Train “Ukraine – Future”: In Which Direction Did the Country Move in the Second Quarter of 2017?

In the second quarter of 2017, the reforms continued to slow down, while the average Index for Monitoring of Reforms (iMoRe) was the lowest for the entire monitoring period since early 2015 (+0.6 points). The greatest progress was observed in the areas of “deregulation,” “fighting corruption,” and “efficiency of public expenditures.” Among the important regulatory acts of this quarter are the laws on the electricity market, compulsory redemption and sale of shares, and the autonomization of healthcare establishments.

More than two and a half years ago, the coalition of deputy factions “European Ukraine” made an agreement, having committed itself to reforming the country. In a month and a half, the President formally set the priorities of the reforms in the Ukraine 2020 strategy. The directions of reforms are also defined in the documents signed with the international partners – the IMF (1, 2, 3, 4), the EU (1, 2, 3), and the World Bank (1, 2).

How are the reforms progressing and which aspects have shown improvements recently? VoxUkraine starts to publishing quarterly reviews of the reforms. This publication focuses on the key legislative changes made by the government in the second quarter of 2017.

The rate of reformist legislative changes has been slowing down recently (graph 1). In the second quarter of 2017, the average Іndex for Monitoring of Reforms (iMoRe) was the lowest for the entire monitoring period since early 2015 (+0.6 points).

Graph 1.

The greatest progress in the second quarter of 2017 was observed in the area of “deregulation”: the total iMoRe index in this area is twice higher than in the spheres ranking second and third – “fighting corruption” and “efficiency of public expenditures” respectively (graph 2).

Graph 2.

Major reformist regulatory acts in the second quarter of 2017

  1. Law on the electricity market (2019-VIII).

The document determines a new market model. It should create opportunities for the development of competition and, as a result, for the free choice of electricity suppliers by final consumers.

“Adoption of this law has marked the end of the first wave of implementation of the Third Energy Package of the EU at the level of basic laws,” says Roman Nitsovych, Dixi Group. “From a technical point of view, this law is of high quality, because experts from the EU structures and the Secretariat of the Energy Community have taken part in its development. The fundamental philosophy of the law is to launch liberalization of wholesale and retail electricity markets, which should result in the transition to market pricing rules, the protection of consumer rights, and the creation of conditions for the competition in the sphere of electricity supply.”

Natalia Boyko, Deputy Minister of Energy and Coal Industry, said that the law provides for the “transitional” period (24 months from the date of entry into force). During this period, the necessary technical, organizational, economic and regulatory prerequisites for the introduction and smooth operation of the market must be created. Over this period, the Ministry of Energy and the National Commission for Energy and Utilities Regulation shall prepare more than 100 subordinate legislative acts.

  1. Law on compulsory redemption and sale of shares (№1983-VIII).

The law harmonizes certain corporate management standards in joint-stock companies with the EU documents.

MP Viktoria Ptashnyk explained that the law is part of the corporate management reform (along with the law on corporate contracts which was already adopted and the draft law on limited liability companies). It lays down a basis for civilized relations in joint-stock companies.

According to Maksym Libanov from the National Securities and Stock Market Commission, the law has introduced a number of corporate management mechanisms. In particular:

  • a squeeze-out mechanism which provides for the right of a shareholder who (directly or indirectly) owns the controlling interest (95% of the shares) to redeem shares of other shareholders in a compulsory manner,
  • a sell-out mechanism which provides for the right of a minority shareholder (less than 5%) to sell their shares to a shareholder who owns 95% of the company in a compulsory manner,
  • a mandatory bid mechanism which establishes the obligation of the shareholder who acquired the controlling interest (50% + 1 share) or the substantial shareholding (75% of shares) to offer other shareholders to sell their shares,
  • a simplified mechanism for the transformation of public joint-stock companies into private companies or limited liability companies, which does not require that permits be reissued after such a transformation.

A squeeze-out mechanism allows to redeem shares from those shareholders who do not have any influence on the company’s activities, yet, nevertheless, the company incurs significant expenses to inform these shareholders about the general meetings, payment of dividends, etc, said Denys Sakva from Dragon Capital.

“The law contains three blocks of changes important for businesses – introduction of escrow accounts, changes in the procedure for pledging money in bank accounts, and the redemption of shares of minority shareholders,” says Zoya Mylovanova, VoxUkraine Law. “Thus, the legislator has removed one of the obstacles that, along with currency risks, restrictions on the withdrawal of capital, and others, forced even bona fide owners willing to pay taxes to formalize the sale of large businesses outside Ukraine.”

  1. Law on the autonomization of healthcare establishments (2002-VIII).

The law allows to reorganize healthcare establishments from budgetary institutions into non-profit enterprises. Such opportunities have existed before, but the procedures were too complicated. The adopted law simplifies the reorganization and introduces new mechanisms of managing such enterprises.

“According to the law, healthcare establishments shall become similar in status to any other enterprise,” explains Pavlo Kovtoniuk, Deputy Minister of Healthcare. “So far, due to vertical management they have been functioning as budgetary institutions in line with the Soviet standards.” Their managers had no freedom of action and were guided by the top-down instructions in the form of orders and decrees.

The law introduces a concept of a “healthcare service” which allows to receive funds from any source of financing in a legitimate and transparent manner, to select the heads of healthcare establishments through competition, and to set up supervisory boards and boards of trustees.

The autonomization of healthcare establishments has been made voluntary – as a compromise at the request of the specialized committee of the Verkhovna Rada.

“Those healthcare establishments that decide to become non-profit enterprises will receive preferential terms for reorganization. Mandatory assessment of property which is usually required in case of reorganization will no longer be necessary. These enterprises will become successors to all the rights and obligations of the relevant budgetary institutions,” said MP Iryna Sysoyenko.

“A new form of management opens up many opportunities for a healthcare establishment,” says Yaroslav Kudlatskyi, Kyiv School of Economics, “from changing the organizational structure to attracting new sources of funding other than governmental funds. The hospitals will finally be able to decide independently which services or equipment to order. This should make provision of medical care more economically efficient and improve the quality of services.”

Gloomy outlook

A number of draft laws are yet to be signed by the President. Once they are signed, it might influence the iMoRe dynamics in the third quarter of 2017.

Further progress will greatly depend on the parliament’s ability to shape the necessary legislative preconditions for the reforms in the spheres of healthcare, the pension system, the land market, privatization, and the reboot of the civil service. Given the fact that the last plenary meeting of the current (sixth) session will be held on July 14 and the next one will take place in September after the vacations, it will not be easy to find the necessary time and adopt the laws important for these reforms during the third quarter.

Index for Monitoring Reforms (іMoRe). Release 26

Index for Monitoring Reforms (iMoRe) from VoxUkraine aims to provide a comprehensive assessment of reform efforts by Ukraine’s authorities. The Index is based on expert assessments of changes in the regulatory environment in five areas. The iMoRe value for the 26th monitoring period (December 21, 2015 – January 10, 2015) stood at +1.6 points out of the possible range from -5.0 to +5.0 points. 

Issue 26: Budget package

The adoption of the budget and other laws from the budget package, civil service reform, optimization of administrative services, some deregulation measures and on-going reform of “Naftogaz Ukraine” all were the major contributors to the Index growth.

Chart 1. іMoRe dynamics

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Chart 2. іMoRe and its components in the current round

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First of all, there are the laws from budget package, which fueled Public Finance sector progress to +2.5 points. The law on State Budget for 2016 (928-VIII of 25.12.2015) received +3.0 points, of which +2.0 points in the Public Finance sector and +1.0 point in the sector of Monetary Policy and Financial Markets. Experts also stressed that the law transfers funding and responsibilities to local budgets and it is a prerequisite for restoring the IMF financing. With regard to the independence of the National Bank, the law still contains provisions for the lower limit of NBU profit to be transferred to the state budget, but its size was reduced. Among the negative points, experts noted the process of the law’s adoption and delay in the enactment of a new system of electronic declaration of civil servants incomes.

Other laws from the budget package were positively evaluated as well. Amendments to the Tax Code as a whole (law 909-VIII of 24.12.2015) scored +2.0 points. The greatest achievements are unified social fee cut and gradual transition of agrarians to a common system of VAT. There was a slight expansion of the tax base in order to compensate for the reduced rates of unified social fee. The law on the stabilization of the state’s financial conditions and improvement of certain provisions of the social policy (law 911-VIII of 24.12.2015) received +2.0 points as well. Changes launch optimization of social security policies, implement verification, while some of the privileges were replaced by targeted aid. On the other hand, experts emphasize the need for a comprehensive reform of social protection. +2.0 points were given to the changes to the Budget Code, which reduce the options for budget amendments (law 914-VIII of 24.12.2015) during the year, which will contribute to a more consistent and predictable fiscal policy.

Governance and Anti-Corruption sector received +2.0 points. In particular +2.8 points experts gave to the new law on civil service (law 889-VIII of 10.12.2015), noting a significant progress. According to Timothy Mylovanov from the University of Pittsburgh, the law

more or less clearly spelled out the structure of orders and instructions, and their implementation, as well as the possibilities for civil servants to challenge them and demand them in a written form.

The law that expands the powers of local authorities in providing administrative services (law 888-VIII of 10.12.2015) and the law on access of the media to meetings parliament’s committees (law 873-VIII of 09.12.2015) received +2.0 points each.

The CMU decree 892 of 04.11.2015 on the reorganization of territorial structure of the State Fiscal Service, which aims to reduce the number of regional tax offices, garnered +3.0 points in total (+1.5 points in each Governance and Public Finance), reflecting the high necessity of the State Fiscal Service reform; on the other hand, reorganization may only be a superficial step.

Industrial Organization and Trade Policy scored +1.5 points, where the highest grades experts assigned to the law on deregulation in agriculture (law 867-VIII of 08.12.2015) and the law on adaptation of seed certification system and procedures for registration of plant varieties to EU requirements (law 864-VIII of 08.12.2015), which is a small but important step in the implementation of free trade area with the EU.

Monetary Policy and Financial Markets, as well as Energy Independence received +1.0 point. The CMU decree 1002 from 05.12.2015 on certain issues of improving corporate governance of NJSC “Naftogaz Ukraine” received a total of +4.0 points (as the sum in Energy Independence and Industrial Organization and Trade Policy). Olena Pavlenko from analytical center “DiXi Group” says:

Approval of the documents on corporate governance reform of NJSC “Naftogaz”- is certainly a positive step. The company, which was constantly losing money and pulled out resources from the state budget, now has a chance to become more transparent in its activities, have a clear structure and decision-making. This will increase the confidence of foreign partners and investors, “Naftogaz” will have a greater chance to raise funds for its activities and development. At the same time, the reform of corporate governance of “Naftogaz” should be harmonized with the broader reform of the gas market and strategic decision of the government about the role of “Naftogaz” in the market. For example, whether gas extracting companies should stay as a part of “Naftogaz”, or they should be beyond its control. Such decisions cannot be taken at the company level; they should be the result of public debate and a clear decision of the CMU.


(Please see charts on the next pages and on the website http://imorevox.in.ua/?page_id=577http://imorevox.in.ua/list_rounds.php)

Note: Index for Monitoring Reforms (iMoRe) from VoxUkraine aims to provide a comprehensive assessment of reform efforts by Ukraine’s authorities. The Index is based on expert assessments of changes in the regulatory environment in five areas:

  1. Governance and Anti-Corruption
  2. Public Finance and Labor Market
  3. Monetary Policy and Financial Markets
  4. Industrial Organization and Foreign Trade 
  5. Energy Independence

For details please visit imorevox.in.ua.

VoxUkraine is a group of global economists and members of the Ukrainian policy community who are working on reforms in Ukraine. The goals of VoxUkraine are to promote research-based policy analysis and commentary on economic developments in Ukraine, to formulate a systemic approach to reforms, to provide high-quality discussion platforms, and to integrate Ukraine into the global network of economists and public policy leaders.


Chart 3. Value of іMoRe components and number of events December 21, 2015 – January 10, 2016

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Index of Reform Monitoring

IMF Program: Summary before the Review

Ukraine looks set to receive the next tranche of IMF funding after accomplishing most of about 100 reform measures stipulated by the IMF Memorandum signed in February 2015.  However, as long as the country relies on external pressure to generate the political will, comprehensive action on reforms will remain elusive.

On February 27, 2015, Ukraine signed a Memorandum of cooperation with the IMF that may soon be characterized as “money in exchange for reforms”. In their “First 100 days in the Office Report” government officials named the IMF agreement one of their main achievements. Indeed, without the IMF loan, Ukraine would not have been able to pay out its external liabilities and stabilize its exchange rate. More details about the IMF program can be found here, here and here.

The reforms envisaged by Memorandum can be summarized as follows:

  • Monetary and banking policy: flexible exchange rate, transfer to inflation targeting, further “cleaning” of the banking system, establishing fair rules of the game and enforcing them;
  • Fiscal policy: elimination of the Naftogaz deficit, raising tax compliance, and providing social safety net for vulnerable groups;
  • Deregulation, judicial reform and the fight against corruption – the “three pillars” of a healthy economy. Ukraine’s Western partners often stress that the combatting corruption must be the foundation of reforms in Ukraine. No wonder that it received significant attention in the Memorandum.

As we can see, nothing is new here – these are the measures that have been discussed by experts and government officials for at least the last decade. Now they have to be implemented.

Importantly, the Memorandum contains not only the reforms outlined above, but, unlike the Ukrainian government program, also a very clear schedule for their implementation. The majority of reform activities will be carried out with technical assistance from the IMF, the World Bank and other international organizations.

The Memorandum also calls for the Government to conduct communication campaigns to inform the public about reform efforts – particularly regarding energy price increases. Unfortunately, this requirement is quite vague and, perhaps because of that the Government does not pay sufficient attention to the informational component of their work.

In May, the IMF mission arrived in Ukraine to assess the implementation of Ukraine’s key performance indicators. The decision on additional funding for Ukraine by the IMF’s Executive Board, which is due in early July, will hinge on the mission’s findings. Judging from the press release issued by the mission, there is a high probability that the Board will decide in Ukraine’s favor. Although some have been delayed, the majority of “structural benchmarks” – that is specific activities with clearly defined terms – were met. The reforms planned in the Memorandum, and their execution, are detailed below (note that we don’t know which measures were included into the Memorandum at the IMF’s request, and which of them were proposed by the Ukrainian government officials).

Note: areas marked in green denote measures that were implemented in time, orange – implemented partially or with a delay, red – measures for which the deadline has passed.

Reform of the monetary and exchange rate policy

Despite the formal announcement about the transfer to a flexible exchange rate policy and a number of periods of significant (over 10%) devaluation of the Hryvnia, the National Bank of Ukraine (the NBU) had actually been pursuing a fixed exchange rate until February 2015. This policy, coupled with the structure of Ukrainian exports, consisting primarily of raw materials, resulted in Ukraine’s over-sensitivity to the world economic crises with alternating periods of deceptive stability and outright panic (read more here). Now the NBU is targeting price stability because the majority of people earn and spend in Hryvnia. The following measures were included into the Memorandum:

Reform area Actions Deadline Outcome
Monetary policy Limit the money supply while maintaining a positive real refinancing rate Next 12-18 months In process – the key interest rate increased to 30% and administrative constraints imposed
Foreign exchange market Draft a plan to remove foreign currency and capital flow restrictions End of May 2015 NBU weakened three restrictions (resolution 354, 355), a plan was developed but not published
Naftogas will buy currency on the market, and not from the NBU Undefined Done
Extend a swap line with the Bank of China Undefined Done
Strengthen the NBU independence Prepare draft amendments to the NBU Law End of February 2015 Draft law was approved in the first reading
Amend the Budget code making it impossible to transfer NBU revenue to the budget prior to the completion of the financial audit of the NBU Undefined Draft law was approved in the first reading
Reform the NBU structure and internal procedures Transform Board of Directors into Executive Committee. Extend the Board competences, form a Monetary Policy Committee, publish regular reports on inflation and financial stability Undefined Monetary Policy Committee was formed, 1st Inflation report published

 Banking system reform

There are several problems in the Ukrainian banking system. First, there is a large number of “pocket” banks in Ukraine and thus a high level of related party lending. Second, there is insufficient capital, which raises risks of bank insolvency in case of exchange rate fluctuations or deterioration of assets. Third there is high amount of non-performing loans, which often became non-performing back in 2008, after a sharp Hryvnia devaluation.

It’s no secret that almost every financial-industrial group had its own “pocket” bank not only for operational purposes, but also for preferential lending to companies belonging to this financial-industrial group – and the source of these loans were personal deposits, often attracted at above the market interest rates. When needed, one could empty this kind of bank in a few days by withdrawing the assets and shifting the cost of deposits redemption to the Deposit Guarantee Fund, i.e., to the other banks which contribute to the Fund and, in case of the insufficiency of such funding, to the taxpayers. Before the adoption of the relevant law on increasing the bankowner responsibility, dishonest owners were not held responsible for engaging in such schemes. Although there were legal restrictions to related party lending, they were easily bypassed via complicated structures of financial-industrial groups. The recently adopted law obliges enterprises, including banks, to disclose the information on the final beneficiaries, but it has not come into full force yet. To eliminate the above schemes and clean up the banking system, the following actions are planned:

Reform purpose Measures Deadline Outcome
Reduce related party lending Adopt relevant legislation and revise the NBU documents to close the loopholes allowing restrictions on related party lending to be bypassed End of March 2015 On May 12, 2015 the NBU adopted a resolution on related parties criteria and reporting
Banks have to provide the information on the volume related party lending End of May 2015 – 10 biggest banks, end of July – 20 next banks, end of September – the rest of the banks In process
The NBU will audit the banks and together with them develop plans to reduce the volume of related party lending Audit 20 biggest banks within a 6 month period, audit the rest of the banks during a 9 month period
Reduce the volume of related party lending. If a bank violates the plan for reduction of related party lending two times, it will be withdrawn from the market. Starting from June 2016, all banks will have a plan in place to reduce the volume of related party lending
Create a specialized department at the NBU to supervise reduction of related party lending.Create plans for all the financial-industrial groups End of September 2015 Head of department was appointed
Improve banking standards, especially treatment of non-performing loans Full transition of banks to IFRS Since July 2015
Legal investigation of cases of banks bankruptcy to identify the causes of bankruptcy (the investigator will be chosen through a tender) Beginning of investigation – June 2015
Adopt a law to extend the bank liquidation period from 3 to 5 years (to raise the recovery rate of the assets’ economic value) End of May 2015 A draft law has been submitted
Create a system of pre-court loan restructuring that corresponds to international practices By the end of June 2015
Submit the draft law on private debt restructuring (personal bankruptcy law) to parliament By the end of July 2015 A draft law has been submitted by MPs (People’s Front and the Radical Party of Lyashko)
Forced conversion of foreign currency loans into Hryvnia will not happen; NBU will not interfere in negotiations between the banks and FX borrowers but will issue a Code of Conduct regulating such negotiations By the end of March 2015 A Memorandum was issued
Bank recapitalization Amendments to the law on measures helping bank recapitalization Law was adopted on Dec 28, 2014
Additional capitalization of the banks based on the results of the 2014 stress test 9 of the 15 largest banks should have been recapitalized by the end of January 2015, next 20 banks – by the end of February, other banks – by the end of June 2015 In process
Updated stress test and evaluation of the banks’ asset quality, if necessary conduct another recapitalization 10 largest banks – end of July 2015, next 10 banks – end of September 2015 In process

 Fiscal policy

The main fiscal policy problems that Ukrainian governments have faced have been revenue-expenditure mismatch and spending inefficiency due to both corruption and “social state” inherited from the Soviet times. Until recently Ukraine had a “Russian-type” social contract, which implies that people let officials enrich themselves, and in return receive “crumbs from the table”, mainly in the form of low tariffs, an ineffective system of privileges and supposedly free healthcare system.

Under such a setup, the middle class representatives, and particularly entrepreneurs, had to pay for both the palaces of the ruling class, and the “guaranteed minimum” of others. Obviously, this model of social relations could not last for long. From now on both the government and households will have to engage in the long-term planning and economizing. For this purpose the following measures are envisaged:

Reform Measures Deadline Outcome
Budget cuts “Freezing” minimum wage and official subsistence level, cutting special pensions (except for the army pensioners) from 70-80% to 60% of salary, cancelling subsidies to the coal mining industry. Thus, public sector payroll (except for the army) in 2015 compared with 2014 will not increase. The number of people getting paid from the budget would drop by 3% (or about 105,000) by September 2015. Of those 67,000 will be civil servants, whose number will decline by 20%. The salaries of public servants will grow accordingly. In the medium term the public sector payroll will be reduced to 9% of GDP 2015-2018 Included in Budget-2015
Healthcare:Submit to the parliament the draft law on medical reform. The law will foresee financing of hospitals depending not on the number of beds, but on the services provided By the end of March 2015 A draft law on medical reform has not been submitted
Adopt a law on drug procurement through international organizations. By the end of March 2015 The law was adopted
Education:Reduce the number of higher educational institutions from 802 to 317, reduce the number of students paid for by the state, reduce the number of schools by 5% (more than 900 schools), as a result in 2015 the expenditures on education will be reduced by at least UAH 300 million By the end of May 2015 Foreseen in the State Budget-2015
Submit to the parliament the draft law on education reform By the end of May 2015 A draft law has not been submitted
Social safety net: replace subsidies with a guaranteed minimum income (GMI) program. Merge utility privileges and subsidies, convert privileges into subsidies.By 2017 introduce a single program of cash transfers (poverty protection mechanism) – completely monetize privileges. By the end of March 2015 Some privileges remain
Reduce Pension Fund expenses and its budget financing For some occupations, in which the workers have the right for early retirement, the retirement age will be gradually increased by 5 years, which will save UAH 1.6 billion in 2015. Undefined The law was adopted
Pensioners who did not receive pensions on the occupied territories will be paid after they resettle Ongoing Pensions are being paid
Preventing the rollback of the pension reform. Ongoing The law that rolled back the reform was vetoed
Submit a new version of the law on pension provision, which will come into effect from Jan 1, 2016 (indexation of pensions, lowering the threshold of nontaxable pension, gradual unification of the rules for calculation of general and privileged pensions) By September 15, 2015 A draft law was submitted, but returned for a complete review by the parliamentary Committee
The single social tax (SST) rate will be reduced in line with the reduction of pension expenditures Undefined The law on SST rate reduction was adopted (certain eligibility criteria were introduced, particularly, salary increases)
Simplification of tax compliance Develop a plan of the State Fiscal Service modernization (improve tax administrative procedures, lay off inefficient staff, introduce automatic customs procedures, make State Fiscal Service subordinate to the Ministry of Finance) in order to start the implementation of the plan of Jan 1, 2016 By the end of April 2015 No plan
Tax reform, transfer pricing, electronic system for VAT administration By the end of 2015 The respective laws were adopted (1, 2)
Entrepreneurs using simplified taxation system will have to use cash registers Since July 1, 2015 The law was adopted, but entrepreneurs oppose the cash registers
All large taxpayers will be transferred to the single Large Taxpayers Inspection. By Jan, 1 2016  Transferred
The agricultural sector will pay VAT on the general basis From Jan 1, 2016
To submit to the parliament amendments to the Tax Code aimed at tax base expansion, making PIT more progressive, expansion of the base and raiding property tax rates, new taxation regime for extraction industry By July 1, 2015 Tax reform is under way, however currently there is only a collection of ideas
Budget process reform Implement medium-term budgeting Since 2018
Review accounts of state entities in commercial banks, close unnecessary accounts and create a payments planning unit within the Ministry of Finance or State Treasury Undefined
Eliminate the differences between protected and unprotected budget items Undefined
Limit the newly issued state guarantees of commercial debt to 5% of the sum of state debt increase Undefined The 5% limit was included into the Budget Code

Except the internal reforms, the Memorandum envisages restructuring of the state foreign debt as well as external liabilities of the state-owned enterprises. The government actively negotiates with investors, but for now only the restructuring of the state-owned Ukreximbank bonds has been agreed upon. To strengthen the government bargaining position, the law was adopted providing the government with the right to impose a moratorium on external debt payments.

Energy sector

Today Ukraine is one of the most energy inefficient countries in the world. For example, according to the World Bank data, Ukraine produces 2.8 times less GDP per unit of energy use than Poland, and 3.7 times less than Germany. This can be partially explained by the high share of the shadow economy in GDP. However, a more important reason for this is a complete mess in the energy sector, where a large part of energy resources are not accounted for, are lost during transportation, or simply wasted. As we don’t value things what we get cheaply, the majority of people do not realize the true price of the “cheap energy”. For example, in 2014 Naftogas financing exceeded the Defense Ministry budget by 3.5 times and the Health Ministry budget by 10 times. In 2013, subsidies for the coal mining industry were equal to the financing of all higher educational institutions.

The energy sector reform plan includes three components – market tariffs, with no hidden subsidies, strict accounting, and targeted support of the poor. The need to raise energy tariffs has been explained by the [broad] Government on numerous occasion – for example, see a recent interview of the Naftogas Head. Planned energy sector reforms are primarily concerned with the gas sector:

Measure Deadline Outcome
Adopt the gas sector reform plan (Split Naftogas into gas transportation, storage and sales, audits of regional gas distributors, installation of gas meters along the entire supply chain) By March 1, 2015 The plan was approved in March
Cancel the decree that ordered 170 companies to buy gas exclusively from Naftogas, avoid such decisions in the future End of February 2015 Cancelled
Submit to the parliament legislation amendments aimed at improving the collection of payments by Naftogas (remove the moratoria that protect energy companies from mandatory collection procedures, disconnect the consumers that do not pay for gas) By March 31, 2015 The law was signed on June 3, 2015
By April, 2017 retail prices on gas and heating will be raised to the level of import prices.At the first stage, prices were raised to UAH 3,600 per 1,000 cubic meters for those who consume less than 200 cubic meters per month and to UAH 7,178 for those who consume more, and also use gas only for cooking and water heating (i.e. in apartment buildings). Average increase was 280%. From April 2015 National Commission for State Energy and Public Utilities Regulation raised the tariffs for gas (1, 2) and electricity (1, 2)
Publish the Naftogas audit: for 2012 – 2013 – by the end of March 2015, for 2014 – by the end of July 2015; audit of Naftogas accounts receivable – by June 30, 2015. By the end of July, 2015 Naftogas published consolidated financial statements for 2012 -2013, however they are not very informative
A law on natural gas market should be adopted (free access to pipelines, rules for tariffs setting by the regulator, liberalization of prices) By the end of April 2015 The Law “On natural gas” market was adopted
Install gas and heat meters in all households (now only 36% of households have heat meters installed, and gas meters are installed mostly by large consumers), pay for the gas and heat based on actual rather than normative consumption. By the beginning of 2016
Make legislative changes that will allow funds to be invested in installation of meters and individual heating of apartment buildings (with the help of IFC and USAID) Undefined
To introduce international management standards into state energy companies (Ukraenergo, Naftogaz, Energoatom, etc.). To privatize Centrenergo and other key producers. Undefined

Business climate and fight against corruption

There is no doubt that corruption is the main problem in our country. Moreover, as repeatedly noted, corruption in Ukraine is not episodic, as in developed countries, but rather systemic. In current conditions an optimal strategy for a Ukrainian citizen without informal connections is to give a bribe and quickly get a service from the state, or avoid punishment. The alternative is not to give a bribe and be kicked from one office to another for months or, for example, pay a fine that exceeds the size of the bribe.

The high priority of fighting corruption was acknowledged in the previously mentioned government program, Strategy of reforms – 2020. It is also acknowledged in a more detailed strategic document that is currently under development.

It is clear that it is impossible to place a policeman next to every civil servant. That is why the most effective method of fighting corruption is reduction of state functions, aka deregulation. For this purpose such measures are planned:

Measure Deadline Outcome
Implement the actions foreseen by the anti-corruption Strategy for 2014-2017 and the State program for the implementation of this strategy, including:
  • National corruption perception survey
Every year in March, starting in 2015 Only the level of perception of corruption by business was surveyed
  • Create Anti-corruption Agency
March 2015 The government decree was adopted
  • Appoint its head so that the Agency starts working by Jan 1, 2016
June 2015 Competition is in process
  • Submit to the parliament the new versions of the Laws “On the State service” and “On service at local self-government bodies” in order to adopt them in May 2015
April 2015 Draft laws (1, 2) adopted in the first reading
  • Draft the law on political parties financing (to adopt it in December 2015)
June 2015 Draft law was submitted to the parliament
  • Draft a judicial sector reform strategy to be implemented by 2019
May – June 2015 Ukrainian and European experts are working on the document
  • Adopt the draft law on the State Bureau of Investigation
June 2015 Adopted in the first reading
  • Adopt the law on raising transparency of Verkhovna Rada and local councils
August 2015
Adopt legislation on disclosure of information on final beneficiaries. By the end of March 2015 The law was adopted but the deadline for information disclosure was moved to September 2015
Forbid high-level officials to accept the gifts (except those with nominal value) or to receive any salary except what is stipulated by the Constitution. Undefined  
Adopt an action plan on deregulation and publish quarterly reports on its implementation and the regulatory effect evaluations By March 11, 2015 Action plan was approved, the first report was published  action
Adopt the law on investors rights protection By the end of March 2015 The Law was adopted and will come into effect on May 1, 2016
Organize National Anti-corruption Agency (appoint its head and provide a budget and an office) By the end of April 2015 The Head of Anti-corruption Agency was appointed on April 16, 2015, office was provided (3, Surikova Str.)
To adopt the amendments to the law on Anti-corruption Agency providing for:

  • External supervision (publication of annual report, monitoring of activity by experts with international experience)
  • The right to pursue investigation against all high-level officials, including former presidents, to get all information, including confidential information about bank accounts without a warrant
  • Careful selection and high salaries for workers of Anti-corruption Agency
Undefined Amendments were adoptedThe law that secures financing of the National Anti-Corruption Bureau and anti-corruption Committee was adopted
To take action on money laundering (make the appropriate changes to the law on the National Bank of Ukraine, to conduct trainings for financial institutions on identification of politically significant persons, to organize a permanent exchange of information between national anti-corruption bureau, NBU and the Sate Financial Monitoring Service of Ukraine On a regular basis

 Judicial system

Apparently, there is no need to stipulate the importance of a properly working judicial system for the existence of a democratic state guided by the rule of law – for the laws that are not enforced are useless – as well as the court orders which are not executed. However, judicial reform is perhaps most difficult because formally it is not subordinate to the government. Nevertheless, some measures for the legal system reform have been included into the Memorandum:

Measure Deadline Outcome
Adopt a law on the court system and status of judges. Submit it to the Venice Commission for evaluation By February 28, 2015By March 31, 2015 A new version of the law was adopted, and received a generally positive feedback from the Commission
Adopt a law on the selective increase of the court fees to double the annual revenue By the end of May 2015 The Law was adopted
Adopt a law on streamlining and easing the procedure and of bank accounts arrest By the end of August 2015
Adopt the law on the private execution agent By the end of September2015

Restructuring of state-owned enterprises (SOE)

Of Ukraine’s nearly 3,400 state-owned enterprises only a little over a half are operating and the majority of those are unprofitable. In 2014 the subsidies to state-owned enterprises (without Naftogas) amounted to 2,5% of GDP, and dividends from them were only to 0,2% of GDP (data from the Memorandum). Therefore, it makes sense to sell the underperforming companies, except for those important for the national security – at the least to reduce state subsidies to loss-making SOE. To remove this “deadweight” from the state budget the following measures are foreseen:

Measure Deadline Outcome
To create a department within the Ministry of Economic Development and Trade that would be responsible for drafting the SOE reform strategy and development of the system of fiscal risk management.Strategy must be approved by the end of March By the end of February 2015 Strategic directions for reform are presented here and here
Prepare a list of the largest 50 state-owned enterprises and their main financial indicators (revenues, profit/loss, payroll, budget subsidies, dividends etc.). By the end of March2015 Report on the Top-100 state-owned companies and their financial statements were published
Prepare the assessment of fiscal risks of state-owned enterprises; introduce a monitoring and reporting system on them. Define Top-30 state-owned enterprises by fiscal risk (Ministry of Finance and Ministry of Economy) By the end of April 2015 Fiscal risk assessment is provided in the Top-100 SOE report
Define 30 “pilot” state-owned enterprises for restructuring By the end of April 2015 Not defined
Adopt a plan for improvement of SOE-related legislation By the end of May 2015 No plan
Create a database of the 50 largest state-owned enterprises and a comprehensive report on their economic performance.Later, create a database of all state-owned enterprises and publish annual reports on their economic performance By the end of June 2015
Make a list of all state-owned enterprises breaking them down into commercial and non-commercial ones By the end of July 2015
State property inventory: to make a list of real estate owned by state authorities (Ministry of Economy and State Property Fund of Ukraine) By the end of August 2015

Conclusion

Ukraine implemented the majority of measures foreseen by the Memorandum. However, these reforms are only a necessary minimum that will “keep Ukraine afloat”. The “shock therapy” experience of other Eastern European countries suggests that to switch into a stable economic growth path, one should implement more rapid and sweeping reforms. It would not only improve the life of Ukrainians already in a year or two, but also attract a new wave of foreign investment. Current pace of reforms induces “weariness from Ukraine” syndrome abroad and “nothing has changed” position within the country.

The article was published also by Ukrainska Pravda.

Ukraine: Eight Required Steps from the Balkans to Poland

President Poroshenko’s first year in office has demonstrated an evolutionary approach to reforms won’t work. It has to be revolutionary.

To judge President Poroshenko’s first year in office, we first need to clarify what we should take as a benchmark and what scope of responsibility we should consider.

The President rightly says that, in accordance with the constitution, he is primarily responsible for security and foreign policy. Russia’s aggression against Ukraine has forced Mr. Poroshenko to devote the lion’s share of his time and energy to these two domains. However, since assuming the status as informal leader of the largest parliamentary faction last November, Mr. Poroshenko has also become responsible for selecting and appointing heads of parliamentary committees, government ministers, fiscal and law enforcement authorities, judges, regional governors, and so on. This means that he, in company with the Prime Minister, should take his fair share of responsibility for managing the economy, battling corruption, breaking up domestic oligarchy, and, ultimately, ensuring the success of structural reforms.

Without a doubt, comparing Mr. Poroshenko with any of the previous Ukrainian presidents casts him in a favorable light. I came to realize Mr. Poroshenko’s true potential back in early 2012 when we met several times ahead of his appointment as economy minister to discuss Ukraine’s economic and investment environment and priority tasks for him in the government. Mr. Poroshenko’s presidential victory in May 2014 clearly boded well for the business climate in our country.

However, Russia’s annexation of Crimea followed by the war in Donbas and Russian economic pressure highly raised the bar of success for the President. What can be done to prevent these challenges having devastating impact on the economy and banking system and the confidence of businesses and the general public? My answer is, roll up your sleeves and charge ahead with sweeping reforms the way Leszek Balcerowicz did in Poland, Vaclav Klaus in the Czech Republic and Mart Laar in Estonia in the early 1990s, Mikulas Dzurinda and Ivan Miklos in Slovakia in the late 1990s, and Mikheil Saakashvili and Kakha Bendukidze in Georgia in the 2000s. In my view, if the current Ukrainian leadership, including the President, are ever to deserve being viewed as reformers on par with the aforementioned leaders, the following eight reforms must show tangible progress in the coming months:

  1. Combatting corruption. In Mr. Poroshenko’s own words, corruption begins at the top. I fully agree and am confident that since the general population is aware of numerous cases of corruption, both the President and Prime Minister should be well aware, too. And recalling everything that was said, at Maidan and later on campaign trail, about zero tolerance for corruption, numerous officials should already have been punished. The President said it very well last year by quoting Lee Kuan Yew in an address to parliament presenting his nominee for Prosecutor General, Vitaly Yarema: “Start with putting three of your friends to jail. You know why you are jailing them, and they know why.” Unfortunately, the most vivid recollection of Mr. Yarema’s following eight months in office was that of the extortion of businesses continuing unabated. Two of my investments are still putting up with post-revolutionary harassment by state prosecutors.
  2. Public administration reform. It’s still a path barely trodden, despite the famed Eastern European reformers putting it straight to the government in March last year: cut public agencies’ staff many-fold, hold examinations for the remaining employees and, keeping the original payroll, hike their salaries. This, along with ensuring the principle of irreversibility of punishment for wrongdoing, will reduce the incentive to engage in corruption. In China, the authorities take government bureaucrats on prison tours to show them jailed ex-officials. In Ukraine, we have no one to show — those who were caught taking bribes, got away with it by bribing either prosecutors or judges.
  3. Judicial and law enforcement reforms. As the late Kakha Bendukidze advised, there can only be one approach to this realm, that of a complete reset. So far, we can only talk about a genuine attempt to reset Kyiv’s traffic police, or some 1,500 people in the 260,000-strong Interior Ministry.
  4. Nominations for key posts. A number of truly capable appointments aside, the practice of selecting subservient and dependent rather than professional candidates remains widespread.
  5. Deoligarchization. Business and politics must be separated. A businessman moving into politics must either sell his business or entrust it to an independent manager. I would also apply this rule to television channels and other media.
  6. Deregulation. Parliament must enact legislation on the regulatory guillotine. Without it, corruption and red tape cannot be eradicated, considering that Ukraine is arguably the most regulated economy globally.
  7. Privatization. I have no misgivings about selling off state assets and liberalizing the land market. It’s universal knowledge that the state is a poor manager. In Ukraine, over 6 million people were awarded land deeds 15 years ago, and I don’t see why they cannot use them as they wish. I don’t buy the argument that people will sell their land on the cheap — it’s the same as placing a ban on selling private apartments until they become as expensive as London real estate.
  8. Democratic elections guided by new rules. Ukraine badly needs a new electoral system based on open-list proportional representation as well as legislation on political funding. Parties that make it into parliament or win a percentage of votes above a certain threshold should receive public funding and be subjected to strict reporting rules. This would be instrumental in reducing the political influence of oligarchs and other disreputable sponsors, practice that lies at the heart of Ukrainian corruption. Holding local elections under new rules this fall (which, by the way, is one of the current parliamentary coalition’s public commitments) and giving newly elected mayors and local deputies additional powers in the framework of decentralization is nothing short of crucial.

What if no convincing progress is made on the above points? Well, in that case Ukraine will continue to limp along towards its European dream the way the less successful Balkan states have done, prodded by the stick and carrot of western creditors and governments. The gravest danger is that the very idea of European integration could be discredited as a result. This is exactly what has befallen neighboring Moldova, where popular support for integration with the EU has sunk from 70%, Ukraine’s current level, to below 40%. This, without overstating, would be a catastrophic scenario for Ukraine. And the authorities can still forestall it if they, by following the example of the people at Maidan, finally embark on changing the country by means revolutionary rather than evolutionary.

Index for Monitoring Reforms (IMoRe). Release 8

Pay attention! We have revised methodology for Index of monitoring reforms. Changes concern two directions. Deregulation and competition policy were excluded from Governance and Anti-Corruption sub-index

This sub-index now includes fighting corruption, decentralization, public administration and provision of public services. At the same time, Foreign Trade sub-index was expanded and became Industrial Organization and Trade Policy, which includes deregulation, competition policy and foreign trade. The previous IMoRe values will be recalculated in accordance with the new methodology in the next round.

The Index is calculated once in two weeks based on an expert survey. The IMoRe value for the 8th monitoring period (April 6th – 19th, 2015) totaled +0.9 points out of the possible range from -5.0 to +5.0 points. The pace of reform decelerated notably. While changes in governance, anti-corruption and deregulation had a positive impact on Index value, absence of significant events in Public Finance and Energy Independence areas slowed down the index pace.

Chart 1. IMoRe dynamics

Chart 2. IMoRe and its components in the current round

Issue 8: Moderate progress in governance, anti-corruption and deregulation

The IMoRe value for the 8th monitoring period (April 6th – 19th, 2015) totaled +0.9 points out of the possible range from -5.0 to +5.0 points. The pace of reform decelerated notably. While changes in governance, anti-corruption and deregulation had a positive impact on Index value, absence of significant events in Public Finance and Energy Independence areas slowed down the index pace.

In the 8th round experts assigned the highest grade to the introduction of online service by the Ministry of Justice. For a fee that can be paid by a banking card online, anyone can get an extract of information from the Unified State Register of legal entities and individual entrepreneurs. Experts emphasized that introduction of this online service significantly lowers business costs and reduces opportunities for corruption. This reform received +5.0 points (a combined grade for this reform as it was also included and evaluated within “Governance and Anti-Corruption” sub-index), whereas Industrial Organization and Trade Policy sub-index scored +2.0 points overall.

Chart 3. Value of IMoRe components and number of events April 6 – April 19, 2015

Governance and Anti-Corruption section received +1.5 points in the last monitoring period as (in addition to creation of online service mentioned above) experts also gave +2.0 points to the law on reforming the internal affairs services. Moreover, the news about the transfer of functions from The State Agency for Land Resources of Ukraine (being liquidated) to The State Service of Ukraine for Geodesy, Cartography and Cadaster scored +2.0 points, since experts welcomed a decrease in the number of government agencies. Experts also assigned +1.5 points to a reform that allows an accelerated real estate registration procedure (within a 3-5 day period) for a double fee – it is believed to improve the quality of public services.

In the “Monetary policy and financial markets” section, experts positively assessed the establishment of the Bank Audit Committee – this event received +2.0 points. Survey participants noted that the decision will strengthen the auditors’ accountability, improve the quality of bank audits, and consequently enhance the credibility of financial statements. Yet, given lack of other notable events, “Monetary policy and financial markets” section was awarded 1.0 point.

There were no noticeable events in Public Finance and Energy Independence section over the last monitoring period (April 6th-19th), implying 0.0 point for each of these areas.

(Please see charts on the next pages and on the website http://imorevox.in.ua/?page_id=577http://imorevox.in.ua/list_rounds.php)

Note: Index for Monitoring Reforms (iMoRe) from VoxUkraine aims to provide a comprehensive assessment of reform efforts by Ukraine’s authorities. The Index is based on expert assessments of changes in the regulatory environment in five areas:

  1. Governance and Anti-Corruption
  2. Public Finance and Labor Market
  3. Monetary Policy and Financial Markets
  4. Industrial Organization and Foreign Trade 
  5. Energy Independence

For details please visit imorevox.in.ua.

VoxUkraine is a group of global economists and members of the Ukrainian policy community who are working on reforms in Ukraine. The goals of VoxUkraine are to promote research-based policy analysis and commentary on economic developments in Ukraine, to formulate a systemic approach to reforms, to provide high-quality discussion platforms, and to integrate Ukraine into the global network of economists and public policy leaders.

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Index of Reform Monitoring

What Principles should guide the coalition government?

This Statement was prepared and signed by members of VoxUkraine Editorial Board, Advisory Board, and its Contributors

On November 21, 2014, exactly one year after the beginning of Euromaidan, five parties elected to Ukraine’s new parliament signed a coalition agreement. Three of the five parties in the coalition did not exist a year ago; the other two were lingering on the margins of politics.

The signing of the coalition agreement is in itself  positive; the failure to form a similar pro-reform coalition in June 2006 stunted Ukraine’s political, economic and military development and put the country on the brink of survival. That failure resulted in a loss of thousands of innocent lives, annexation of major swaths of the country’s territory, and enormous hardships for millions of citizens. We are glad that history did not repeat itself, for the costs of another political failure would have been catastrophic. Ukraine now has a pro-reform coalition and, as of December 2, 2014, a new coalition government.

Nevertheless, we believe that neither the coalition agreement nor the coalition government is sufficient to lead Ukraine out of its current predicament. The coalition and its government need to regain the trust of its citizens by proving to them that they serve the broad interests of the Ukrainian people rather than those of a few powerful clans and political groups. We believe that in order to regain this trust, politicians and government officials should agree on a set of general principles that govern the reform process in the country. Without a commitment to such principles, any action plan is doomed to not be trusted by the people and, thus, fail.

We suggest the following 10 commandments that should guide the legislative, judicial, and executive branches in Ukraine.

  1. Serve Ukraine, not your own personal interests. Laws and appointments should be for the benefit of Ukraine, not a payment for political or financial support.
  2. Follow the rule of law and only the rule of law. Disputes must be settled in the courts according to an established law, and courts and government institutions will be made accountable to the public rather than to politicians.
  3. Commit to deregulation and decentralization. At last, give the citizens their due rights and responsibilities. They will know how to govern themselves better than any central authority ever will.
  4. Be responsible for your failures. Publicly commit to a few specific objectives, identify those responsible for implementing them, and set up the timeline for implementation. Be public about failures and the reasons for failure.
  5. Protect the checks and balances. Every branch of government should have independent powers and areas of responsibility, and should be separately held accountable to the public.
  6. Agree to zero tolerance of corruption. Every party of this coalition must agree to be intransigent towards corruption starting with its own members. Any law/reform passed should include specific provisions of how to tackle corruption in the area of that law/reform.
  7. Regain legitimacy of the Parliament and the State. Members of the coalition must participate in the Rada sessions and vote in person. Key governmental decisions must be communicated clearly and proactively, debated publicly and the interests of key stakeholders, including public at large, must be respected. There should be no murky deals behind closed doors. The commitment to transparency must be paramount.
  8. Protect the freedom of speech, the freedom of press, and the right of citizens to express themselves. Each coalition member must protect the freedom of expression, independence of mass media, and whistleblowers.
  9. Stop making excuses. The war, non-cooperative parliament, corrupt judges and such should not be used as excuses not to conduct radical reforms. They are a direct consequence of a lack of reform, not the other way around.
  10. Equal rights. Create a level playing field without exceptions. Everyone should be treated equally, from student to oligarch, from a person living in Crimea and Donetsk to those in Lviv, and regardless of ethnicity, race, sexual orientation, religious beliefs, and cultural values.

Undersigned:

Members of the editorial and advisory boards of VoxUkraine.org:

  1. Andrei Kirilenko
  2. Yuriy Gorodnichenko
  3. Olena Bilan
  4. Tymofiy Mylovanov
  5. Dmytro Sologoub
  6. Tom Coupe
  7. Oleksandr Talavera
  8. Oleksandr Zholud
  9. Natalia Shapoval
  10. Ilona Sologoub
  11. Zoya Mylovanova
  12. Kateryna Dronova
  13. Volodymyr Bilotkach
  14. Dmytro Boyarchuk

Contributors to VoxUkraine.org:

  1. Oleh Havrylyshyn
  2. Mariya Sydorovych
  3. Olena Nizalova
  4. Agnieszka Piasecka
  5. Victor Maziarchuk
  6. Irina Paliashvili
  7. Vadym Volosovych
  8. Dmytro Ilin
  9. Anna Pechenkina
  10. Sergii Meleshuk
  11. Denys Nizalov
  12. Yegor Grygorenko
  13. Maksym Cherkasenko
  14. Vitaliy Vavryshchuk
  15. Alex Nikolsko-Rzhevskyy
  16. Dmytro Goriunov
  17. Maxym Kryshko
  18. Alex Sobolev

The cost of (not) bailing out Ukraine

Despite securing sizeable financial support from western lenders in April — $27bn for two year — Ukraine is again finding itself precipitously close to a financial meltdown. Ukraine needs $12-15bn of additional external funding next year, on top of the $16bn scheduled under the current support package.

Were Ukrainian authorities solely responsible for pushing the country to the brink of disaster? Not this time. The government and the central bank met virtually all the requirements of the International Monetary Fund and other donors. The critical issue was that the financial support package approved in April assumed that a separatist conflict in eastern Ukraine, which had not yet turned into all-out war at the time, would end quickly and produce no significant damage. The reality proved less rosy. Ukraine effectively lost control over 7 per cent of its territory this year, including the Russia-annexed Crimea and the territory in the east controlled by Russian-backed rebels.

Western countries seem to question the expediency of providing additional financing to a country fighting with an external aggressor and plagued by domestic vested interests. But positive changes are there. The central bank, managed by a team of private sector professionals, is actively overhauling itself, downsizing its staff, cutting red tape and getting rid of non-core assets. The banking system is being cleaned from money-laundering institutions and unviable banks despite the continuing resistance of vested interests.

Ukraine’s incipient reform steps need strong external backing. If the West wants to keep Ukraine moving forward, it should provide sufficient additional support, strictly conditioning it on a broad-based and radical reform programme covering anti-corruption policies, business deregulation and other areas. In fact, western creditors stand to put a relatively small amount of money at risk. Even with the additional financing needs fully covered by official creditors, the west would need to disburse some $40bn to Ukraine, only a fraction of the $300bn (€240bn) spent to bail out Greece.

But the cost of inaction could be much higher, and will come in non-monetary form. Without additional aid, Ukraine will hardy be able to avoid a financial meltdown and a new wave of social unrest. This would give Russia another ideal opportunity to regain its grip on Ukraine and ultimately win its geopolitical showdown with the west.

Full text was published by Financial Times (free access upon registration)

Deregulating Ministries in Ukraine?

The new Ukrainian Parliament was elected on October 26, 2014. About a month later, five parties in the new parliament formed a coalition and appointed a new government consisting of Prime Minister and 17 ministers.

In their political programs, the parties have committed to economic and institutional reforms, among which deregulation is one of the top priorities. Reduction in the number of ministries could have been a part of deregulation. (VoxUkraine.org recently offered another rationale for elimination of some ministries and state agencies – reduction of the budget deficit.) The coalition, however, has chosen to keep all the existing ministries and introduce a new ministry of information.

VoxUkraine has conducted a non-scientific and simplistic survey on Facebook about which ministries in Ukraine can and should be eliminated as a part of deregulation. The survey is non-scientific because the Facebook audience is not random. The survey is conceptually simplistic because it did not allow the respondents to respond by suggesting to merge or reorganize the ministries.

The survey was open to public on Facebook and was promoted to people who liked VoxUkraine page, their friends, and friends of members of VoxUkraine. There have been 159 answers over 10 days. Here are the results.

VoxUkraine survey. Which ministries can and should be eliminated?

(Respondents could choose as many as they wanted.)

  1. Ministry of sports and youth – 71.7%
  2. Ministry of regional development – 69.8%
  3. Ministry of ecology – 55.3%
  4. Ministry of culture – 53.5%
  5. Ministry of infrastructure – 50.9%
  6. Ministry of agriculture – 42.8%
  7. Ministry of social policy – 34.0%
  8. Ministry of economics – 32.1%
  9. Ministry of energy – 27.0%

The remaining ministries are justice (7%), finance (7%), foreign affairs (2%), interior (5%), health (12%), education (10%), and defense (4%).

One possible interpretation of these results is that they measure public satisfaction with performance of these ministries and public perception of their importance.

In any case, it is interesting to observe that the ministries could be split in three groups. The first group, which can be called, CORE ministries, includes justice, finance, foreign affairs, interior, defense, health, and education. These ministries received very low scores (which is good), between 4% and 12%. These are the ministries providing core functions for existence of Ukraine. The second group, which can be called SERVICE ministries, includes energy, economics, social policy, and agriculture. These ministries received intermediate scores between 27% and 43%. These ministries are perceived to be important by a substantive share of the respondents, while others are either dissatisfied with their performance or believe that their functions are not critical. Finally, the most problematic is the group of ministries that received scores above 50% and as high as 70%. The public either does not understand the functions of these ministries, is extremely dissatisfied with their performance, or believes that these ministries could be reformed, merged, or subordinated as agencies to other ministries in order to increase their efficiency.

Regardless of the interpretation, the results suggest that ministries differ in the amount of public support and that these differences can be drastic. It can be valuable to explore the reasons for dissatisfaction with the structure and the performance of the ministries in the top-6 group. Such analysis can suggest an optimal way of restructuring the ministries of Ukraine, their functions, and responsibilities.

But how many ministries are there in other countries and what those ministries are?

There are 21 ministries in Russia, 20 ministries in China, 19 ministries in Georgia, 17 ministries in Poland, 15 ministries in Germany, and 15 secretaries in the United States. Thus, the number of 17 ministries is not out of line.

The CORE ministries (justice, finance, foreign affairs, interior, health, education, defense) are present in all of these countries.[1] The SERVICE ministries (energy, economics, social policy, and agriculture) are present in all of these countries, except that there is no ministry of energy in China and Poland, and it is combined with economy in Germany.

The remaining ministries (sports, regional, infrastructure, ecology, culture) are present in many but not all of the countries: Environmental protection is delegated to the agency level in the USA, there is no ministry of regional development in Poland, Georgia combines regional development and infrastructure in one ministry, there is no sports ministry in China and the USA, and there is no culture ministry in the USA. Interestingly, all these ministries except infrastructure are absent in Germany.

Overall, it appears that the existing structure of ministries is not that different from those of China, Russia, Georgia, and Poland, while there are slightly more differences with Germany and the USA.  Georgia has ministries of Diaspora, Displaced People, Euro-Atlantic Integration, and Reconciliation, while Russia has ministries of Crimea and Far East. On the other hand, ministry of information is present only in Russia and China.

The number of ministries in Ukraine is consistent with that in other countries and the structure of the Cabinet (with the exception of Ministry of Information) is also quite similar. At the same time, some of the ministries are perceived unimportant by the surveyed people. This, in our view, signals that if the new government wants to fight bureaucracy and raise effectiveness of public administration, dubious ministries are first targets to have their functions audited. Based on our results, the government should start the process with Ministry of sports and youth or Ministry of culture and determine if these ministries should continue to be dissolved/restructured/merged with other ministries.

Note

[1] In China, there is no Ministry of Health but a National Commission on Health Issues.