Editor’s Note: Former Georgian President and Odesa Oblast Governor Mikheil Saakashvili, now chair of the executive committee of the National Reform Council, writes periodic columns for the Kyiv Post.
When President Volodymyr Zelensky invited me to head the National Reforms Council in May, I enthusiastically accepted the offer. The responsibility is enormous, but I am confident that Ukraine is not only prepared for a free-market revolution but, crucially, that the best time to undertake it is now. We will succeed if we make Ukraine more prosperous and freer.
Since the fall of the USSR, officials have been making futile attempts to solve complicated issues with even more complex solutions. This flawed policymaking not only brings economic costs. Consistently high levels of corruption, investment lag, lack of certainty, and repressed economic freedom are reasons why, unlike the Baltics and Poland, we cannot proudly say that we freed ourselves from the Soviet past.
Ukraine is overly dependent on International Monetary Fund loans, and a beggar for funds from world organizations. To solve this problem, the Office of Simple Solutions and Results proposes reforms that could break this vicious circle.
Here are 10 steps that Ukraine should take:
1. Justice
According to the latest survey, over 70% of Ukrainians have no trust in the justice system. A fundamental, decisive, and fast justice reform should be prioritized. Changing judges won’t help — we have to overhaul the system.
We have to drastically reduce the number of courts, eradicate specialized courts, and introduce a new court control system. In order to digitalize the field of justice, the Office of Simple Solutions and Results has suggested moving key procedures such as filing lawsuits and paying court fees online. The Constitutional Court is an otiose institution that has disgraced itself many times, and we need to come together as a nation to collectively decide on the verdict for its actions.
In order to unload the courts, we also suggest using alternative dispute resolution tools such as arbitration courts and mediation. Additionally, if we could introduce jury practice in categories with special important and socially dangerous crimes and use English common law to solve investment disputes, this reform could be a mind-blowing success.
2. Privatization
Ukraine could earn $10 billion if privatization was upheld quickly and in a smart way. The annual losses of state-owned enterprises are Hr 184 billion, or $6.5 billion, according to an analytical note published by the Security Service of Ukraine. During the first meeting of the National Reforms Council, we presented the concept of accelerating and simplifying rapid privatization. State enterprises are an economic resource that has been neglected, and the longer we continue to turn blind eye to the potential ways of utilizing it — such as privatization — the more we lose in economic terms. Behind every state-owned enterprise, there is a deeply-rooted corruption interest. Transparent and clear rules of game that we are proposing can bring Ukraine billions of dollars. In order to help the economy, we need to take the risks.
3. Exit Capital Tax
Income tax is entirely corrupt, and fighting corruption is our main pursuit. Exit capital tax — a concept supported by Zelensky — is the innovative solution our country needs that would allow us to attract investment and elevate economic growth.
Such a tax was introduced in Estonia in 2000, a post-Soviet country known as the most attractive country for business activities. Under the exit capital tax, businesses will be exempt from paying 20% of their revenue to the state. Instead, they will be able to invest the money into their companies. Exit capital tax will also reduce tax pressure on business, make it easier to keep official records thereby opening access to credit resources. By abolishing the income tax and opting for exit capital tax, we will attract $4–6 billion of additional investment per year.
The draft law should be registered in parliament.
4. Subsoil use
Currently, mining is carried out only on 35% of all explored deposits of industrial significance in Ukraine. The subsoil user’s path to the immediate start of mining is a complex and bureaucratic process that takes 1–2 years and involves obtaining several permits from 8 bodies. Trillions of hryvnias are buried in the rich lands of Ukraine, and we need to let businesses extract minerals and pay taxes, and that would be a win-win situation for all.
Together with the Ministry of Environment and the Environmental Committee of the Parliament, the Office of Simple Solutions and Results has developed a comprehensive reform in the form of a draft law that would enable miners to obtain a special permit in a 2–4 month period through one government body under a single permit. Additionally, we believe we should digitalize the relationship between the state and subsoil users. All available geological information of the state should be placed on the Interactive map of minerals, and all documents will ideally be submitted through the electronic office of the subsoil user in electronic form.
Another problem is the heritage that lots of valuable deposits have been obtained through corruption schemes in an unfair way by interest groups. These are so-called sleeping permits, and in order to incentive tax measures based, we propose to opt for the “use-or-drop” principle.
As part of the mining reform, we are also helping the president with the Ukrainian economic passport reform.
Zelensky previously proposed introducing a Ukrainian economic passport, and we have been helping him bring that noble idea to life. The concept goes as follows: every child should have the right to accumulate in his account part of the state’s sale of natural resources (subsoil, land, etc.). And after reaching adulthood, the child will receive these savings as start-up capital. This would allow children to have some certainty about the future. We have closely examined the foreign experience of similar direct payment and have met with the respective stakeholders to discuss our vision of the reform. We will brief the president on our concept shortly.
5. Construction
The construction sector has been crippled by corruption for years. In order to overcome it and attract investment, we have to transfer control to third parties. The new system should eliminate the government’s monopoly in the construction control field, and it will function in a similar manner to the system of private notaries, where there is transparent and fair competition, and therefore there will be no incentive to accept bribes. We also need to fight against illegal settlements and solve the problem of unfinished construction and protect the rights of investors.
The initiative is actively supported by all major stakeholders — the National Reforms Council chaired by Zelensky and Prime Minister Denys Shmyhal — and we expect it the law to be passed by the end of this year.
6. Electricity
Getting access to electricity in Ukraine is complex and very time-consuming. In some cases, it may take years. At the same time, the connection costs borne by businesses are among the highest in the world. Ukraine is lagging behind many prosperous countries — even Russia and Belarus have opted for a more liberal approach — and the need to find the most efficient solution is urgent. As of 2019, Ukraine ranks 128th out of 189 countries in the World Bank’s Doing Business ranking in terms of ease of connection to electricity networks. We haven’t moved up since 2014 mainly due to the ignorance of previous Ukrainian governments.
One of our top priorities in this field should be to ensure that electricity services are provided in the shortest possible time and in the most convenient and simple way. We propose to reduce the time needed to get electricity from 270 days to 97 days and cancel unnecessary bureaucratic procedures. A draft law prepared by the Office of Simple Solutions and Results is the first step towards getting electricity reform.
7. Labor
The Office of Simple Solutions and Results is also working on a comprehensive labor code reform. As of now, Ukrainian labor regulations are excessively bureaucratic and overly intrusive. The existing labor code is outdated and fails to meet the changing working environment. It is a reminder of our painful Soviet past.
For example, companies need to sign off around 20 documents per employee which is burdensome time and resource-wise for big and small enterprises. We propose deregulating labor relationships according to the principles of voluntary agreement and limited state intervention, and a draft law is being prepared. It should be completely up to employers and employees to decide on the details of their labor arrangements. Plus, the nature of work is changing, and we need to ensure our legislation can keep up.
8. Health-care reform
Our health-care system has been hardly prepared for the pandemic. But even without the coronavirus, Ukraine’s health care is hardly a matter of national pride. Some of the reforms initiated in the past haven’t yielded many positive results. The health and wellbeing of Ukrainians are of the highest value and so we need to act now and ensure they have access to the best health-care services. Private insurance and public-private partnerships that have proved to be successful globally could help us go out of the healthcare gridlock. Together with the Ukrainian parliamentarians Ministry of Health we will be working closely to examine the latest trends and will soon present a viable strategy in these two major directions.
9. Land reform
Since regaining independence, Ukraine hasn’t managed to finalize a smart land reform. Multiple attempts have been made, and, finally, starting from 2021, we will open our land market and restrictions on purchasing of agricultural lands will be relieved. However, in order for the reform to be successful, we need to deregulate the purchasing process by implementing electronic auctions, guarantee transparency, and limit the number of steps potential buyers need to take before they can dispose of their land. Additionally, it is also important to ensure local communities are able to make decisions about how to use the land since managing and utilizing the land will be their responsibility which will help enhance their local budgets.
10. Deregulation
As a democracy, Ukraine has made significant steps towards enhancing the relationship between its electorate and officials. And yet, the Ukrainian government has not been very responsive to ideas and concerns expressed by the business.
Ukraine is in dire need of business-friendly reforms, and the Office of Simple Solutions and Results has been working closely with Ukrainian businesses to identify black holes in our business climate and develop feasible solutions.
For example, Ukrainian small wine producers face unreasonable difficulties. Unjustified increased state interventions, the bureaucratization of basic processes and outdated existing standards make it impossibly difficult to produce and sell wine for small wine producers. The Ukrainian wine market is dominated by imported products and wine produced by large producers. Although there are hundreds of potential producers in Ukraine, they cannot enter the market due to the existing regulations. Moreover, the ban on the purchase of grapes for small producers contradicts the laws of the free market and blocks their development in Ukraine.
If we cancel licenses for small wine producers as well as excise taxes and stamps for the industry as such, we will reduce market entry barriers and make it easier to produce wine in Ukraine. I will be presenting our concept at the upcoming National Reforms Council meeting.
There are many other examples of flawed policies, and we are working hard to identify and tackle them.
Ukraine’s ranking in international indexes of economic freedom is depressing. We are the 134th freest in the Heritage Foundation’s Index of Economic Freedom, and, according to the Doing Business Index 2020, we are the 64th business-friendly economy in the world. However, if we follow the easy steps outlined above, I am confident we can break the chains of corruption, bureaucracy, and overregulation and make Ukraine a success.
I would like to encourage businesses to reach out to our team with ideas of how we can make Ukraine better, and our experts will gladly work together with you and ensure the president, the Cabinet of Ministers, and parliament hear you.
Mikheil Saakashvili is chair of the executive committee of the National Reform Council.
