Professional Documents
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Improving The Business Climate in Ukraine 2004
Improving The Business Climate in Ukraine 2004
the Business
Climate
Canadian advisors who provided their experience in policy analysis and organizing
the public consultation process were Paul Brown, Bohdan Krawchenko and
Larissa Lozowchuk.
External experts who provided commentary and recommendations for this paper
were Olena Adamovych, Larysa Bezdudna, Viacheslav Bykovets,
Svitlana Khodakova, Valeriy Kokot’, Yuriy Paperniy, Volodymyr Prytula,
Maya Rudenko, and Yuriy Sosedko.
A number of other specialists and analysts took part in preparing this document,
organizing the consultation process and coordinating the project: Yevhenia Akhtyrko,
Andriy Beha, Tetiana Beha, Andriy Blinov, Daria Hlushchenko, Volodymyr Hnat,
Natalia Hnydiuk, Viktoria Humeniuk, Liudmyla Kotusenko, Natalia Martynenko,
Vira Nanivska, Volodymyr Nikitin, Oksana Remiga, Ihor Shevliakov, Yevhen Shulha,
Olha Shumylo, Yegor Sobolev, and Ostap Stasiuk.
The speedy growth of Ukraine’s economy in The high level of pessimism among the
– should not lull anyone. Even tak$ general population testifies to the fact that
ing into account the current acceleration of the business environment in Ukraine has
the economy, the level of GDP at the end of not managed to eliminate some of its worst
was only about % of GDP for . drawbacks. Despite the fact that the
Unless Ukrainians remove barriers to com$ Consumer Confidence Index has been
mercial activity, increase the rate of invest$ steadily rising and reached . in Q’,
ment and raise the efficiency of industrial it has not yet broken the record set in
capacity utilization, it will be a long time December , when the CCI was .
before they reaches the level of prosperity of points. Economic expectations have tend$
EU countries. ed to improve the most among poorer
, ,
,
,
consumer confidence report #, July , prepared by GfK–USM and ICPS.
Finland .
Slovenia .
Hungary .
China .
Russia .
Ukraine .
Libya .
Nigeria .
Transparency International, http://www.transparency.org, .
The higher the index, the lower the level of corruption in the country (maximum points).
Excerpted from a speech by President Kuchma at an All$Ukrainian Council on problems in combat$
ing organized crime and corruption and the protection of human rights, January .
Data from the All$Ukrainian conference – October called “How to ensure transparency in
the regulation of SMEs.”
Consultations with the general public have shown that properly defining a problem is a very difficult
challenge. The number of problems raised by people was in the dozens. Of course, many of them over$
lap or repeat each other, and some of them are actually consequences rather than root causes. See
APPENDICES and .
Registration procedures for the most part mean state registration of business entities and post$regis$
tration processes such as: registering with the Tax Administration, the Pension Fund, the three manda$
tory universal social insurance funds, and state statistics bodies.
World Bank “Doing Business” Indicators, . See http://rru.worldbank.org/DoingBusiness/TopicReports/.
Henceforth, the word “approval” is used in the broad sense to include licenses, operating licenses,
certificates and so on.
Materials from an internet conference on the topic, “Ways to reform the system of getting approvals
in Ukraine.” See http://www.vlasnasprava.info.
Excerpted from a speech by President Kuchma, op. cit.
This can include payments to both government agencies (such as for licensing fees) and non$govern$
ment agencies (such as laboratory testing to have a product certified).
Law №$IV on the State Budget, dated November .
Results of a quarterly enterprise survey in Ukraine by the Institute of Economic Research and Political
Consulting. See http://www.ier.kiev.ua/English/qes6eng.cgi.
Certain rates (for instance, residential services rates and transit fares) reflect political aims rather than
economic realities.
By industrial infrastructure is meant the interlinkage of companies and organizations that provide
businesses with basic resources and services: telecommunications, transportation, electricity, water sup$
plies, and so on.
Statistical Pocket Guide of the European Central Bank, http://www.ecb.int/stats.
For one thing, the state allocates an unac$ Today, Ukrainian businesses are feeling ever
ceptably low amount of money to finance the more sharply the need to increase share cap$
court system, which should be the main ital since: () positive conditions on external
means of defending property rights. In , markets are spurring the use of expanded
for example, the State Budget allocated a investment opportunities and () the com$
mere UAH mn to cover the entire branch. panies’ own resources and expensive credits
By comparison, the Tax Administration, are limiting the capacity to expand capital
whom businesses see as the main violator of investment. However, the unregulated cor$
their rights, was allocated UAH .bn. porate environment makes it impossible to
expand share capital and to involve minori$
Not surprisingly, businesses have little faith ty shareholders.
in the courts. Only .% of respondents
felt that the legal system was capable of According to a report by the EBRD, the level
enforcing their commercial contracts, and of corporate governance in Ukraine is “very
another .% that the courts were capable low” and the development of legislation in
of effectively protecting both their business$ this area is considerably removed from actu$
es and their persons from wrongdoing. al business practice. This is a serious prob$
lem, as it is generally agreed that the value of
One important aspect that guarantees prop$ a business (its investment attractiveness)
erty rights is regulating issues around corpo$ depends not least from the quality of its cor$
rate governance. After all, investors who are porate governance.
According to data from Derzhkomzviazok, the state communications and informatization committee,
there were only telephones per residents of Ukraine at the end of , which is about . times
lower than the average for Europe ().
Institute of Economic Research and Political Consultation. See http://www.ier.kiev.ua/English/qes6eng.cgi.
Ibid.
Based on information from Context, a business information service. See http://www.context6ua.com.
Data from the State Entrepreneurship Committee.
Quarterly Enterprise Survey of the Institute of Economic Research and Political Consultations, №,
February . See http://pigra.kiev.ua/ier/qes/qes_eng.pdf.
Excerpted from President Kuchma’s speech, op. cit.
In this paper, the word “taxes” is used to mean the combination of all taxes, fees and universal manda$
tory contributions.
These include the Pension Fund, the Social Welfare Fund for those who are temporarily unable to
work, the Universal Unemployment Fund for those who are out of work, and the Workers’
Compensation Fund to cover those who have been in an accident.
Contributions to the various funds are: % for pensions, .% for welfare, .% unemployment
insurance rate and .% (minimum) for universal workers’ compensation insurance without counting
discounted rates.
Of this, % goes to the Pension Fund (the most common rate), % to insurance against temporary
inability to work, and .% to the Unemployment Insurance Fund.
Biznes newspaper № –, May .
• baselessly high costs for doing business; According to official statements by the coun$
try’s leaders, the share of the shadow econo$
• the movement of commercial activity my is just about as big as the official econo$
into the shadow economy. my in Ukraine, nearing %. For this rea$
son, despite record post$independence
Ukraine was th among countries in growth in the current year, , the coun$
the Corruption Perception Index. try still has a monthly GDP of only UAH
This high level of corruption leads to an per person, less than US $.
opaque business environment and thus to
higher risk for doing business. This slows the Under such conditions, even the most ideal
flow of investment into the Ukrainian econo$ legislative initiative won’t make any differ$
my. In fact, the main investors in Ukraine ence, since it is being ignored by both those
today are businesses themselves and the level in power and those in business. It has
of lending remains low, while foreign become inconvenient to work legally, since a
By comparison, Russia was th. See http://www.transparency.org.
Excerpted from President Kuchma’s speech, op. cit.
All$Ukrainian conference, op. cit.
Official site of the State Tax Administration of Ukraine at http://www.sta.gov.ua/english/index.php.
Data from the Akademia think$tank at http://www.academia.org.ua.
Explanatory brief to the Bill on amending certain Laws of Ukraine regulating commercial activities.
See http://www.parliament.org.ua.
“Ukraine and Russia: State policy regarding SMEs,” Institute of Competitive Society, .
Akademia, op. cit.
The Law on Mortgages has already been approved and a State Registry of Mortgages has been set up
to protect creditors. One and the same mortgaged property can be used as collateral for several credi$
tors, so the highest priority is given to the creditor who first registered the loan contract.
Given the reported responses of the general public, it is possible to note four reasons why
current legislation is flawed:
• norms and regulations are seen as instruments for satisfying specific business or politcal
interests and not as a way to effectuate government policy;
Henceforth, this text uses the term “norms and regulations” synonymously as legislation and regula$
tions.
• tax breaks that lead to an uneven distribution of tax pressure and reduces opportunities
for reducing tax rates across the board;
• inconsistent and unsystematic regulation of the tax system, which makes it opaque,
increases business risk, and raises the unproductive costs of doing business;
• passing on the burden for the state’s social function to business, and ineffective man$
agement in this area.
For instance, today, changes to tax legislation are often in violation of the Law on the tax system and
the Budget Code. It is critical to determine that, when such conflicts arise, business entities have a right
to refuse to comply with new requirements as long as these conflicts have not been resolved.
Based on this principle, when a legal norm or other regulatory act or the norms of different pieces of
legislation or different regulations allow for ambiguous or multiple interpretations of the rights and
responsibilities of business entities or government agencies, allowing for a decision to be taken in favor
of both the business entity and the government agency, then the decision shall be made in favor of the
business entity.
This means the Pension Fund, the Social Welfare Fund (temporary incapacity to work), the
Unemployment Fund (loss of work), and Workers’ Compensation Fund (loss of work through on$the$
job accidents).
In order to resolve the issue of lowering tax The Ukrainian Government finances its
pressure, the state also needs to keep in social commitments through the social con$
mind the need to collect enough revenues tributions of businesses. Another source of
in the Budget to adequately finance all its funding is the Budget itself. The simplest
expenditures. In the first phase of reducing way to reduce the burden on businesses is to
tax rates, the main source of compensation increase the share of financing of social
of Budget losses has to be the legitimization spending that comes directly from the
of the shadow economy and the resulting Budget. However, this step cannot be taken
expansion of the tax base as a result of grow$ at the same time as tax reforms.
ing reported revenues among commercial
entities. But this resource is also limited. To Thus, the current task facing the Govern$
further reduce tax rates will require using ment is to concentrate efforts on other,
proactive measures to increase the country’s alternative options, among which key is:
financial options. Among such steps, one
takes priority:
. Consolidating Social Funds
. Reviewing and reducing tax to minimize unproductive
breaks costs to business
A large portion of the funding that finds its
The system of tax breaks means that the bur$ way into the various Social Funds is spent
den of paying taxes is not evenly distributed not on social benefits but on administering
across all businesses. Most existing tax these funds. In addition, the complicated
breaks are groundless, economically ineffec$ bureaucratic system increases unproductive
tive, and only satisfy specific interests among costs for businesses (for reporting, account$
influential business groups. These holidays ing, paying fines and bribes, and so on).
need to be immediately eliminated. Consolidating all the Social Funds would
make it possible to:
In some instances, tax breaks can be
replaced by direct, targeted subsidies. • firstly, reduce administrative costs in the
budgets of the Social Funds and thus
Eliminating tax breaks will make it possible increase the level of actual social spend$
to increase revenues to the Budget and at ing;
the same time set up a reserve that will even$
tually allow tax rates to be further reduced. • secondly, reduce the rates of contribu$
tions and thus lower pressure on busi$
In addition to lowering tax pressure on busi$ nesses. The reduction in receipts from
ness, the pressure of having to pay into businesses would be partly compensat$
Reforming the system of government administration should ensure that certain key obsta$
cles in the business environment are removed:
• unregulated procedural issues around the services that the government provides;
This primarily refers to costs related to obtaining government services such as licenses and permits,
certification, registration and so on. And among these costs, of course, time has to be included, such as
how long it takes a company to go through a particular process.
If this alternative is brought into play, busi$ • Establish and enshrine in law simpli9
ness will be assured real access to informa$ fied procedures for providing govern$
tion about the activities of government ment services and approving decisions
agencies, their right to interfere in the that affect the business community.
activities of commercial entities, the form
that any kind of interference should take, • Oblige government bodies to regularly
and so on, as well as information about disseminate information about their
what kinds of decisions government bodies functions, rights and obligations, and the
can take, in what timeframe and in what rights and obligations of citizens and busi$
order. ness. It also makes sense to obligate such
bodies to explain the procedures for pro$
Moreover, informational openness is im$ viding public services and to ensure the
possible unless the Government continually necessary financing.
reports about its activities. The Govern$
ment has to show the consequences of its • Clearly assess the value of government
interference and its effectiveness. To achieve services, indicating the methods used to
this stage, four steps are needed: calculate this, and ensure the dissemina$
tion of this information.
An example of such openness might be national bodies regulating the power sector and telecoms.
The procedures for approving key decisions by these two bodies allow businesses the right to express
their positions, to present their arguments, and to suggest other options.
Here the issue is not only control of assets, but also the right to dispose or utilize assets in order to
earn a profit. The problem today is not only a matter that owners are illegally (groundlessly) deprived
of their property, but that government bodies use their position to set obstacles that make it impossible
for business owners to effectively use their assets to earn those profits.
• the absence of accountability on the part of the government and guaranteed rights for
commercial entities;
• the lack of corporate culture in doing business and effective legislation in this area.
to ensure the option of handling some by state institutions. This means basically
kinds of disputes in the business communi$ a system of arbitration panels. However,
ty on a non$judiciary basis, that is, directly key to their effective functioning is that
among the disputing parties without their decisions must be binding.
recourse to government institutions. This Another important task is to inform the
requires effective procedures for arbitrat$ general public and businesses of the ben$
ing disputes outside the court system as well efits of this form of dispute settlement.
as new institutions that would review busi$
ness disputes. • Expand the system of administrative
suits (challenges to the decisions of gov$
The main advantage such a system has over ernment bodies) and pre9trial settle9
the judiciary is that decisions are taken more ments (disputes among commercial
quickly and are less costly, especially in entities). Along with this, the objectivity
terms of cash outlays. To achieve this goal, of such mechanisms has to be very high,
the government needs to: which means, among others, ensuring
that there is broader representation of
• Develop community institutions that stakeholders (business, NGOs, and so
can take on themselves some part of on) in such dispute settlement commis$
disputes that are currently undertaken sions.
Today, to cancel the state registration of a regulatory act is possible only on the initiative of a special
authorized body that lacks the necessary resources to study the enforcement of a particular law in all
areas and at all levels of government. Moreover, this can be done only after an appropriate review by
judiciary bodies, which is not always carried out as both resources and political will are often lacking.
For example, clearly defining legal norms, forbidding abstract references, mandatory conformity of
the text with other legislation or the introduction of necessary changes, including clear penalties for vio$
lating these conditions, and so on.
For instance, reducing employer contributions by –% and increasing deductions from employees
by the same amount.
In , the reform of the pension system of Ukraine was launched. Specifically, a law about universal
mandatory pension insurance was passed, and one on non$state pension funds. These laws should ensure
the establishing of a three$pillar pension system. One pillar will, in fact, be private pension insurance.
Today, for instance, government bodies are not obligated to pay fees when they appeal to the courts.
This encourages them to launch suits in the most hopeless situations, which overloads the court system.
Today it is very common to see different judges hand down completely contradictory decisions in one
and the same case.
This means, above all, reducing administrative pressure on the part of government bodies on the
courts and judges to an absolute minimum.
This means court fees and the costs of informational and technical support.
Most of all, this refers to the responsibility of the executive service and government officials.
The project’s goals are to help promote • Vitaliy Zeliuk, Center for Social Studies,
reforms in Ukraine by institutionalizing Poltava;
Government consultations with the public
on policy$making and to raise the capacity of • Nina Ponomarenko, Chernihiv Regional
civil society to formulate public opinion on Development Agency, Chernihiv;
the most pressing issues in reform.
Correspondingly, the first goal envisaged • Arsen Osmanov, Institute of Social
two components: conducting a full cycle of Studies, Simferopol, the Autonomous
consultations with stakeholders on three Republic of Crimea.
Government policy priorities and preparing
policy briefs in order to help improve con$ The project’s Ukrainian specialists intro$
sultations on Government activities. The duced a public consultation mechanism by
second goal was to be achieved through the studying stakeholder opinions on three
educational component. All three compo$ important Government policy areas in
nents were based on studying, applying and Ukraine:
transferring the experience of developed
democracies. • reforming the system of privileges;
• analyzing the results of the public con$ • two papers on consultations with stake$
sultations and revising the Papers based holders to be prepared and published
on the input received. jointly with Government representatives:
a policy brief on public consultations
More information about the methodology and a handbook on organizing public
and implementation of the consultation consultations;
process is in APPENDICES –.
• Government consultations when prepar$
Final versions of the White Papers include ing and adopting key legislative and nor$
detailed and well$reasoned presentations of mative acts that regulate public partici$
problems in relevant areas and recommen$ pation in shaping and implementing
dations for tackling these problems, sup$ government policy in Ukraine;
ported by key interest groups in the society.
Project participants expressed the hope that • the participation of the Government
such papers would become powerful tools representatives in public hearings in the
for debating government policy in Ukraine. regions.
was being implemented. The first round . Coffee break ( minutes).
took place in March and April, the second
in June and July . . Group discussions (– minutes).
The hearings in every city followed the same . Presentation of the results of group dis$
pattern. In fact, discussions on “Improving cussions (– minutes).
the Business Climate” and the two other top$
ics—“Reforming the System of Privileges” . Wrap$up discussion and closing com$
and “Bringing Personal Incomes out of the ments (– minutes).
Shadows”—were organized as a single event
consisting of three parts. This event took one During the first and second rounds of pub$
entire day for discussions on two topics and lic discussions, ICPS specialists Ildar Gazi$
the morning of the next day to discussion zullin, Oleksandr Tatarevskiy and Natalia
the third topic. Each topic was given three Tychuk delivered the reports.
hours: :–: or :–:. All the
discussions took place on weekdays. The dis$ Five questions were formulated for the first
cussions all followed standard rules of order. round of discussions on “Improving the
Business Climate.” During the discussion in
Each discussion had the same structure: the first city, the ICPS specialists noted that
the responses of the participants did not
. Welcome and introductory speech by the fully correspond to the goal of the discus$
presenter (– minutes). sion. As a result, the questions were refor$
mulated without changing their essence for
. Report by ICPS specialist on the results discussions in other cities, as follows:
of research presented in the policy brief
(– minutes). • What are the policy goals for develop$
ing the business environment in Ukrai$
. Co$report by a local specialist on the dis$ ne?
cussion topic (– minutes).
• What key problems hamper the business
. Division of participants into working environment?
groups (– groups with – partici$
pants each), announcement of the com$ • What are the roots of these problems in
position of each group and guidelines the development of the business envi$
for group work ( minutes). ronment?
• Yuriy Sosedko, consultant, Center for the • Vinnytsia Oblast State Tax
Support of Reforms, a civic organization. Administration;
• ZAT Podillia;
Chernihiv
Kyiv
• Producers unprotected;
• Lack of business education in Ukraine;
• Burdensome and unsystematic taxes;
• Traditional mentality;
• Inconsistency between financial and tax
• Lack of clear and fair rules of the game reporting;
(business$government$oversight);
• Burdensome tax pressure on employers;
• Complicated permit system;
Question . What are the priority goals for improving the business
environment?
Vinnytsia • Increasing transparency in local
governance;
• State support for business;
• Regulating the tax system;
• Micro$lending to cover more businesses;
• Attracting foreign investment (need • Raising professionalism among civil
mechanism to provide owner servants and entrepreneurs;
guarantees); • Strengthening the role of regional and
• Improving regulatory environment and local governments;
legal base; • Setting up public access to information
• Raising standard of living and social about laws and regulations;
standards; • Participants agreed with the goals
• Creating new jobs; proposed in the ICPS Green Paper.
Question . What are the most effective ways to achieve these goals?
Vinnytsia • Strengthening government
accountability through public oversight
• Facilitating cheaper loans;
and independent media scrutiny;
• Raising the effectiveness of legislation;
• Developing small business, educational
• Lowering tax pressure for start$ups within campaigns;
the first three years;
• Making the legislative base effective and
• Promoting the development of lending stable;
environment (credit unions);
• Developing professional government;
• Improving current legislation on
• Ensuring stability in the legislative base
micro$lending;
and informational sources;
• Improving land legislation;
• Creating new jobs (SMEs), access
• Targeting privileges by type of activity to material and technological resources.
and by territory;
• Reducing the cost of licensing,
Kyiv
certification, permits, notarial services;
• Increasing the role of business centers
• Conforming regulatory acts to
and incubators in business development
ISO standards;
innovations;
• Improving the legal base;
• Bringing order to legislation intended to
• New leaders who can effect change; establish a transparent regulatory envi$
ronment;
• Making policy$making transparent;
Question . How does the proposed White Paper help explain and
justify the changes needed in government policy
to improve the business environment?
Vinnytsia • No mechanisms for carrying out the
identified tasks and no list of sources.
• Clearly and specifically identifies
priorities;
• Covers all pressing issues regarding the Poltava
business environment and property
• Contains fairly clear explanations and
rights;
justifications for the necessary changes in
• Provides in$depth and qualitative government policy to improve the busi$
analysis; ness environment in Ukraine.
• Easy to understand;
• The information provided is necessary, Simferopol
but not complete;
• Needs more practical recommendations;
• Too theoretical;
• No discussion of regional peculiarities;
• Materials should have been distributed
earlier to give participants time to study
them; Chernihiv
• Provides few specific examples of small • Needs simpler presentation;
business development.
• Needs examples;
• Needs illustrative materials;
Kyiv
• One$sided (business is good, government
• Should support government policy and is bad);
accelerate reforms of specific
• Problems with registration and
government policies identified in the
regulation are fictitious and exaggerated;
analytical report;
• Calculations of the business tax burden
• Well$structured, but references to sources
contain inaccuracies;
should be more precise;
• Proposals to reform inter$budget
• Proposal to set up an out$of$court system
transfers are already underway;
for protecting property rights is not
convincing; • Too emotional.