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
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
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
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
“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.
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 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
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
For more information on Doing Business in 2006, please contact:
Dmitro Derkatch (380 44) 490 66 71/72/73
Larissa Shidlovskaya (380 44) 490 64 00
Irina Likhachova (1 202) 473-1813
Cell: (1 202) 247-7231, Email: email@example.com
For more information, please visit: www.doingbusiness.org
For more information on Business Environment in Ukraine survey, please
Tamara Sukhenko (380 44) 490 64 00
* 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.