At a recent meeting of international investors in Ukraine I listened to another government spokesperson rattle off an impressive list of reforms, I could not help but notice a disconnect between the rosy picture and the reality. Earlier that week, Sanofi Aventis claimed that a representative of the State Executive Service had hand-delivered orders to three banks serving the pharmaceutical company’s Ukrainian subsidiary to seize Hr 46 million from its accounts. Since July, Sanofi Aventis Ukraine has been stripped of Hr 180 million. One need not look to high profile examples of financial raiding to be dismayed at the state of the business environment in Ukraine. Despite millions of dollars spent on reforms, government development plans, and business clusters, the Ukrainian business community doesn’t feel itself much better off than under Yanukovich.
After years of reforms and “expert” input into legislation, has anyone asked businesspeople for their input as to the effectiveness of reform? Data points are relatively few because those running small and medium sized businesses in Ukraine are busy with their own affairs and reluctant to attract attention to their success. However, after spending some time in Kyiv talking to business owners and business associations that represent thousands of Ukrainian enterprises, the general feeling is that reforms have neither harmed nor helped them. A sad result, really, for the amount of time, effort, and money spent.
Top-down or bottom-up
After the Revolution of Dignity, local and international experts developed and implemented many legislative changes in a top-down manner that set these reforms up for failure. One example of a well-intentioned reform that has the potential to become a burden on business is electricity reform (Article 21, electricity market of Ukraine). The new law hands over a great deal of regulatory discretion to the electricity regulator (НКРЕКП), including the development of a method to determine the cost of connecting consumers to networks. If the regulator disregards this requirement or implements it in a way that negatively affects businesses, the law, for all its good intentions, will not work. Top-down reform might work in the aftermath of a major political revolution, but for the long-term success of Ukrainian markets and democracy, the reform process needs to start at the bottom by solving specific problems faced by businesses and citizens.
Businesses might not know how to fix what is wrong, but they can definitely tell you what is broken. In an alternative, bottom-up approach to regulatory reform, the Center for International Private Enterprise (CIPE) works with Ukrainian business associations, and Ksenia Lyapina, Head of the State Regulatory Service of Ukraine, to identify and address key impediments to doing business in Ukraine. To start the process, CIPE asks businesses to complain – this part is very easy – and CIPE then helps Ukrainian business associations to categorize their complaints to identify particularly troublesome areas of regulation. Then, using a modified M-Test methodology developed by CIPE and the Commercial Law Center, Ukrainian business associations assess corruption potential and opportunities for cost savings in local regulations. Through piloting the process in three regions, Ukrainian business associations have saved businesses and local governments nearly $250,000 annually in fees and administrative costs, while reducing the chances for corruption by eliminating duplicative or contradictory regulations.
Letting Ukraine Succeed
A fundamental truth is that entrepreneurs want to grow their businesses. They do not need the government’s strategic plans or ideas; they do need clear rules of the game and a court system that will stand up to attempts at raiding. Rather than come up with another development plan or cluster, the Ukrainian government should create a culture that lets its businesses grow. Ukraine is a country blessed with an abundance of natural resources and talented human capital. For Ukraine’s economy realize its full potential the government needs to stop trying to control business and start to support it.
Eric K. Hontz is a Program Manager for the Center for International Private Enterprise (CIPE). The views of the author do not represent those of CIPE.
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