• image
  • image

Ukraine Reforms Watch (December 8, 2014)

On November 20, five Ukrainian political parties, including “Block of Petro Poroshenko”, “Samopomich”, “Batkivshyna”, “Radical party of Oleg Lyashko” and “Narodniy Front”, together comprising more than 60% of seats in the parliament, signed a final version of the Coalition Agreement. The document contained an outline of 17 key reforms that the new government and the parliament will have to implement. Overall, we believe that the proposed reforms definitely represent a step in the right direction, and will positively impact the Ukrainian economy as a whole. We present a short overview of the key planned reforms below. Furthermore, we will issue an update on the reforms’ implementation on a monthly basis. 

 Scoring methodology

For each of the planned initiatives, we issue a score ranging from 1 to 10. The highest score (10) means that the initiative may have a significant positive impact on the economy as a whole and on investment climate of Ukraine, once implemented. We assign a lower score if:

  • the initiative will have a limited effect (specific industry/area)
  • the initiative will not have a significant impact
  • the initiative is expected to have drawbacks and/or side effects

The lowest score (0) represents a neutral score, meaning that the initiative will not change anything. And lastly, the score of 5 means that the initiative is likely to have a positive overall impact, but have a limited effect on the economy as a whole.

 

Economic policy reform  

 
Major problems Proposed changes Effect Timeline Score
Overregulation, bureaucracy Decrease the number of documents and procedures for business

Improved business environment

Flaws: lack of details

1 year

8

Outdated Soviet-era standards

Bring the Ukrainian technical standards in accordance with the EU standards

Create independent bodies for standards and measurements

Open new markets, Improve quality and competitiveness of Ukrainian products (e.g. food products quality will improve) 1-3 years 10
Weak protection of property rights Improve protection of investors rights and intellectual and property rights

Improved business environment

Flaws: lack of details

1 year

8

Poor antitrust legislation

Make anti-monopoly commission (AMC) regulations more transparent

Increase threshold which requires AMC permit

Decreased pressure of AMC on small business 1 year 5
New and innovative enterprises are not encouraged

Develop a legal framework that would catalyze formation of new enterprises, especially innovative/science-related

Stimulate high-tech projects/enterprises

Enable Ukraine to catch up with developed countries.

Increased GDP growth

Flaws: lack of details

1 year 6
Overall score:   37
Responsibility:

Ministry of Economic Development and Trade (Aivaras Abromavicius)

Parliament Committee on Economic Policy (Andriy Ivanchuk)

Parliament Committee on Industrial Policy and Entrepreneurship (Victor Galasyuk)

Tax system reform

 
Major problems Proposed changes Effect Timeline Score
Costly tax management

Decrease the number of taxes to 9 from 22

Merge tax reporting and financial reporting (corporate income tax calculated on the basis of UA GAAP or IFRS EBT)

Slightly reduced tax burden, significantly reduced cost of tax management 3 months 6
High share of “shadow”
economy
Decrease Unified Social Tax (paid by enterprises from payroll) to 18% from 33%. Planned to be implemented only in 2016. Reduced tax burden on enterprises, fewer enterprises paying “hidden wages” 1 year 7
Tax evasion

Unification of transfer pricing legislation with the guidelines of the OECD

De-offshorization of the Ukrainian economy

Liquidate tax evasion schemes involving “pyramid” schemes, operations with stocks of fictitious issuers

Reduced tax evasion, increased State Budget revenues

Flaws: no mention of tax evasion schemes involving non-VAT payers (individual entrepreneurs)

3 months 6
Fiscal pressure on business Remove income from tax penalties from the State Budget plan, introduce possibility of a “tax compromise” in 2014, and amnesty of capital in 2016 Reduced fiscal pressure 1 year 6
Overall score:   25
Responsibility:

Ministry of Finance (Natalie Jaresko)

Parliament Committee on Tax and Customs Policy (Roman Nasirov)

Energy sector reform

 
Major problems Proposed changes Effect Timeline Score
High tax burden on oil & gas sector (55% royalty rate for gas wells, 45% for oil wells less than 5,000 in depth) Set royalty rates at economically reasonable level, ensure stable fiscal environment Effect unclear, as no specific rate is mentioned, although it is expected to be less than the current rate 3 months 3
Corruption in Naftogaz

Implement Third Energy Package of EU, divide Naftogaz into three branches

Ensure access of investors to gas transit system of Ukraine (GTS)

Improve transparency (EITI initiative)

Reduced corruption in Naftogaz, reduce budget deficit, modernize GTS 1-1.5 years 3
Overregulation

Liberalize energy and coal mining sectors, switch to direct sale/purchase contracts

Harmonize local regulatory policies with EU norms

Simplify the provision of land for exploration of oil & gas, obtaining permits

Improved attractiveness of the sector for investors 1 year 3
Dependency on Russian gas

Develop legislative base for the creation of Ukraine-Europe gas hub

Increase imports of gas from the EU

Develop alternative energy sources

Decreased dependency on Russian gas, lower gas prices, decreased Budget deficit

Flaws: no mention of LNG terminal
project

2-3 years 4
Compensatory subsidies that drain State Budget Liquidate cross-subsidies, set economically justifiable prices for gas and electricity, implement direct subsidies for economically disadvantaged groups of population

Decreased State Budget deficit

Flaws: increased cost of living

1-2 years 2
Unprofitable coal mines that drain State Budget

Privatize/liquidate all state-owned coal mines

Gradually decrease govt. support of coal industry to zero

Decreased State Budget deficit, reduced corruption

Flaws: complicate social environment due to increased unemployment

3-5 years 2
Low energy efficiency

Implement fiscal stimuli for renewable energy generation sector, including biomass

Set economically justifiable “green” tariffs for renewable energy generation

Stimulate energy efficiency projects, including investments in modernization of heat transmission networks, cogeneration

Increased energy efficiency and share of renewable energy in total energy generation

Flaws: No clear indicators or measures provided.

2-3 years 4
Overall score:       21
Responsibility:

Ministry of energy and coal industry (Vladimir Demchyshyn)

Parliament Committee on Energy Complex, Nuclear Policy and Nuclear Safety (Mykola Martynenko)

Anti-corruption reform

 
Major problems Proposed changes Effect Timeline Score
Public sector corruption

Create National Anti-Corruption Bureau (detection and suppression of corruption)

Create National Agency for the Prevention of Corruption (formation and implementation of state anti-corruption policy, monitoring of public workers’ lifestyle and income)

Liquidate corruption schemes in public sector

Gradually reduce corruption of public sector

Flaws: two government agencies instead of one.

6 months 10
Lobbying of interests of business groups by political parties/MPs Implement Group of States against Corruption (GRECO) recommendations on financing of political parties and election campaigns Complicate lobbying of interests 6 months 4
Lack of transparency

Publish data on tenders, public property, income declarations of govt. workers

Open database of enterprises

Open access to data on land plots owners

Ensure mandatory publication of final beneficiary owners of legal entities

Improved transparency of public sector, reduced corruption in public procurement 1.5 years 6
High level of corruption in public procurement

Make all data on tenders public

Check that the price of procurement is close to current market prices

Introduce electronic tenders system

Simplify procedures, eliminate all unnecessary restrictions that could lead to “own” people winning tenders

Significantly reduced level of corruption in public procurement. Reduced expenses of the State Budget 1 year 6
Overall score:       26
Responsibility:

Cabinet of Ministers (Arseniy Yatsenyuk)

Parliament Committee on Prevention and Combating of Corruption (Yegor Sobolyev)

Financial sector reform

 
Major problems Proposed changes Effect Timeline Score
Low liquidity of capital markets

Develop new law on derivatives

Improve the laws on corporate bonds

Promote the implementation of modern infrastructure for stock exchanges

More companies will be able to attract funds by issuing local bonds

Increased trading activity of bonds and derivatives

6 months 6
Poor regulation of capital
markets

Implement International Organization of Securities Commissions (IOSCO) principles to the Ukrainian stock exchange

Develop unified standards of data transmission between market participants

Bring the Ukrainian legislation on M&A deals involving financial market participants into accordance with EU norms

Clear standards of capital markets’
operation, improved protection of
investors’ rights
6 months 5
Capital controls, low integration with world capital markets Simplification of the procedures of investing funds from abroad and investing abroad from Ukraine. Liberalization of operations with foreign currency (from 2016) Could bring a considerable amount of direct foreign investment (FDI) to the country 1 year 9
The rights of minority stockholders are not fully protected. Poor corporate governance.

Develop a legal base for the squeeze-out procedure (buyout of shares of minority shareholders at majority owner’s request with checks to ensure fair purchase price)

Protect shareholders against execution of contracts that will hurt the company financially

Introduce shareholders’ agreements,anti-takeover legislation

More protection for minority
shareholders

Improved corporate governance

Flaws: lack of details

1 year 6
High interest rates on loans Create the mechanics to attract funds for CapEx at lower interest rates (no details)

National companies will be able to attract loans at lower interest rates.

Flaws: no impact on private sector

1 year 3
Absence of retirement plans/defined contribution systems Introduce defined contribution pension
system

Increased liquidity of capital markets, growth of personal wealth

Flaws: lack of details

1 year 6
Overall score:       35
Responsibility:

Ministry of Finance (Natalie Jaresko), National Bank of Ukraine (Valeria Hontareva)

Parliament Committee on the Financial Policy and Banking (deputy head Leonid Klimov)

Judicial reform

 
Major problems Proposed changes Effect Timeline Score
Some judges are corrupt and earn their living mainly from bribes, not official salaries. Introducing declaration of revenues and expenses of judges, members of their families and related individuals. Corruption will be partially eliminated from the judicial system, although it may become more sophisticated. 6 months 10
The judges make voluntary decisions without serious responsibility. Develop clear grounds for attracting a judge for disciplinary responsibility

The judges will be more responsible in making decisions

Flaws: lack of details

6 months 9
Court decisions are often not executed properly Implement effective control of execution of court decisions (no details) Important court decisions on business cases (for example, on debt payments) would be executed 6 months 6
Overall score:       25
Responsibility:

Ministry of Justice (Petro Pavlenko)

Parliament Committee on Law and Justice (Ruslan Knyazevich)

Public sector reform

 
Major problems Proposed changes Effect Timeline Score
Bureaucratic and inefficient work of state organizations

Develop and implement an electronic government system

Implement results assessment system

Increased efficiency of the government bodies, economy of budget funds, more efficient interaction with business. 1 year 5
Low quality of state budget planning

Implement 3-year state budget planning and evaluate budget plan execution by the results, create risk management system for the public debt

Exclude unnecessary expenses from the
State Budget

Economy of public funds, increased quality of budget planning and debt risk management.

Flaws: lack of details

1.5 years 2
Inefficient operation of state-owned companies State privatization program Increased income from privatization of state-owned enterprises, increased productivity/effectiveness due to efficient owners 1 year 3
Inflated number of state employees

Optimize the government structure

Reduce the number of state workers

Increased effectiveness of government, decreased expenses 3 months 2
Large amount of unnecessary administrative paperwork Reduce the amount of administrative paperwork Improved ease of doing business 6 months 6
Government services are delivered by different organizations Open centers for providing the majority of administrative services in one place Improved ease of doing business, economy of budget funds, more efficient interaction with business 6 months 4
Calculation of public workers’ salary is very complicated and non-transparent. Officials get a lot of additional social benefits. Implement classification of posts in the government and unify salaries for all state officials depending on category, level of responsibility and complexity, official’s competences Transparent principles of officials’ payments, no social benefits, subsidized from the budget. 3  months 3
Professional level of the state officials is extremely low.

Introduce competitive selection procedure for candidates, HR departments

Create an effective system of professional training and education

Attract well-qualified and motivated professionals to the state service

Flaws: no mention of salary increases to the level of real sector

6 months 4
Overall score:       29
Responsibility:
Cabinet of Ministers (Arseniy Yatsenyuk)

Law enforcement reform

 
Major problems Proposed changes Effect Timeline Score
Low professionalism of law enforcement officers

Develop a new attestation system. Conduct a reattestation of all policemen.

Introduce a 3-level system of professional training (basic and specialized)

Introduce a clear system of selection of candidates (competition-based)

Improved professional level of law enforcement officers; weed out unprofessional and corrupt individuals 1 year 6
Complex internal structure Separate civil and specialized law enforcement branches (e.g. military police) into separate institutions Fewer conflicts of interest, clear structure of divisions, increased efficiency of work 1.5 years 2
Corruption, bribery

Create a National Bureau of Investigations that will fight organized crime and corruption in law enforcement

Implement personal ID badges

Decreased corruption

Flaws: no mention of increased responsibility of law enforcement workers for bribes

1 year 7
Overall score:       15
Responsibility:

Ministry of Internal Affairs (Arsen Avakov)

Parliament Committee on Legislative Base of Law Enforcement Activity (Andriy Kozhemyakin)

Agriculture sector reform

 
Major problems Proposed changes Effect Timeline Score
Complicated land lease procedure

Create a legal base for the consolidation of landowners that can select a single lessor

Simplify the land lease registration procedure

Develop a clear legal base for the transfer of ownership rights

Better protection of lessors’ rights

Simplified administration of large portfolios of land lease contracts 6-12 months 3
Prevalence of short-term land lease contracts Stimulate long-term land lease contracts by a legal restriction of a minimum contract period (specific period not mentioned) Increased share of long-term land lease contracts 6-12 months 1
Absence of the possibility to buy/sell land lease rights Introduce effective regulatory mechanisms for the development of an agricultural land lease market, with the possibility to sell and collateralize lease rights. Liberalized land lease market 6-12 months 3
Overregulation

Simplify all permits/licensing procedures

Simplify customs procedures and decrease additional costs during export operations (certification of produce, confirmation of origin)

Eliminate all export limitations

Improved business environment 1 year 4
Complicated access to financing

Promote investments from IFIs

Government support for small/medium farmers in the form of subsidized loans

Decreased financial cost for small agricultural enterprises   4
No legislative base for commodity forwards/futures Develop the legislative base for commodity forwards/futures Increased trade volumes, liberalize commodity trade markets. 3 months 3
Underdeveloped infrastructure for exporting grains

Develop a legal base for the development of infrastructure of agricultural market

Promote domestic agricultural and food products in foreign markets

Simplified process of investing in infrastructure.

Flaws: No clear measures.

1 year

3

Absence of stable taxation system Preserve the current taxation system in agriculture up to January 1, 2018; afterwards – develop and implement a new taxation system that will stimulate the development of agriculture

Minimize risks to agricultural enterprises of volatile profitability due to sudden cancellation of VAT refunds or transfer from FAT tax to common system in the medium term. Set positive expectations for the long-term.

Flaws: No guarantees that the State will prolong preferential tax system for the long-term period.

-

3

Overall score:       24
Responsibility:

Ministry of Agriculture (Oleksiy Pavlenko)

Parliament Committee on Agricultural Policy and Land (Taras Kutoviy)

Decentralization reform

 
Major problems Proposed changes Effect Timeline Score
Local budgets have few responsibilities and limited sources of financing. The government uses the system of re-distribution of local budget revenues, transferring funds from budgets with surplus to the local budgets with deficits Approve changes to the legislation to delegate more responsibilities to the local budgets and attach additional sources of funds

Local communities would be less dependent on the government decision-making, would make independent decisions, and would use the funds, earned by themselves

Flaws: concrete sources of revenues not specified (taxes that are going to be attached to local municipalities)

1 year 10
Overall score:       10
Responsibility:

Cabinet of Ministers (Arseniy Yatsenyuk)

Parliament of Ukraine

 
Total score (across all reforms) :   247

For full report please contact us by:

Phone: + 38 044 237 77 27, NY: +1 917 475 04 47

Email:  This email address is being protected from spambots. You need JavaScript enabled to view it.