EďŹƒcient Regulation
Contents
2
Introduction
3
Obstacles for business created by the regulatory system
4
Regulatory issues
6
Case study: how does legislation work in construction?
6
Place of BRDO in efficient regulation process
8
Economic growth - result of the efficient regulation
8
Objectives of efficient regulation
9
BRDO assistance in policy process
10
Focus of BRDO work
11
Analysis of draft regulations
11
Systematic review of regulations (Rolling Review)
12
Roadmap for Doing Business - 2017
14
Projects of regulation
15
Future of regulation
16
Center for Efficient Regulation
18
BRDO founders
18
BRDO partners
18
Team
19
INTRODUCTION
Regulation in Ukraine should be based on trust History knows two universal principles for organizing a group of people, regardless of size, location or other features. These are fear and trust. In each specific case their application is usually combined, but as a basis for building relations in the group, they are mutually exclusive. Fear allows to build relations quickly and makes the system very well controlled through the vertical structure of decision-making and the right of power as a basic principle of interaction. Compulsion, vagueness of the rules, unexpected decisions, manipulating with information, and cultivation of guilt in people – these are the basic tools of such systems. However, such systems are expensive and unstable, because eventually human lives begin to be the price of their existence. To build relations based on trust is a difficult task that requires wisdom and patience. But the result is worthwhile – this system is much cheaper and more effective. It does not suppress business, and stimulates its development. About the trap of quick wins and easy solutions Fear is still the basis for building relations in Ukraine. And every generation of executives, whose task is to solve the problem of poor regulation, looks for Quick Wins. These people did not have the necessary credibility, and were afraid of losing their influence, positions, and rarely – losing face. When fear is a driving force for actions, there’s no time for real problem analysis and good planning of ways to address them. No time for advice with all the stakeholders and taking into account their interests, no time for explanation of consequences. The Quick Wins strategy creates chaotic movements of authorities, which can only scare business and force it to
onto the defensive, to go “into the shadows”, reducing the contact with the state to a minimum. This is the trap of Quick Wins strategy: choosing it to gain trust, and realizing in a way that creates fear. However, the use of tools that would contribute to trust between state and business is simulated. Within the degradation of state apparatus, the regulatory system becomes overgrown, and almost completely turned into a cargo cult. Even its representatives do not seem to believe in its authenticity. The gap of distrust increases and relations become burdensome. When there’s no trust for building a civilized relationship, and no force for coercion, the easiest solution seems to be the breaking of corrupted relations: cancel rules, eliminate institutions, “break ties”, because the less contact – the less recalls about them. This strategy of escaping from corrupted relations we used to call “deregulation” and it has nothing in common with building of trust. This key contradiction is felt subconsciously when trying to combine our deregulation with European integration, the process, where everything, even the smallest procedures exist primarily to create trust.
This will put an end to many stereotypes and manipulations, and give a chance for frank talk about interests. The comparison of interests together with choosing the common goals is the next step. To this end, there must be an open discussion about interests and searching for opportunities for joint strengthening and growth. Agreed common objectives will be the foundation for a joint development plan that will be a guide for all and will enable the first joint victory, which, in turn, will raise the people’s trust up. Availability of at least minimal trust will contribute to creation of the first effective rules. And they will not be “launched from above” or “imported from abroad”. They will be adopted together. Otherwise, force would be used for their implementation and that only makes the purpose distant. Joint implementation of this plan will form the trust, sufficient for rules to start working without force. Only then the era of efficient regulation will begin in Ukraine. That is the purpose BRDO works towards. Oleksiy Honcharuk, Head of BRDO
About the future When choosing a system based on trust, remember that the use of fear will ruin the system and regulations do not work without trust. Forced decisions based on emotions, can not be its foundation, and imitation of procedures cannot be cover. For its creation we conduct an inventory of relations. This will affect every industry, every single market. Comparison of business and government information fields allows us to form a common perspective. 3
OBSTACLES FOR BUSINESS, CREATED BY THE REGULATORY SYSTEM
Supposed obstacles
which regulatory system creates for business High taxes It is believed that the tax burden in Ukraine is excessive. According to international experts, the share of tax revenues to GDP in Ukraine amounted to 28.1%, and taking into account the payroll taxes – exceeded 37%. This figure corresponds to the average level in developed OECD countries (34.8%), but is much higher than in most developing countries. Competition with the shadow economy and legal uncertainty in tax administration create a confrontation between fiscal authorities and business. Average tax burden conceals situations where the tax burden on one business can be many times higher than on the other, or it can be almost absent because of taxation peculiarities or corruption.
Real obstacles Impossibility of forecasting Ukraine business usually learns about changing of rules from the media or during the next forced contact with the state. The problem is in the unpredictability and instability of tax legislation. Changes to the Tax Code are made every year. In Europe, long public procedures take place prior to changing the rules; significant innovations are introduced only after evidence of a positive effect.
Poor state regulation In Ukraine, new rules are implemented in an arbitrary way – through the “political will” without analysis of problems and pragmatic calculation. As a result, the quality of decisions can not be evaluated, and about 30% of all acts violate the principle of legality. In Europe, the system allows you to follow the history of the regulation of certain markets and assess their real effectiveness. Another problem is the obsolete legal acts and lack of compliance of technical regulations with EU standards.
OBSTACLES FOR BUSINESS, CREATED BY THE REGULATORY SYSTEM
Overregulation It is believed that there are numerous restrictions for business in Ukraine. In fact, the level of overregulation in Europe and the US in some spheres is much higher than in Ukraine. The problem is in quality of legislation, lack of system, conflicts between acts, and duplication of regulatory instruments.
Business expenses from interaction with the state It is believed that business spends a lot of time and resources on interaction with the state. In fact, according to our preliminary estimates, the total amount of costs incurred by business to comply with law is around 2.5-3% of GDP. For example, in Denmark it’s 2.4% of GDP, and in the Netherlands – 3.6% of GDP. However, in our opinion, the actual costs of compliance with the requirements of regulation could be even lower due to the fact that many entities use the prevalence of corruption to avoid spending any resources to meet the requirements of regulation.
Ignoring business interests In Ukraine, business rules are created without any real consideration of the balance of interests of society, state, and entities. As a result, they do not always work efficiently, because are rooted in the idea of forcing business to perform super heavy and complex requirements. This dooms them to failure. In Europe, business rules are formed in cooperation with business, and arise from a dialogue and understanding; thus, their implementation requires far fewer resources.
Excessive control and supervision Unreasonable number of controls, excessive number of regulatory bodies and regulations that impose unjustified restrictions or conditions that cannot be met – all this creates conditions for corruption, and represent real obstacles for doing business in Ukraine.
Regulatory Issues
Why is the current system inefficient ECONOMIC EFFECT OF REGULATIONS
For 25 years the regulatory system has been based on documents rather than economic cases which take into account the needs and problems of business, economic benefits of the state
is not taken into account
Current regulatory system has no convenient standardization of information sources and documents There is only a formalist approach to the assessment of regulatory documents and analysis of their efficiency
CORRUPTION OPPORTUNITIES for manipulation
A favourable environment and motivation to manipulate the system: regulations that contradict each other, which create the possibility of evading regulation
FORMALIST APPROACH to evaluation and analysis
Case study: how does legislation work in construction? Possible abuses and risks, promoted by the legislation CONSTRUCTION PHASE
PROBLEM SUMMARY
DIFFICULTIES AND ABUSES
INTERESTING FACTS
BRDO INITIATIVE 15 See details on page 15
6
LAND PLOT
ownership transfer
Complex, protracted procedure
Promotes corruption
In Kiev allocation of a land plot requires 17 contacts with officials and 55 separate papers. The entire procedure takes 2-3 years
17 1.2
DATA COLLECTION raw data collection for design
Violation of the legislation in practice
Non-transparency: investor does not understand the technical conditions for electricity, gas, heat and water, and its cost
PROJECT DOCUMENTATION
EXPERTISE
of project documentation
elaboration
The need to comply with obsolete state construction standards
Complicates the use of European standards in construction
Lack of clear requirements to the expertise of project documentation Control has turned into formal, corrupted procedure. Construction is not made in accordance with the project
Objects are built with significant deviations from the approved project The customer never knows what are the terms and conditions of project documentation since they are not in the public domain
Ukraine has regulation from 90s, by which the developer has to build a waste chute in all buildings, even in five-star hotels. A space for cleaning the carpets and drying clothes has to be equipped next to each apartment building.
2.3
Basic principles of regulation To make the system effective, it is important to create predictive and an efficient regulatory framework, where the balanced real needs of society, economic needs of business, and the functional possibilities of the state will be taken into account.
Business
State
• • • •
Society
OBTAINING CONSTRUCTION PERMIT
CONSTRUCTION
Unclear determination of complexity category of construction
Lack of clear control over compliance of construction with project documentation
Promotes abuses in the determination of complexity category of housing construction
According to Dealing with Construction Permits rank (Doing Business): 140 position of 189
Advisability Efficiency Predictability Balance
SHARE PARTICIPATION
ACCEPTANCE OF THE CONSTRUCTION OBJECT
MAILING ADDRESS
Unreasonably large amount of share contribution
Non-transparent and complicated procedure of object acceptance
Delaying the assignment of the mailing address (up to 1 month)
in the creation and of the local infrastructure
Stimulates abuses by supervisory authorities
Reduces the project attractiveness for investors
Corruption schemes that hinder high quality construction
Corruption risks
CONNECTION
OWNERSHIP REGISTRATION
The longest period of connecting to power in the civilized world
Delaying the registration
Tangled procedure allows the customer and controlling authorities to avoid responsibility for the inadequate quality of construction
Corruption risks
to utility networks
There is no such payment as share contribution in European countries at all
assignment
Connecting buildings to power networks in Ukraine extends to 277 days
277
5.1
2.4 7
Place of BRDO in the efficient regulation process
REGULATORY SYSTEM REFORM
Parliament
BRDO mission – promoting the creation of efficient regulation and improvement of economic freedoms in Ukraine with a priority for small and medium businesses.
Government
STATE BODIES:
State Regulatory Service
SOCIETY
STRATEGY "UKRAINE 2020"
Ministries
BUSINESS
COALITION AGREEMENT
GOVERNMENT ACTION PROGRAM
IMF Memorandum
Agreement on DCFTA
Economic growth - result of efficient regulation EFFECTIVE REGULATORY SYSTEM
Improving the regulatory system in Ukraine 8
REDUCING CORRUPTION REDUCING SHADOW ECONOMY
Ensuring conditions for sustainable economic growth in Ukraine
Objectives of efficient regulation REDUCTION OF GOVERNMENT CONTROL OVER BUSINESS ACTIVITY Cancellation of unnecessary licenses, permits, inspections, review of the grounds for contact between business and government, as well as procedures and cost.
CREATING BARRIERS TO OVERREGULATION Consolidated barriers to the creation of new excessive and economically unreasonable legislation.
SUPPORTING EFFICIENT REGULATION Ensuring effective legal framework, consistent with EU legislation. Use of best practices to create legislation.
SUSTAINABLE ECONOMIC DEVELOPMENT BUSINESS ACTIVITY DEVELOPMENT OF COMPETITION VALUE ADDED
SOCIAL PROSPERITY
EXPORT GROWTH SUPPORTING TALENTS
9
BRDO assistance in policy process Discussion and development of state policy in Ukraine is concentrated around documents. But this is a much more complicated process than just writing texts and discussing draft documents. BRDO activity meets the basic stages of development and implementation of effective policies.
EFFECTIVE REGULATORY POLICY
Problem definition
Policy development
Adding to the agenda
Policy implementation plan
Selection of policy
Policy evaluation
Policy Implementation
Where BRDO can assist
Help to conduct analysis of regulatory impact and M-test. Analyze global regulation practices. Simulate effective state policy.
10
Help to identify and measure the problem
Develop and accompany the adoption of regulations
Support the authorities in implementation of acts adopted
Evaluate regulations by the Rolling Review method. Analyze the effectiveness of current regulatory environment
Focus of BRDO work ANALYSIS AND
REVIEW AND
IMPROVEMENT
ANALYSIS
DEVELOPMENT
OF DRAFT
OF EXISTING
OF STRATEGIC
REGULATIONS
REGULATIONS
REGULATIONS
LATEST STRATEGIC PROJECTS
IMPLEMENTATION METHODS ROLLING REVIEW. Systematic review of legislation
NEW REGULATION FILTER
LEGISLATIVE PLAN
REGULATION CONCEPTS. Formation of efficient regulation concepts
Sectoral focus
CONSTRUCTION
CONTROL AND SUPERVISION
POWER
AGRICULTURE
TRANSPORT
Draft regulations analysis One of the BRDO priorities is to establish a systematic and effective process for creating new rules for business.
DRAFT REGULATIONS ANALYSIS
Outcomes
Analysis of 148 draft regulations
DEVELOPMENT and support of the best practices in creation of regulations
SYSTEM APPROACH to creating rules for business
Creation of guidelines for the development of licensing conditions 11
Systematic review of regulations (Rolling Review) How does it work
Is the act lawful? Is it registered with the Ministry of Justice and acted upon?
Inventory
Regulations assessment
Identifying a complete list of regulations in five sectors
Analysis is performed through the Rolling Review methodology
BRDO office has found 9,083 regulations
Office plans to review 6,500 regulations during the year
According to preliminary estimates, about 30% of the regulations in Ukraine are illegal because they are created in violation of the fundamental principle of legality. In 95% of cases it is impossible to evaluate the effectiveness of legislation and determine reliably what was the goal pursued by the regulator when introducing rules or restrictions for business. Under such conditions it is impossible to manage state policy systematically to achieve economic results.
12
1
Is the act necessary? What are the effectiveness and usefulness according to business?
2
What is the level of corrupt implications?
3
Is it convenient for business?
4
Rolling Review results Number of acts reviewed according to sectors Transport
By criterion of "Lawfulness"
Control and supervision
90%
30
Power
72%
36 Agriculture
By criterion of "Actuality"
Lawful
87%
153
43
28%
Actual
Partly not actual Unlawful
11%
73 Construction
Not actual
2%
The results of acts review by type 68 98
28
Laws
Orders
29
Decrees
25 Prescriptions Others
5
1
8
2 Reviewed and recommended to save / improve Reviewed and recommended to remove
*As of March 18, 2016
DCFTA
5
6
How expensive is the regulation?
Is the regulation efficient?
Does it meet the requirements to Ukraine under DCFTA?
Following verification, one of three decisions is adopted for each regulatory act:
Remove
Improve
Save 13
Roadmap for Doing Business - 2017 Together with the Ministry of Economic Development and Trade of Ukraine, BRDO developed a plan for implementation of best business practices. Fulfillment of all given instructions, rules and recommendations will allow Ukraine to get into Top 50 best countries on the terms of creation, existence and development of entrepreneurship within a year.
Doing Business 2016 1 ranking 2 3 4 5 CREATING BUSINESS
SINGAPORE NEW ZEALAND DENMARK KOREA HONG KONG
TWICE FASTER AND EASIER
4 TIMES FASTER
SYSTEM OF CONTRACTS
TWICE AS EFFECTIVE
25POLAND
LICENSING PROCEDURES IN CONSTRUCTION
SYSTEM OF CONTRACTS
1/3 FASTER AND MUCH CHEAPER
BETTER PROTECTION
INVESTOR PROTECTION
TAXATION
44BELARUS
50 51RUSSIA INTERNATIONAL TRADE
REGISTRATION 3 TIMES FASTER
PROPERTY RIGHTS
52 MOLDOVA
3 TIMES FASTER
BANKRUPTCY
TWICE AS FAST AND MORE EFFICIENT
TWICE AS FAST
CREDITING
MORE CHEAP AND AVAILABLE CREDITS
83UKRAINE 14
Projects of regulation BRDO has developed and approved a plan of legislative work for 2016. During the first month BRDO experts alone or together with ministries and MPs have prepared 21 draft regulatory acts including:
18 DRAFT LAWS:
8.1 Introduction of a new way to enforce the obligations trust law as an alternative to mortgage.
4.1 Will reduce legal uncertainty in legal relations.
2.1 Cancellation of the procedure of declarations registration in construction and obtaining raw data on civil protection. 2.2 Improving procedures for obtaining permission to the use of landscaping facilities. 2.3 Envisaged a clear mechanism to protect the rights of owners of real estate that will be built in the future, from the double and illegal reselling, changing of specifications. 2.4 Legislative regulation of procedures of assigning mailing address to property.
REDUCING LEGAL UNCERTAINTY
4.1
8.1
2.1
CONSTRUCTION
2.4
SIMPLIFICATION OF THE REGULATORY PROCEDURES
1.1
2.2 TRANSPORT
CREDITING
1.2
2.3
1.3
1.4 AGRICULTURE
3.1 5.1
7.2
5.2 CORPORATE LAW
9.1
7.1
PROCEEDINGS
1.1 Doing business is simplified through the cancellation of 18 permits or transfer to declarations. 1.2 Procedure for obtaining land to private ownership or use of land in state or municipal property is simplified. 1.3 The project was developed in cooperation with Easy Business. The process of VAT payers registration is more simple and fast. 1.4 Necessity for seal on documents is cancelled, and responsibility for illegal demands of seal on documents is introduced.
6.2
6.1
POWER
3.1 Liberalizing market access for intercity (interregional) transport operators, with a new mechanism of interaction between motor carriers and bus stations.
9.1 Improved legislation on local agro-food markets.
5.1 Improved procedure for accession to electrical networks. 5.2 Improved quality of service in supplying of electricity. 7.1 Introduce the possibility of filing a claim and payment of court fee online, improving procedure of evidence evaluation. 7.2 Creation and management of limited liability companies is regulated; it will become easier to do business.
6.1 Expanding the jurisdiction of arbitration courts, they are entitled to hear cases concerning real estate and corporate disputes. 6.2 Additional control of transactions to protect interest of minority shareholders.
3 OTHER DRAFT DOCUMENTS The order on amending the procedure of granting and revocation of rights to operate airlines;
Resolution "On approval of the action plan for implementing best practices of effective and qualitative control, as reflected in the World Bank Group methodology for Doing Business 2016 ranking;
Guidelines for the development of license conditions for economic activities, which are subject to licensing under the Law of Ukraine "On licensing of economic activity".
15
Future of regulation “ProstIR� If an official wants to create in Ukraine a rule for any business, the question should be asked first - why?
The decision chosen has to be calculated with clear criteria that could clarify its effectiveness in the future.
What problem will it solve? How does it help society? Will it contribute to economic growth?
It is also important that in 3-4 years after the decision is made, it could be re-assessed by those criteria to see what results were achieved.
Then, outlining the problem, it's necessary to seek ways to solve it.
How will the interactive analysis system "ProstIR" run in 2017
Identifying the problem by analyzing Rolling Review results, macroeconomic indicators, survey results.
Choosing a market which is affected by the problem
Choosing a sector of economy affected by the problem
16
Based on the results of the instrument implementation, build trends and develop strategy for the next period. Learning the history and effectiveness of the regulation instruments and alternatives.
In terms of value, determine influence of the instrument on market participants and market development.
Identifying the type of activity within the market
Algorithm of future government regulation Problem
Instrument
Economic effect
Ineffective approach that we change
Plan
Legal act
Legal act and regulatory impact analysis 17
Center for efficient regulation Joint initiative of the State Regulatory Service and BRDO Services: State Regulatory Service
BRDO
Preparation of training materials for the development of skills for analysis of regulatory policy Training regulators and MPs
Online Support from Center specialists for regulators and MPs in analysis of state policy
Center for efficient regulation
Contacts: +38 (044) 332 49 12 centre@brdo.com.ua
Information campaign for responsible regulation
BRDO Founders Office of efficient regulation is created by the Ministry of Economic Development and Trade, which is leading deregulation reform, and with financial support from international donors
BRDO Partners BRDO cooperates with: • Ministry of Energy and Coal Industry • Ministry of Agriculture and Food • Ministry of Ecology and Natural Resources • Ministry of Infrastructure • Ministry of Regional Development, Construction and Housing • State Service for Regulatory • National Council for Reforms 18
Team
Oleksiy Honcharuk Head of the Office for efficient regulation Denys Malyuska Office expert, Rulemaker team leader malyuska@brdo.com.ua
goncharuk@brdo.com.ua
7
experts Oleksiy Dorohan Head of Rolling Review dorogan@brdo.com.ua
5
8
Head of the "Market supervision" Sector holovatenko@brdo.com.ua
heads of sector
Administrative and communication teams
analysts
Volodymyr Holovatenko
4
lawyers
Andriy Zablotskyi Head of the "Agriculture" Sector zablotsky@brdo.com.ua
Olena Shuliak
Oleksiy Orzhel
Oleksandr Kava
Head of the "Construction" Sector
Head of "Power" Sector
Head of "Transport" Sector
shulyak@brdo.com.ua
orzhel@brdo.com.ua
kava@brdo.com.ua 19
04070, 21/16 Grygoriya Skovorody Str., Kyiv, Ukraine +38 (044) 332 49 12 +38 (094) 832 49 12 office@brdo.com.ua brdo.com.ua
This publication was supported by the Expert Deployment for Governance and Economic Growth (EDGE) Project. The Project is implemented by Agriteam Canada Consulting Ltd. and funded by Global Affairs Canada. The views expressed in this report are those of the authors alone. They do not necessarily reflect the official position of the Expert Deployment for Governance and Economic Growth (EDGE) Project, Agriteam Canada Consulting Ltd. or the Government of Canada.