Turbo-mode of the Ukrainian Government: Reforms in the 4th Quarter of 2019

The ‘turbo-mode’ has become a commonly used word to describe a rapid (often with violation of procedures) voting for draft laws by the new Ukrainian parliament. The speed has born its fruit – in the 4th quarter the Reform Index value did not fall below 0.7 points and peaked at 1.7 points. The last time the index was that high in 2015. It reached the same or higher value only four times in its history.

During the 4th quarter of 2019, 71 reforms were evaluated by Reform Index experts. The average score for a reform was 1.1 points. The reforms mostly affected Business Environment and Public Finance. The lowest number of reforms was observed in the Energy sector. The Governance sphere “caught up” two anti-reforms and became the most controversial. 

The majority of reforms were conveyed by the Verkhovna Rada – 55 new laws. The Cabinet of Ministers initiated 10 regulations, the National Bank of Ukraine – 6. Three anti-reforms were observed during the period.

The main events within the 4th quarter of 2019 are:

• the split law (Reform Index №120) which tightens the regulation of non-banking financial institutions and implements a common approach to the control over all financial sector companies. The law liquidates the National Financial Services Market Regulation Commission that previously was overseeing the insurance and leasing companies, credit unions, credit bureaus, pawn shops, non-governmental pension funds, construction financing funds, and distributes its powers between the National Bank of Ukraine and the National Securities and Stock Market Commission. The law received +3.0 points. 
• the investment incentive law which is supposed to make Ukraine more interesting for investors and presumably move the country 15 steps up in the Doing Business ranking. The law cancels contributions to the local budgets by construction companies, sets up the institute of trusted ownership, establishes compensation for the minority shareholders (Reform Index №119). The law received +4.1 points from Reform Index experts.
• the law on the use of electronic cash registers and checks in trade, catering and services (Reform Index №120). The previous legislation defined a list of devices that business can use to register cash payments. Now, along with these devices, businesses can use cash register software (which should be provided by the supervisory authority for free), and instead of paper receipts issue electronic receipts to their customers. The law also hardens sanctions for violations of the rules of receipt provision. Reform Index experts believe that this law will have a positive effect on the efficiency of the tax system and gave it +2.5 points.

Anti-reforms

In the 4th quarter, three laws got negative estimates from Reform Index experts. 

1. The law on the legal status of the National Energy and Utilities Regulatory Commission (NEURC), got -1.8 points, since it lowers transparency and independence of the Regulator.
2. The law on cancelling the immunity of MPs got -1.0 point. This Law was intended to simplify the procedure for bringing MPs to criminal responsibility. However, instead it made them dependent on the Prosecutor General who is in turn controlled by the president. Thus, the law bears risks to MPs independence while providing no clear mechanism of punishment for their misdeeds
3. Reform Index experts had reservations on the law that allowed MP aides (consultants) to simultaneously hold other jobs or run businesses. MPs aides have substantial powers – they can freely enter not only the Parliament premises but also any other government institutions and even state-owned enterprises. One MP can have up to 5 paid aides and up to 30 volunteer aides. The main risk is that this opportunity will be used for lobbying. Adoption of a proper law on lobbying has been discussed for over a decade without any result. The law got -1.0 point.

Experts’ opinions are polarized over two laws. Final grades (the medians of individual grades) for these laws are 0.0 points, but the laws received both positive and negative grades.

• the law on the remuneration (cashback) for buyers who report violations of receipt issuance rules (Reform Index 120). This law was evaluated under two spheres – Business Environment (-2.0 points) and Public Finance (+2.0 points). Thus, total grade for this law is 0.0. On the one hand, the law extends the scope of private entrepreneurs that must use cash registers.Thus the law provoked protests from small businesses who demanded its cancellation. On the other hand, the law widens the tax base and thus will positively impact the government’s ability to raise tax revenues.
• the law on “rebooting” of the State Investigation Bureau (Reform Index 125) (range of individual grades from experts -2.0 — +2.0 points). On the one hand, adoption of this law resolved the problem of ‘Maidan Investigations’ which could no longer be processed by the General Prosecutor Office – the SIB picked up the cases and employed prosecutors who investigated them. On the other hand, the law undermines independence of the SIB, making it effectively subordinate to the president and thus highly politicized. Taking into account the wide powers of the SIB, this may result in usage of this instrument against political opponents. 

Other notable reforms

???? A significant progress was observed in the Business Environment sphere. For the last 3 months of 2019 there were 25 important changes. They mainly touched three areas: 

1. harmonization of Ukrainian legislation with the EU laws, 
2. simplification of business regulations, strengthening of business protection against raiders and unlawful actions or inactivity of regulatory authorities, and 
3. higher liability for violation of laws and regulations.

In October 2019, Ukrainian enterprises were allowed the voluntary use of national standards (Reform Index 119). Previously standards were mandatory, which was a relic Ukraine inherited from the USSR. The EU uses voluntary approach to standardization, and by signing the Association Agreement Ukraine committed to implement this approach. This is one of the conditions that will allow Ukraine to join ACAA agreement and to receive the so-called industrial visa-free regime.

Ukraine is aiming to simplify the customs’ procedures for reliable companies. They can obtain the status of an authorized economic operator (Reform Index 121) and fast-track through the border, i.e. skip the line while going through customs formalities, use special lanes, self-seal goods to be moved across the border etc. One more regulation related to customs, the Law 202-IX, not only protects intellectual property rights during movement of goods across the border of Ukraine but also defines and allows so-called parallel imports (Reform Index 122). Now, in order to bring products to Ukraine legally, it is not necessary to be an official dealer of the original manufacturer as long as the products are manufactured by a company that holds the intellectual property rights for it or has the permission of the original manufacturer.

Yet another law simplified the work of accountants (Reform Index 121). It allows to pay all taxes and fees except for VAT and excise taxes to a single account.

???? Notable positive changes were detected in the Public Finance sphere. 18 new regulations improve social protection and verification of social payments, administration of government debt, and procurement. 

The problem of verification of social payments is quite acute for Ukraine. For example, the Ministry of Labor and Social Policy found out that in January 2019, more than UAH 32 million UAH (3.5%) of state social assistance was provided to citizens who falsified the data in their applications. The procedures and mechanisms of verification are set out by the special law (Reform Index 124). To implement the law, in December 2019 the Government launched the State Social Service created at the end of 2018. The Social Service should start working in 2020. It will verify and control social payments. Before that, local social protection authorities were performing inspections themselves, which clearly created a conflict of interest and incentives for them to not find any violations. Simultaneously the government will continue to monetize subsidies – the rules for that were included into the State budget-2020.

To improve the government debt management, the Cabinet of Ministers established a special agency – the Debt Management Office. It will implement debt issuance and management functions previously performed by the Ministry of Finance. 

Public procurement procedure was improved this fall. The law 114-IX (Reform Index 120) introduced personal responsibility for violations of procurement law, a new effective anti-dumping tool, and improved the mechanism of judicial appeal. This law is a step towards harmonization of Ukrainian public procurement with international standards. In addition, the government decided to use Prozorro.Sale system for sale of debtors’ property (Reform Index 119). This decision opens the door for implementation of the new Bankruptcy Code adopted in summer-2019.

 ???? During the 4th quarter of 2019, 20 significant changes were recorded in the Governance sphere. They affect anti-corruption, state property management, decentralization, selection of civil servants and work of directorates.

The National Anti-Corruption Bureau and the State Bureau of Investigations received the right to wiretap suspects without permission of the State Security Service (SBU) and court orders (Reform Index 120). Anti-corruption CSOs and Ukraine’s international partners have been advocating for this change for years. Exclusion of the SBU and courts from the investigation significantly lowers the probability of leakage during investigation of anti-corruption crimes and crimes of top-officials.

National Agency of Corruption Prevention, although created in 2015, did not function properly because of its organizational design – decision-making there had to be taken by the consensus of all five members. The new law gives the decision-making power to the Agency director selected via an open competition with participation of international experts (Reform Index 120). The agency is responsible for control of e-declarations submitted by Ukrainian civil servants.

The new government is determined to find a more efficient management for state-owned property than the state (Reform Index 120). This will be done in two ways – privatization and concessions. In the 4th quarter of 2019, the parliament adopted laws that considerably simplify both. The first law cancelled the list of objects prohibited from privatization (however, other laws still ban privatization of strategic objects such as weapons producers or nuclear power plants and natural monopolies such as gas transit system or railroads). The new law on concessions is the third attempt to launch concessions in Ukraine (the first attempt was in 1999, the second one in 2018). Both of the previous laws were inoperational. Since recently two ports have been concessed, the third attempt may be more successful.

The decentralization process enters its final stage (Reform Index 124). This stage implies mandatory merger of communities that did not merge voluntarily during the last five years. To facilitate the process, oblast councils who often blocked mergers were excluded from it – now it’s totally the responsibility of the executive branch. 

The last but not least are the next steps in the civil service reform.The Cabinet of Ministers decided to create directorates in all the Ukrainian ministries (Reform Index 124). Directorates will be tasked with specific policy-development projects. Since 2017, directorates (units responsible for policy development in support of the government strategic goals) were created in 10 pilot ministries. Their experience is quite inspiring. To attract more people with various experiences to the state agencies, the Cabinet of Ministers simplified the competition rules for civil servant positions (Reform Index 123). Today, even 0 points for solving a situational task does not prevent a candidate from competing for the position.

In the fourth quarter of 2019, the new parliament and government adopted a lot of reformist legislation. Although there were some anti-reforms, the majority of adopted legislative acts were positively evaluated by Reform Index experts.