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The Reform Index №167: connecting businesses to power lines and the financial stability of the gas market

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5 October 2021
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The Reform Index is +0.4 points for the period from August 16 to August 29, 2021, with possible values ranging from -5.0 to +5.0. In the previous round, the index was +1.0 points.

Chart 1. iMoRe Dynamics

Chart 2. іMoRe and its components in the current round

The law that streamlining procedure for connecting small and medium businesses to power lines, +2.0 points

The duration and cost of the process of getting connected to power lines are important indicators of how easy it is to do business in the country. The enterprises wanting to build new production facilities always need to be connected to the grid. According to the Doing Business 2020 ranking, connection process in Ukraine takes 267 days (in the high-income OECD countries, it takes 75 days) in average. The connection costs 3.5 times more than GDP per capita (in the OECD countries, it is 0.6 of GDP per person). Such duration and costs negatively affect the amount of investment required to start a business, as well as the investment projects’ implementation period.

Law 1657-IX of July 15, 2021, streamlines land relations and permitting procedures associated with connecting to the electrical grids. It introduces the “one-stop-shop” and simplified procedures for connecting to power lines for consumers of up to 1 MW. 

Resolution on converting dachas and garden cottages into residential homes via the Building Activities Register, +1.0 points

According to construction norms, dachas and garden cottages are garden-type houses or buildings for summer (seasonal) use. The law imposes some restrictions on the use of such houses, e.g. you cannot register your place of residence there. However, it is often the case that owners of such houses built them in accordance with the requirements for residential buildings and reside in them permanently. In this situation, it makes sense for the owners to convert dachas and garden cottages into residential homes and use them without restrictions.

Resolution  No.881 of August 18, 2021, simplifies the process of converting these cottages into residential homes and makes it possible to submit the necessary documents electronically.

The law on ensuring financial stability in the natural gas market, -1.0 points

Since 2016, the companies vested with the special responsibility to supply gas to the population have been accumulating debt to Naftogaz. The main portion of the debt was accumulated by the RGC (Regional Gas Company, or the so-called gas distribution networks, controlled by oligarch D.Firtash) and by “teplokomunenergos” (enterprises providing heat energy and utilities). Some of the teplokomunenergos’ debt could have arisen because, in certain periods, teplokomunenergos’ tariffs did not fully cover the cost. According to Naftogaz estimates, the total debt was UAH 93.3 billion as of August 31, 2021. 

To tackle this problem, the MPs passed Law 1639-IX of July 14, 2021, which introduced the restructuring of this debt. Furthermore, Naftogaz and teplokomunenergos will conduct a comparative analysis to determine the amount of debt that arose due to the differences in cost and tariffs. Because of the restructuring, the due date of depts will be rescheduled for the future, while a part of the debt could be written off. In particular, the debt will be written off that arose due to the differences in tariffs, fines, penalties, etc.  

Some experts assessed this law negatively, which resulted in an overall negative evaluation. This can be explained by several factors. Firstly, due to the restructuring, Naftogaz will not receive the funds necessary for the implementation of investment projects for the development of new fields and production of its own gas in the near future. Secondly, regular debt write-offs distort incentives when the non-repayment of debt becomes a rational behavior. Thirdly, it imposes an additional burden on the budget.

Chart 3. Value of іMoRe components and number of events

Reforms Index 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: Governance, Public Finance, Monetary system, Business Environment, Energy.

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