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Regulatory Reforms are Essential for Solid Business Development: World Bank Group Report. Immediate measures are needed to improve the business climate in Ukraine


IFC Kyiv
Larissa Shidlovskaya

Tel.: +380 44 490 6400

e-mail: lshidlovskaya@ifc.org


IFC Washington

Irina Likhachova
Tel.: +1 202 473 1813

e-mail: ilikhachova@ifc.org


Kyiv, September 16, 2005. -  The economies of the Commonwealth of Independent States (CIS) are increasing the pace of reform to help small and medium businesses generate more jobs. Georgia was the top CIS reformer and second in the World. But reforms in the region lag behind their Central European neighbors, and heavy legal burdens on business remain in most countries, according to a new report from the World Bank Group.

Doing Business in 2006: Creating Jobs, cosponsored by the World Bank and the International Finance Corporation, the private sector financing arm of the World Bank Group, finds that such reforms, while often simple, can create many new jobs. The report tracks a set of regulatory indicators related to business startup, operation, trade, payment of taxes, and closure by measuring the time and cost associated with various government requirements. It does not track variables such as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates.


The annual report finds that every country in the CIS improved at least one aspect of the business environment—among the highest rate of reform of any region. According to the report, Ukraine reformed two areas of business regulation.


Reforms in Ukraine

In the last year Ukraine made it easier to start a business. Specifically, the cost of starting a new business decreased from 17.6% of income per capita to 10.6%.  However, this improvement will not be sustainable unless the underlying requirements for starting a business are further simplified and the registration process streamlined.  The recent improvements were largely brought about by efforts of registration office to help entrepreneurs negotiate the labyrinth of requirements that remain.

Ukraine made access to credit easier by improving the regulations of credit markets with a new collateral law. The new law allows entrepreneurs to use a broader range of assets as collateral, and allows creditors to enforce collateral privately, without a lengthy court trial. Creditors now have first priority to the collateral if the debtor defaults.
Needed Reforms in Ukraine


According to the report, Ukraine could consider reforms in a number of areas such as taxation, licenses, property registration, labor regulation, and investor protection.


Ukraine has one of the most cumbersome taxation systems in the world. With 2,185 hours per year needed to undergo all necessary procedures to pay taxes, Ukraine is at the bottom of the list followed only by Brazil (2,600 hours) and is among bottom ten countries in the world in terms of the number of tax payments (84).


The cost of obtaining licenses in Ukraine is among the highest in Eastern Europe and the procedures are quite complex. In September 2005, Ukraine passed a new law to simplify the process of obtaining permits (please see below).


Another important area for reform is registering property. The overall process to secure property rights in Ukraine consists of 10 steps and takes 93 days. The cost to register property is 3.8 % of overall property value.  


Ukraine and other former Soviet countries have some of the highest social security payments in the world, higher than even in Western Europe. An employer in Ukraine has to pay 36% of a worker’s salary in social security payments. In addition, Ukraine has high costs of firing a worker (17 weeks of salary). These factors lead to a greater degree of informal employment, which means no social protection for employees at all.


On the Doing Business index of protecting investors, Ukraine scores in the bottom ten countries in the world. Poor protection of investors’ rights is typical of many of the transition countries. Some countries of the regions, however, such as Russia, made more progress on reforming this area recently.
“The costs and risks of doing business in Ukraine remain high, especially in the regional context.  Dramatic and immediate measures are needed to improve the business climate.”  – said Paul Bermingham, World Bank Director for Ukraine, Belarus and Moldova. – ““Immediate next steps should be to revisit the entire licensing, business registration and inspection regime and make operational the intent to simplify procedures.  Another important step will be to implement the law on permits which was recently approved by the Verkhovna Rada.  Over the longer term, consistent with the law on entrepreneurial activity, Ukraine should mandate a test of EU principles for all new.  We are pleased to note that the government has already started to address these issues, and hope that its initiative can be accelerated.”


On the overall ease of doing business, the report positions Ukraine at 124th place out of 155 countries surveyed by the report. The low ranking is due to slow progress of reforms in some of the key Doing Business indicators mentioned above.  

Business Environment in Ukraine: Presenting the Views of Ukraine’s Entrepreneurs

The World Bank Group, through its International Finance Corporation also conducts annual surveys of entrepreneurs in a number of CIS countries, including Ukraine. The Ukraine survey, Business Environment in Ukraine,   complements the Doing Business report by annually polling 3,000 local businesses to give an in-depth picture of regulation, directly from the viewpoint of entrepreneurs.


The conclusions of the 2005 Business Environment in Ukraine survey * are similar to those of Doing Business: the tax system and regulation of business through permits and inspections pose significant barriers to private sector development in Ukraine. According to Business Environment in Ukraine, the complexity of tax legislation results in two-thirds (63%) of firms having difficulty calculating their tax liability, while only 18% of all firms claim that they do not conceal revenue from taxation. The permits system is another barrier: each new firm must obtain an average of 3 permits to launch operations, while obtaining one permit takes over a calendar month and costs $175. Every third firm pays unofficially to obtain a permit, without necessarily meeting all issuance requirements. Meanwhile, 52% of all firms were found to be in violation of requirements during inspections, and were either sanctioned or paid inspectors unofficially as a result. These figures show that the current system of regulation through permits and inspections does not successfully prevent violation of the law by enterprises.


Partnering with the Government to Improve Regulation


In order to address such regulatory barriers, the International Finance Corporation, through its SME Policy projects in Ukraine and other CIS countries, provides assistance to government agencies in improving legislation, streamlining regulations, and improving cooperation with the private sector. In Ukraine, IFC assisted the government in drafting the Law “On the System of Permits for Business Activities”, adopted by the Ukrainian Parliament on 6 September. The new Law will significantly decrease the number of permits required for business activities in Ukraine, will diminish the ability of state agencies and municipalities to create new permits, and will greatly simplify procedures for obtaining permits for activities that do not pose heightened risk to society or the environment. IFC is now working directly with permit-issuing agencies to assist them in simplifying their issuance procedures and improving communication channels with entrepreneurs.

In addition, IFC in collaboration with the Council of Entrepreneurs of Ukraine at the Cabinet of Ministers drafted a law on protection of entrepreneurs during inspections. The draft law passed a public hearing earlier this month.
“Despite all difficulties for doing business in Ukraine, our survey results show that most firms look positively towards the future and expect the government to improve the business environment in the coming months.” – emphasized Elena Voloshina, Head of the IFC Operations in Ukraine.


Additional Information

 
Doing Business in 2006 updates the work of last year’s report on seven sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, registering property, getting credit, protecting investors, and closing a business. It expands the research to 155 countries and adds three new indicators: dealing with business licenses, trading across borders and paying taxes.


The new indicators in this year’s report further reinforce the overwhelming need for reform, especially in poor countries. The report finds that poor countries levy the highest business taxes in the world. These high taxes create incentives to evade, driving many firms into the underground economy, and do not translate into higher revenues.


The analysis also shows that reforming the administrative costs of trading can remove significant obstacles to exporting and importing.  Contrary to popular belief, customs paperwork and other red tape (often called “soft infrastructure”) cause the most delays for exporting and importing firms. Less than a quarter of the delays are caused by problems with “hard infrastructure” such as poor ports or roads. In Azerbaijan, for example, an entrepreneur would have to submit 18 documents and obtain 55 signatures to import goods. For manufacturers in developing countries, the administrative burdens of trading can pose larger costs than tariffs and quotas.


The annually published report gives policymakers the ability to measure regulatory performance in comparison to other countries, learn from best practices globally, and prioritize reforms. Now in its third year, the report has already had an impact on business environment reforms around the world.


“The Doing Business benchmarking has inspired and supported reforms in more than 20 countries, and since last year, nine governments have asked for their countries to be included in the Doing Business analysis,” said Caralee McLiesh, an author of the report.
The top 30 economies in the world in terms of the report’s ease-of-doing-business index, in order, are New Zealand, Singapore, the United States, Canada, Norway, Australia, Hong Kong/China, Denmark, the United Kingdom, Japan, Ireland, Iceland, Finland, Sweden, Lithuania, Estonia, Switzerland, Belgium, Germany, Thailand, Malaysia, Puerto Rico, Mauritius, the Netherlands, Chile, Latvia, Korea, South Africa, Israel, and Spain.
The Doing Business project is based on the efforts of more than 3,500 local experts – business consultants, lawyers, accountants, government officials, and leading academics around the world - who provided methodological support and review. The data, methodology, and names of contributors are publicly available online.


Online Media Briefing Center:


Journalists can access the material through the World Bank Online Media Briefing Center at http://media.worldbank.org/


Last year’s Doing Business in 2005 report and further information is available at http://www.doingbusiness.org

For more information on Doing Business in 2006, please contact:


Dmitro Derkatch (380 44) 490 66 71/72/73

Email:  dderkatch@worldbank.org


Or:


Larissa Shidlovskaya (380 44) 490 64 00

Email: lshidlovskaya@ifc.org


Irina Likhachova (1 202) 473-1813

Cell: (1 202) 247-7231, Email:  ilikhachova@ifc.org


For more information, please visit: www.doingbusiness.org


For more information on Business Environment in Ukraine survey, please contact:


Tamara Sukhenko (380 44) 490 64 00

Email: tsukhenko@ifc.org


* The annual survey “Business Environment in Ukraine” has been conducted by the International Finance Corporation since 1996. The aim of these annual surveys is to monitor barriers to SME development and to provide recommendations to the Government for improving the business climate. The survey is funded by the European Commission and the International Finance Corporation. The full text of the 2005 survey report will be available in November 2005 on www.ifc.org/pep and www.vlasnasprava.info. The International Finance Corporation carries out similar studies of small business in a number of other countries of the CIS: Uzbekistan, Georgia, Belarus and Tajikistan.