Reforms Put On Pause. Slow Start In The First Quarter of 2023

Key reforms

In the first quarter of 2023, two laws and one resolution of the Cabinet of Ministers received +2 points (in the range from -5 to +5), which, according to experts, separates significant changes from less important ones.

The law on transparency in defense procurement (Reform Index 201) was enacted partly in response to several scandals involving the Ministry of Defense inflating purchase prices. Under this law, customers are required to publicly announce their purchases on the purchaser’s website and the ProZorro electronic procurement system unless they involve state secrets. While goods and services worth up to UAH 200,000 and defense works worth up to UAH 1.5 million can still be purchased outside the electronic system, agreements and purchasing orders must be published in the electronic system within ten days of their conclusion. The Cabinet of Ministers is also required to include information about the procedure for setting the maximum price for food products purchased by state customers, as well as the grounds for making essential changes to procurement contract terms that were not carried out through the electronic procurement system, in the tender announcement and the published contract. Finally, the contract for the purchase of food products or food services must include detailed information about the purchase, including the subject of the purchase, the price per unit of each product item, and the calculation of the price of services with an indication of the cost of all components.

The law expanding the use of electronic money (Reform Index 198) has effectively made electronic wallets almost equivalent to bank accounts. This law permits the use of electronic money to pay for goods and services, receive payments for business trips, and even pay taxes, provided that the e-wallet operator can convert them into fiat when transferring to the State Treasury. The government has also significantly increased its control over electronic money, requiring electronic wallets to be registered with the tax service and imposing taxes on the funds held within them, which may also be seized or confiscated by court order. These changes remove electronic money from the previously gray area, where it was often used to evade taxes. The law also includes provisions to protect Ukrainian citizens who have been defrauded. If fraudsters receive payment through a bank, the bank must return the money and the paid commission to the rightful owner within ten days of proving the payment’s illegality.

We want to remind you that banks are prohibited from issuing electronic money and replenishing wallets during martial law.

The resolution on the reconstruction of damaged objects taking into account the requirements of barrier-free and energy efficiency (Reform Index 199) highlights the state’s commitment to rebuild infrastructure and buildings with a people-centered approach. The resolution mandates that all goods purchased with public funds, such as public transportation, be accessible to individuals with disabilities, including those with reduced mobility and visual or hearing impairments. Additionally, it is essential to consider requirements for energy efficiency, civil protection, and the needs of people with disabilities when constructing new buildings or restoring damaged structures. Despite these provisions, effective monitoring and enforcement of compliance with the resolution’s requirements pose a significant challenge. Pointing out the risks of implementing the resolution, Volodymyr Vysotskyi, a consultant on barrier-free and spatial inclusion, says that “the key challenge remains precisely the issue of effective control over compliance with these provisions and ensuring an effective mechanism for the inevitable prosecution of strict liability for their violation. Resolution No. 152 does not contain any provisions regarding these aspects.”

Zeros

In the first quarter, the resolution of the Cabinet of Ministers on creating the Ukrainian Youth Fund received 0 points (Reform Index 200). This happened due to conflicting expert assessments (from +3 to -2 with a median of 0 points).

“The creation of the Ukrainian youth support fund is necessary to ensure that initiatives by young people from local communities receive state support, especially in cases where there may be insufficient funds available,“ says Yurii Yuzych, chief expert of the RPR Youth Policy Team. “However, the finalization of the law did not do enough to ensure the success and effectiveness of this new institution.“ One of the main concerns is the possibility of inefficient use of budget funds in an industry that has been operating successfully without state intervention.

What are the changes in key areas?

The Reform Index tracks regulatory changes across six areas: governance, public finance, monetary system, business environment, energy, and human capital. During the first quarter, “Human capital,” “Monetary system,” and “Governance” showed the most progress. While not many major changes were implemented in these categories, there were even fewer in the other areas of reform.

Human capital

During the three months, we identified seven significant changes in this area. Four were initiated by the Cabinet of Ministers, two by the Verkhovna Rada, and one more by the President.

In the first quarter, the government focused on developing educational opportunities for Ukrainians.

Due to Russia’s invasion since 2014, Ukraine’s labor market has undergone significant changes. The metallurgical industry, for example, has been heavily impacted, with the country losing around 80% of its steel production over the past decade. To address this, Ukrainians need to be retrained for new professions. To make this process more effective, the Cabinet of Ministers has approved the procedure for retraining the unemployed (Reform Index 201, +1.5 points) based on the principle of “money follows people.” Under this scheme, an unemployed individual (either at the request of a career counselor, employer, or for self-employment) will receive a training certificate which they can use to enroll in an educational institution of their choice. Additionally, the certificate grants the right to study at the workplace (either at the factory or through an internship). The maximum amount for the certificate is ten subsistence minimums for non-disabled individuals as of January 1 of the current year, which is currently UAH 26,840.

The state has expanded the list of individuals who are eligible to receive study vouchers, as per the government’s decision (Reform Index 201, +1.5 points). It now includes Ukrainians who were discharged from military service after participating in hostilities, individuals who were injured, and those with disabilities.

Ukrainians released from captivity and their children are entitled to vocational, pre-university, and higher education benefits per the state’s decision (Reform Index 201, +1 point). These benefits include full or partial payment of tuition by the state or communities, preferential loans for education, access to a social scholarship, free accommodation in a dormitory, textbooks, and access to the Internet.

Monetary system

In the first quarter, the authorities adopted four significant monetary regulations, with three of them relating to the NBU and one to the Verkhovna Rada. Apart from the law on expanding the use of electronic money, there was also a resolution regulating the activities of the Export Credit Agency (ECA) (Reform Index 196, +1 point). This resolution requires implementing a corporate governance system and compliance by the ECA to ensure business ethics. It also establishes the same rules for the agency as for other financial service providers, including requirements for the ownership structure and its disclosure, on-site supervision, and scheduled and unscheduled agency inspections.

The NBU also implemented additional requirements for authorizing the activities of financial service providers (Reform Index 200, +0.5 points). These requirements include checking the business reputation of employees responsible for financial monitoring, ensuring compliance with sanctions-related legislation, and having adequate technical support such as computers and accounting systems. Furthermore, financial service providers must survey their users regarding their relations with the aggressor country and submit the survey results to the National Bank.

Launching a new electronic payment system operating 24/7 (Reform Index 200, +1 point) is another positive development in this area. This step follows the previous launch of the SEP in 2020, which operated 23/7. Previously, interbank payment transactions could only be conducted on working days from 8:30 a.m. to 7:00 p.m. The new system will no longer “shut down” for one hour at night, and bank transactions will be displayed with the exact date of execution.

Public finance

Only three public finance reforms were implemented during the three-month period, two of which were credited to the Verkhovna Rada and one to the Cabinet of Ministers. In addition to the law on defense procurement, which was included in the list of top reforms, the law on compensation for destroyed and damaged property (Reform Index 201, +1.5 points) is noteworthy. This law enables property owners, their heirs, and apartment building managers to receive compensation from the state for residential real estate located in government-controlled territories as of February 24, 2022, that was damaged or destroyed due to Russia’s invasion. Compensation for damaged property will be provided in the form of building materials or construction work, while owners of destroyed housing will receive vouchers to purchase new homes. If a private house is destroyed, the owners can receive funds into a designated account, which can only be used for construction purposes. Applications for compensation can be submitted during martial law or within a year from the date of its cancellation in the areas where the damaged housing is situated.

Who is the biggest reformer?

During the first quarter of 2023, the Cabinet of Ministers took the lead in implementing reforms by adopting five resolutions and initiating five laws. The Verkhovna Rada came in second with the initiation of eight reforms. The National Bank also made significant contributions by adopting three important resolutions. In addition, the President initiated a reform to accede Ukraine to the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired, or Otherwise Print Disabled.

Compared to the previous quarter, in the first quarter of 2023:

• important regulations’ numbers more than halved from 51 to 22;
• the average round score fell from 0.7 to 0.5 points, with one of the rounds scoring 0 since we found no reforms;
• the average event score increased from +1 to +1.1 points, in the range from -5 to +5.

The authorities implemented long-awaited reforms after receiving the status of a candidate for the EU last year. By the end of 2022, they adopted laws on the media, national minorities, and the principles of selecting judges for the Constitutional Court (although the latter law received significant comments from the Venice Commission). However, in 2023, the pace of reforms has slowed down, and the authorities’ enthusiasm seems to have decreased.

We are hopeful that this does not mark the end of our reform efforts but rather a period of preparation for the next big leap forward. Reforms are not just a prerequisite for our accession to the EU and the receipt of significant financial support from the European Union this year; they are also a necessary component of Ukraine’s economic stability amidst the extraordinary challenges that we face daily.