Ukraine demonstrated a breakthrough in the Doing Business ranking as a result of improvements in construction. The Construction Sector Head at BRDO Olena Shulyak explains why this achievement may turn out to be temporary.
The last week of October becomes for me a period of reviewing expert assessments regarding the change of regulatory legislation in the Ukrainian construction industry for four consecutive years. On the last day of October, World Bank Group experts announced the results of the annual Doing Business index. The Group’s analysts complete their work on collecting all data on business regulation in 190 countries on the last day of May and consolidate them during June-October. And traditionally, along with World Bank experts, local analysts provide forecasts on changing the ranking of ease of doing business in their own country.
Ukraine has been constantly trying to improve its positions. We have shown a significant progress having risen from 147 position among 183 countries in 2010 to 76 out of 190 countries in the latest ranking. However, Ukraine has never been able to significantly improve the indicator of “obtaining construction permits” until this year.
The Doing Business methodology implies assessing the quality and effectiveness of regulation in a particular city of the country (sometimes in a few of them). As a rule, in the capital. The main indicator that kept Ukraine within 140 position is the cost of licensing procedures, which according to estimates of World Bank experts, totaled 15.2% of the estimated construction cost.
Overregulated construction procedures and their high cost have been keeping Ukraine within 130-140 positions in terms of this indicator for almost ten years. This, of course, also affected the overall rating. But a miracle had happened! In 2017, Ukraine made a breakthrough in the category of “obtaining construction permits”, and we moved from position 140 to 35.
I predict a huge number of news and press releases about a new triumph, a significant advancement of reforms and the ease of doing business in the coming months. And all this will be true. But, unfortunately, it will be partially true…
What helped us make a significant progress in terms of the indicator of Dealing with construction permits?
First of all, reducing the cost of procedures from 15.1% to 3.1% (documents registration costs and share participation – LIGA.net) had a positive impact on increasing Ukraine’s positions in the rating. This indicator was partly influenced by the clarification of the technical inspection cost (from 5% to about 1%) in the total construction costs. As a result, the cost of licensing procedures decreased by almost 4%. We finally left Togo, Sudan and even Senegal behind in terms of construction costs.
But we got the main progress due to a temporary decision of the Kyiv city council. The fact that the Doing Business methodology implies assessing the quality and effectiveness of regulation in a particular city of the country (sometimes in a few of them). As a rule, in the capital. The main indicator that kept Ukraine within 140 position is the cost of licensing procedures. According to estimates of World Bank experts, it totaled 15.2% of the estimated construction cost. Additionally, experts use standard technical requirements – obtaining a permit and construction of a 14,000 sq ft warehouse (1 foot = 0.09 sq km) – to prepare the rating for each country.
A decreasing coefficient for paying share participation in Kyiv will no longer be used from the beginning of 2018. And of course, this will negatively affect not only the indicator of obtaining construction permits, but also the overall rating of the country.
Some experts found out that at one time, Macedonia slightly “cheated” to conduct an assessment under the Doing Business rating. The country’s government maximally simplified construction conditions just for warehouses, which exactly corresponded to the technical requirements of the methodology. As a result, the Balkan country has significantly improved its position in the rating without significant improvements for business.
We saw a similar situation in Ukraine. In the end of 2016, the Kyiv authorities reduced the share contribution to infrastructure development from 10% to 4% and set a decreasing coefficient of 50% for 2017. In such a way, 2% instead of 10% as before was taken into account in the calculation of the cost of licensing procedures under World Bank methodology.
In the new rating, we demonstrated a lower index of the cost of construction procedures than on average in the region, and it is only 10 times higher than the cost in Poland (0.3%) and 32 times more than in Slovakia (0.1%).
In this context, we should note that a decrease in the share contribution size in Kyiv does not reflect the situation in Ukraine as a whole. There are still 10% in Odessa, Lviv, Vinnytsya as well as in most other cities…
Thus, the 35th position in terms of this indicator is our achievement. But the decreasing coefficient for paying a share contribution will no longer be used in 2018. Ukraine will again move from the average index of the cost of obtaining permits to high costs in the region. And in the next rating, we have all the chances to “get back” our position of outsiders. This is the price of situational non-systemic regulatory decisions.
The decreasing coefficient for paying share participation in Kyiv will no longer be used from the beginning of 2018. It will be 4%. And of course, this will negatively affect not only the indicator of obtaining construction permits, but also the overall rating of the country. The cost of licensing procedures, which is higher than all our neighbors have even under the present conditions, will again become higher than on average in the region at best.
Currently, we are starting the countdown from preparations to the implementation of reforms that will be taken into account in the rating already in 2019. And we – experts, business, the public, legislators, civil servants and local authorities – have all the chances to keep and improve the investment image and the business environment of Ukraine while implementing reforms and eliminating excessive financial burdens, in particular, through the cancellation of share participation as a hidden tax on investments, in our hands.