Oleksiy Honcharuk: Ukraine has such a political system that makes it impossible to implement reforms effectively

30-11-2016

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The source: UNIAN

The head of the Better Regulation Delivery Office (BRDO) and member of the National Council of Reforms told about how to create a favorable business environment in Ukraine, why the deregulation doesn’t solve all the problems and when we can enter the top-20 of the DoingBusiness ranking in the interview to UNIAN.

The Better Regulation Delivery Office (BRDO) was established more than a year ago at the initiative of the former Minister of Economic Development Aivaras Abromavicius with the support of foreign donors.

A main purpose of the organization as an advisory body at the Ministry of Economic Development and Trade is to develop measures to improve the state regulation and conduct the deregulation that will allow creating a favorable business environment and improving Ukraine’s positions in the DoingBusiness ranking.

However, despite the government’s ambitious statements on the plans to enter the top-50 and the top-20 of the ranking, Ukraine has just advanced by one position during this year, taking now the 80th place.

UNIAN discussed with the BRDO Office’s head, who is the member of National Council of Reforms since recently, why the result was unsatisfactory, which initiatives have been already implemented and are being developed at that moment, what to do with the state regulation in general to allow small and medium businesses to develop smoothly.

You have been heading the Better Regulation Delivery Office for more than a year. It is funded by European donors. Why did the international partners choose the deregulation field for their investments? Is this issue so important for Ukraine now? 

Ukraine has many different projects supported by international organizations. The European Union, the US, Canada and other countries provide technical support for such projects, and the regulation reform, or more usually, the reform of the state itself as an instrument to regulate the business is one of them.

Our partners consider that it is necessary to make Ukraine an effective modern regulator, because today we still have a lot of fragments of the old system. These fragments prevent the development of the domestic economy. Therefore, providing support for reforms in this area is the transformation of Ukraine into a civilized and equitable regulator and player.

The deregulation have been actively started already by the former government. There were the ideas to cancel employment record books and abolish thousands of Soviet state standards (All Union State standards). For example, the former Prime Minister Arseniy Yatsenyuk announced that all European technical standards would be approved and 15 thousands of old standards would be abolished by the end of 2016. However, 2016 is drawing to a close, but we still have employment record books and the abolishment of standards is extended till 2019. Why did they delay?  

Political plans and the reality do not match in most cases. When you are assigned to the post, you think that all changes can be carried out quickly, but in reality, you need to do a lot, nothing can be done quickly.

In addition, we lack specialists. The reforms cannot be implemented without an adequate civil service. The Government hoped that the civil service reform would be implemented in less time and there would be effective and motivated civil servants, but the quality civil service resource they expected has not appeared yet. Therefore, the prediction made two years ago has not proved to be fully correct.

Speaking specifically about the “All Union State standards”, this really requires major efforts. It is impossible just to say that from tomorrow we will use something else. It requires a certain time and specialists to refocus and prepare new solutions.

Skeptics believe that the deregulation can have more negative effects than the positive ones. For example, when we reduce the state control, we rely on market mechanisms of self-regulation. However, the state institutions that should ensure the normal market relations are not functioning properly. In such circumstances, businesses can abuse, and citizens only lose.   

The deregulation can not be an end in itself for sure, it can be a way to solve certain problems. There are two classic cases where the deregulation is needed. First, when regulatory instruments are not used correctly and only bring a harm. Second, if the procedure to apply them is too cumbersome, and the positive effect is less than the negatives they create.

It is a superficial approach to call the regulatory policy the deregulation. For example, the deregulation definitely won’t be helpful in a case of natural monopolies, and we have a lot of problems with them. This is not only the connection to electricity grids or the creation of a gas market, it is also about the “Ukrzaliznytsya”, “Ukrtelecom” and so on. It is obvious that the deregulation is not a solution in this case. Instead, we need to create adequate instruments to regulate monopolies.

The deregulation could be a priority at a certain point, when the government, which came after the Maydan, wanted to reduce the burden on businesses drastically and quickly. However, today, this can’t be a top priority, just one of them.

It is necessary to create adequate instruments to regulate monopolies.

Why do you mention reducing the burden on small and medium businesses when talking about the deregulation? Will large businesses benefit from this?

These concepts are often associated with each other, but the abolition of rules does not lead to improving the business environment by itself, since there are many problems that can not be resolved in this way.

Who is there the focus on small and medium businesses? Because a large business, theoretically, has sufficient resources to build its relations with the state independently. It has legal departments, GR-specialists and sometimes lobbyists, can pay money to order the analysis of regulations conducted by experts and defend its interests in court. In addition, the large business is represented both in the Parliament and other government agencies, and the same can’t be said for small businesses.

This means that if you want to change the whole regulatory system, first of all, it is necessary to think about how this system affects those, who are not able to defend themselves.

Recently, the Ministry of Economic Development and Trade presented a program for the development of SMEs till 2020. Did your BRDO Office participate in its drafting? 

We were not directly engaged in its drafting, but we submitted our proposals. We paid most attention to the section dedicated to the regulation and are planning to continue submitting reasoned proposals to provide it with content.

There were many such strategies in Ukraine. The improvement of the business environment is included to the priorities every year. The President and the Prime Minister promise again and again that Ukraine will enter the top 50 or even the top 20 of the World Bank’s DoingBusiness ranking of the ease of doing business. However, there is almost no progress for the second consecutive year, we are still at the 80th position increasing our ranking just by one-two points. Why?

The progress was really small last year. And the then Minister of Economic Development Aivaras Abromavicius set the task to analyze why it happened and develop a plan, the implementation of which would allow to enter the top 50 and then in the top 20 of the ranking.

We have developed the plan, it was taken as a basis for the Resolution of the Cabinet of Ministers approved last December. It consists of more than 50 initiatives for the current year. 90% of them – the development and adoption of laws, because almost everything has already been done at the government’s level.

The Government has prepared more than ten relevant draft laws, some of which were registered in the Parliament, while others were waiting for the approval of the government or the parliamentary groups.

And then the minister resigned and the entire structure of the Cabinet was changed. The new Government had very little time to submit this draft law to the Parliament. After all, the ranking takes into account only the changes adopted by May 31.

So, is this reason a technical one?

If we discuss why we have such a slow progress in general, it is an imperfect system. The Parliament and the Government do not play the roles appropriate for them. In a normal parliamentary-presidential republic, a parliament forms a cabinet of ministers and then this cabinet forms a policy. It is obvious that this policy should be supported by the parliament, or else the parliament simply has to dissolve the government.

In our case, the deputies form the Cabinet of Ministers, and then compete with it for the title of best reformer. A good example is the statistics of draft laws registered in the parliament. Less than 10% of them are government’s initiatives. In other words, the deputies elected the Cabinet and then develop a large amount of draft laws, including the economic ones.

Imagine that you are a Prime Minister and have a parliament that adopts some laws without your knowledge. And you have to think not only about how to change the situation in the country, but also deal with everything, which is happening in the parliament.

If you add the Presidential Administration, which is the third pole of influence on many issues, you will get a system, where it is virtually impossible to implement reforms effectively.

So, what progress in DoingBusiness should we expect this year? What decisions, which were not calculated for the index, were adopted after May?

This year I predict a better result, it may be 20 or more positions, but we need to work for this purpose. Preconditions have been already formed up, and perhaps, the progress will be even greater. We have a realistic estimate of 15-20 positions at this moment.

What exactly has been approved?

A single social contribution was reduced. Now we continue to process the tax reform and we may expect the further easing out of the tax burden on businesses.

There is also a reform in the field of connecting to electricity grids, which can provide a significant progress by 10 and more positions. But this will depend largely on whether we implement these changes or not. Because the World Bank that forms the DoingBusiness ranking takes into account not the things written on paper, but their real effect. A survey of real businesses will be conducted.

What else should be adopted to improve our positions in the DoingBusiness ranking based on the results of this year? 

The draft law on seals (it abolishes the mandatory use of seals in business activities – UNIAN) has been already adopted in the first reading and now we should go through with it.

The draft law “On mediation” (alternative (non-judicial) mechanism for dispute resolution) was also adopted in the first reading. This will also add 1.-1.5 positions in the ranking.

There are all the preconditions to increase our position by 15-20 points based on the results of this year, it depends on their quality implementation.

And what steps would increase our position by 5 or more points at once? 

For example, the cancellation of share contribution in construction. This could increase our position by 6-8 points.

This draft law has been already registered in the Verkhovna Rada…

Yes, the document has been registered and is being discussed now. It is at a cross-point of interests of local authorities and construction developers.

Now developers should make a contribution to the development of the area they are building on. Is this norm so burdensome or discriminatory for businesses?  

The problem is how it is done. First, this creates barriers to enter the market. Second, it creates huge corruption preconditions, as the calculation method allows to calculate differently in every individual case.

A normal approach is when you come to the local authorities and say that you want to build a certain facility. And they answered you that you also have to build a certain infrastructure in addition to this.

Today, the developer says that he wants to build something, but receives the calculation of how much he should pay for a permit in a non-transparent way. This leads to the fact that companies are trying to bargain to pay less, but to the pockets of officials.

What are other initiatives to improve the business environment?

It is necessary to restore the system of alternative methods for dispute resolution. I have already mentioned the draft law on mediation, but, frankly speaking, it is not so important.

There is an arbitration system operating in Europe and other civilized countries. This system has been used in Ukraine, but it was discredited in the first half of the years of 2000 – 2009, because they started to carry out illegal seizures and property transactions with its help. Now we should restore it.

The court of arbitration allows not to spend large amounts of time and money on still ineffective Ukrainian court system.

Another initiative that can increase our position in the DoingBusiness ranking is the trust ownership. Today, when you loan money to someone to buy apartments, cars, etc., you can secure the obligation with the help of a mortgage or collateral. And if this loan is not repaid, you go to court and take this property. The problem is that the process of recovering debts in the court is a complicated and expensive option.

We offer a European instrument. If you get a loan from me and purchase certain assets, they are immediately registered in my name. And when you repay the loan, the property is automatically re-registered for you.

The effectiveness and predictability of the state regulation is a key to a good investment and business climate.

Does a person who purchased the property on credit funds manage i

Yes, you are using it. But I am the owner. If you stop paying on the loan, I don’t need to prove in the court that I own this property. And it is more difficult to take this property without repaying the loan than it is within the current model. That’s why, there will be much less frauds.

Are there any other important initiatives being prepared?

I listed all the global initiatives, there are also about a dozen cosmetic changes, which, however, also affect the ranking. For example, we need to make registries public. Not all registries in Ukraine are as available as it is in Europe.

Also, the World Bank recommends to make the registries electronic allowing the possibility to receive a certificate remotely. We increased our position in the DoingBusiness by 1 point and almost a part of this increase was based on the fact that the option of paying a court fee online has been introduced.

Recently, you have become the member of the National Council of Reforms. How effective and needed is this body?

We understand that it is impossible to resolve the problems that currently exist at the level of this government. It is needed to negotiate with the President and the Parliament. From this point of view, the creation of the National Council of Reforms is a right step – there should be at least some communication.

Another thing is the way it is functioning now. The National Council of Reforms is now a body approving a final decision. To my mind, the National Council of Reforms is an additional opportunity to promote systemic economic reforms in Ukraine. I believe that the deregulation is a good thing, but this is a kind of reflection.

To succeed, we need to draw a model of Ukraine, as we want to see it in 2020, and move towards this model. We have such a model, our Concept for effective regulation demonstrates the way this model should look in terms of business regulation in a few years. Its draft has been already presented to the National Council, and we are planning to present it to government officials and submit for approval on December 13.

Does the government share your vision?

Yes. For example, our initiative, the so-called “guillotine”, was supported on November 23. The Government abolished 367 regulations in agriculture, transport, construction, energy and IT fields at once.

In our opinion, the guillotine is the right step in the deregulation, which can be used, but it should be prepared carefully. Now we are developing another 12 decisions on quick deregulation.

However, as I mentioned before, the deregulation itself is not a panacea. It can solve 20% of problems, all the rest require the effective regulation.

If the deregulation can solve 20% of problems, what do with the rest?

We should establish the effective regulation, without which we can not trade with civilized countries. This means, in particular, the standardization as well. So, the deregulation is not what is needed in this case, rules can not be canceled. Instead, they should be improved and we call this the effective regulation.

How to improve them?

The BRDO Office insists that the regulation should be predictable for business.

Today, everything is changing rapidly. We call it the regulatory tachycardia, when the reform processes are constantly accelerated, but there is no benefit. It is because the changes of the regulatory filed are too fast for the business to follow, it is true especially for small and medium companies, which have no legal departments to monitor the changes in regulations.

We propose to introduce a regulatory season, when in spring, the government reforms the economy, and from July 1, all reforms are over and the business knows for sure that all adopted rules will apply from January 1 next year.

If the Verkhovna Rada doesn’t change anything during this period…

This should be a model for the whole country. We can discuss the dates, but the principle should be formed in that way.

In addition, it is important to make the decisions measurable. For example, when a grand master plays chess, he records all moves to analyze own actions later. Ukraine is a country that hasn’t been recording its moves for 25 years.

The system of recording moves for the state is a regulatory system. This is a system, when we can measure the effectiveness of some regulation amended seven years ago. Today, it is not impossible in our country, because the system is only the simulation: tons of papers accompanying regulatory acts are fake, they don’t contain any analysis. According to form, everything is fine, but in fact – the imitation.

According to the World Bank, 32 economic reforms have been implemented in Ukraine over the past 10 years, this is 3.5 reforms per year. In terms of a number of the reforms, we take the 11th position in the world, in terms of their quality – we even won’t talk about that.

Why so? Because nobody measures their effectiveness. For example, let’s take the inspection activity. In our country, the effectiveness of fire inspections is measured not with decreasing in the number of fires, but in the number of successful inspections, that is the number of fined business entities.

This is something we still live with. And while it doesn’t change, there will be nothing good. The effectiveness and predictability of the state regulation is a key to a good investment and business climate, and consequently, the economic development.

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