abolished acts and other parameters creating the illusion of changes, but not demonstrating the qualitative state of business regulations.

It is high time for Ukraine to come to reasonable regulation based on a system of measuring its effectiveness. To do this, the Government needs to change not only its rhetoric, but also, without any exaggeration, its working ideology. In the context of new ideology, every document to be saved as a result of the system review should be assessed in terms of expecting some results from its existence or abolished if these results are not achieved. The World Bank’s Worldwide Governance Indicators methodology can be taken as a basis, although there are interesting domestic projects.

Such approach will give a possibility to gather experience, see the real weaknesses of regulation, make right conclusions and improve oneself. As a bonus, it will open opportunities to use “fine-tuning methods” of the regulatory system such as the exotic “one in two out” (when a document introducing a new rule should abolish some other equivalent rule) and “sunset clause” (when a document is adopted for a certain period of time and continues its effect only if its effectiveness is proved).

12. The defect of informational framework

Ukrainian state is the enforcement-based state apparatus. In the modern world, the state is the relationship based on favorable interaction. This fundamental difference characterizes the climate difference between the system of civilized rules and our realities. The manipulation of information and even outright lies to justify own position is widely practiced by both the business and the state in our country. This destroys trust.

The restoration of confidence should begin with the creation of a common information space with a fundamentally new standard of communication on the rules – with systematic accumulation of information not only concerning the nature of decisions taken by the state, but also the reasons for their adoption and productivity. This step requires a comfortable platform with a coordinate system, which is clear for both the state and businesses, and where motives, interests and intentions of the parties would be clearly defined  understood.

This extremely complicated task requires the existence of an open information-analytical system (such as the REFIT platform, which is being created in the European Union), which is currently designed and developed by the Better Regulation Delivery Office. The system has a working title of “PROSTIR” and will be launched in the test mode this September. Its main task is to build and systematize information on the regulation in such a way that it will be convenient for both officials, experts and ordinary public figures to work with it. We are confident that the use of this tool will change Ukraine forever while starting an era of effective regulation.

The BRDO team is working now to implement these main ideas.