Public consultations between government and business

The lawmaking process in Ukraine provides several stages for the general public to participate in drafting laws. They are shown in the infographics below.

Public consultations between business and government before adopting new regulatory norms is regulated by the Law of Ukraine “On the Principles of State Regulatory Policy in the Field of Economic Activity” (hereinafter — the Law) and the Resolution of the Cabinet of Ministers of Ukraine of 03.11.2010 No. 996 “On Ensuring Public Participation in the Formation and Implementation of State Policy “(hereinafter — the Resolution). In accordance with Article 9 of the Law, ‘each draft regulatory act is published in order to receive comments and suggestions from individuals and legal entities and their associations’. A notification on publication of a draft regulatory act should include, inter alia, ‘information on the period during which the comments and proposals from individuals and legal entities, their associations are received’ and ‘information on how private persons, legal entities and their associations can provide comments and suggestions.’

In accordance with item 12 of the procedure for conducting public consultations on issues related to the formulation and implementation of state policy approved by the Resolution, “Public consultations are mandatory in the form of public discussions on (…) draft regulatory acts”.

The period for receiving proposals from the public is set by the author of a draft regulatory act, but it may not be less than one month and more than three months starting from the date of its publication.

In practice, provisions of these laws are carried out selectively and inconsistently. Public consultations are carried out regarding only a small fraction of draft regulatory acts published on the websites of ministries.

At the same time, there are a lot of regulatory problems and low-quality regulatory norms in Ukraine. For a better understanding of what regulatory issues Ukrainian business faces, it is worth looking at individual cases.

Wood Industry

Another example of a poor-quality regulation is the moratorium on the export of round timber.

The authors of the Law linked its adoption to the need to develop the wood processing industry. The explanatory note to the draft law says that ‘the export of wood in unprocessed form harms the economic and ecological situation in Ukraine.’

According to the conclusion of the Parliament Committee on Industrial Policy and Entrepreneurship, ‘the purpose of the bill is ‘to restore the wood processing and furniture industries, to create jobs, and to re-orientate exports from raw wood materials to products of a wider degree of processing, by establishing a moratorium on export of unprocessed timber and lumber for a period of 10 years”.

More than three years after the adoption of the bill the preliminary results of its implementation indicate, that as a regulatory measure it has failed to achieve the declared objectives.

First of all, there is no real evidence that the introduction of the moratorium has led to the improvement of the environmental situation. According to the data of the State Statistics Service, the forest felling rate remains the same — in 2013–2014, about 20 million cubic meters were down. In 2017, 21.9 million cubic meters were cut down[. Illegal felling in large volumes persists.

According to the Ministry of the Economic Development and Trade, the ban on exports of round timber has not contributed to the increase of forest cover and has not solved the issue of illegal logging.

According to the Better Regulation Delivery Office, the fight against illegal logging should start with the introduction of clear rules for market access and the introduction of national timber database.

The economic effect of the export ban is limited. According to a Vox Ukraine study, the growth of the wood processing industry has been increasing in recent years, but it is negligible in relative terms. Ukraine began to export “wood semi-finished products” instead of unprocessed timber. However, further processing has not advanced. As for the production of processed sawn timber, the only item that has been actively developing after the introduction of the moratorium is 6 mm timber products.

In addition, according to the Ukrainian Classification of Goods for Foreign Economic Activity (UKTZED), fuel wood may have the appearance of logs. The lack of a clear legislative distinction between “fuel wood” and “unprocessed timber” leads to a different interpretation of the legislation by different customs authorities. Such gaps in the regulatory field create opportunities for circumvention of the moratorium and export of products under other export articles.

Thus, the law on the temporary ban on the export of unprocessed timber is an example of inadequate regulation as it seeks to solve the complex problems of logging and wood processing industries in an easy, yet counterproductive way. It has not proven an effective mechanism for achieving regulatory goals of the wood industry.

Tobacco Industry

One of the areas where examples of unbalanced regulatory practices can be found is the tobacco industry. Currently, three draft bills (# 2820, # 4030 a and # 4030 a-1), which may greatly complicate the regulatory field of this sector, are registered in the Verkhovna Rada of Ukraine.

The most important goal, declared in the bills # 4030 а and # 4030 а-1 is the restriction of cigarettes sale to children.

Draft laws # 4030 а and # 4030 а-1 impose a prohibition on the visible display of tobacco products at the points of sale. According to the estimates of the Ministry of Finance of Ukraine, the implementation of these measures would result in 3.7 bln UAH reduction of fiscal revenues annually. In addition, another consequence may be an anticompetitive redistribution in the retail trade market.

It should be noted that the efficiency of the prohibition of the visible display of tobacco products as a mechanism for combating tobacco use among minors is not supported by evidence. At the same time, this problem can be solved by increasing the efficiency of the enforcement of the existing regulations, in particular in the area of combating illicit cigarette trade at unregistered points of sale.

In addition, this regulatory initiative contradicts several OECD principles of better regulation: it fails to meet the principle of minimizing costs as well as distorts the retail market.

The prohibition of the visible display has also caused a negative reaction from the representatives of the retail business. Having realized the likelihood of job losses which would be potentially caused by the adoption of this bill, the retailers have collected more than 11 thousand signatures in support of the appeal to the Verkhovna Rada, the Cabinet of Ministers and the President of Ukraine to prevent interference in retail trade.

Draft law # 2820 introduces a new manner of placing a medical warning on cigarette packs. However, new requirements are not harmonized with the requirements of the tax legislation regarding the location of excise duties stamps. The transfer of the excise stamps to another part of the package will result in additional costs on cigarette producers associated with the adjustment of technical equipment. In addition, the suspension of production in order to adjust equipment would cause reduction of tax revenues and currency earnings from cigarettes export. In 2017, the tobacco industry provided UAH 50.4 billion or 6 % of tax revenues, as well as $ 293.5 million of currency earnings.

As seen from above, this regulatory initiative contradicts the principle of consistency with other regulations and policies. In addition, it violates the market dynamics.

Retail Electricity Market

According to 2018 Doing Business Report prepared by the World Bank, Ukraine ranked 76th in the general rubric Ease of Doing Business. While the country has relatively good positions in such areas as starting a business (position 52), getting credit (29), dealing with building permits (35) and paying taxes (43), setting up access to electricity (128) is one of Ukraine’s weakest spots in the rating.

According to the information provided in the report, access to electricity takes an average of 281 days and costs 525 % of income per capita. This problem directly affects the performance of small and medium enterprises, as the connection to the electricity supply is a necessary component of any production setup.

This problem is associated with poor-quality regulation of this area and has a large number of manifestations. First, there is a mismatch between the real and declared state by the terms of standard connection. This problem is related to two others:

1. Electric distribution companies are not accountable for non-compliance with the terms of power supply connection.

2. The process of connection involves getting approval from third parties (local government, gas, water, heat distributing companies, etc.). At the same time, there is no detailed procedure for the participation of third parties.

Together, these regulatory problems lead to delays in the connection of consumers.

Secondly, large volumes of discretion exist within the regulatory field, which creates considerable corruption risks. One of the manifestations of this problem are the manipulations with the criteria for standard connection. Currently, regulations stipulate a distance criterion for the standard connection: it should not exceed 300 meters in a straight line from the place of power supply to the place of connection. In cases when the distance approaches the threshold but does not exceed it, distribution companies sometimes manipulate the criteria in order to force consumers into a non-standard connection procedure which is more expensive and advantageous for power companies.

Thus, the regulation of this sphere does not coincide with several OECD regulatory principles, since:

  • It is not clear, simple and convenient
  • It is not consistent with other regulatory norms
  • It does not minimize costs.

The Problem of Legislative Spam

Ukraine is the absolute leader among the European countries in the number of registered draft laws. Annually, members of parliament submit on average 1.8 thousand draft laws. It is 300 times more than in Norway and Switzerland and three times more than in Italy. At present, there are 10.7 thousand bills registered in the Supreme Rada of Ukraine.

Most of the draft laws are submitted to the administrative office of the parliament by the MPs. For instance, out of 2367 draft laws MPs registered 2129 in 2017. But their performance is the least effective — only 7 % of draft laws submitted by members of parliament have been adopted.

The quantity of draft laws does not turn into quality. On the contrary, according to the Committee of Voters of Ukraine, every second draft law receives negative evaluation from the Central Scientific Experts Office of the parliament, and one out of three — negative evaluations from the Ministry of Finance.

In addition, MPs often register draft laws that go beyond the responsibility of their respective committees. For instance, 38 % of MPs registered more draft laws in spheres not corresponding to the work of their committees.

In order to compare Ukrainian and European law-making practices, let’s give the following example: Directive 2014/40/EU, which is to harmonize the regulation of the tobacco and related products markets of European Union countries. The process of revision of then valid Directive 2001/37/EU started in 2010. After that, the process of public consultation began, which involved processing more than 85,000 proposals from citizens, public organizations, governments of the EU member states and representatives of the tobacco industry. Directive 2014/40/EU was adopted in 2014, but its entry into force had been delayed until 2016. If the transitional periods provided by the Directive are taken into account, it will be fully in force only in 2020.

As you can see, such approach allows the regulator to take into account the opinion of the largest possible group of people, as well as analyze the impact of both a particular regulation and of possible alternatives.

The problem of legislative spam in Ukraine has two main manifestations.

Firstly, low-quality regulation of MPs’ law-making activity causes an avalanche of draft laws, which becomes a burden on the administrative resource of the Parliament.

Secondly, such an approach does not contribute to the improvement of the Ukrainian regulatory field. A fast-pace legislative process precludes proper regulatory impact assessment of new draft laws. Also, it is difficult to hold consultations with stakeholders affected by the bills due to excessive workload of the parliament. It is worth noting that consultations are essential to ensure transparency in the decision-making process and to develop balanced regulation.

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