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THE refor guiTHE reforms guide


THE reforms guide Đ? book for understanding seventeen key reforms taking place in Ukraine

This publication was prepared by the Internews Ukraine NGO with the financial support of The Finnish Embassy in Ukraine

Kyiv — 2017


Any part of this publication can be used, whether partly or in full only after prior agreement with NGO Internews Ukraine and on condition of it being a source reference. Dear readers, you have the Reforms Guide in your hands, and it will help you to find your way around the tricky labyrinth of reforms that started with the Revolution of Dignity. The Government undertook 62 reforms and stated this in The Strategy for Sustainable Development Ukraine 2020. After the survey, we chose 17 projects that society was most concerned about, and then analyzed the background, current situation and main ‘betrayals’ and ‘victories’ for each of them. The Reforms Guide will lead you through a little but very important part of the history of the Ukrainian nation. The history of the fight for freedom, national identity, economic and territorial integrity as well as human rights and freedoms. Read this Reforms Guide to know not only what the Government has to do for us, Ukrainians, but also to see what we can do for our country. The Reforms Guide is also an informational and analytical site — reformsguide.org.ua where you can review all the materials about reforms online. We are very grateful to the Embassy of Finland in Ukraine for its financial support, which enabled us to create the Reforms Guide. Editor in chief Anna Kyslytska Editorial board Nataliia Pedchenko, Andrii Kulakov Authors Team Bohdan Butkevych, Iryna Mokrytska, Dmytro Zinchuk, Kramarenko Oleksandr, Zoia Zvyniatskivska Expert board Yevhen Radchenko, Yuliia Kyrychenko, Oleksandr Liemienov, Zoia Zvyniatskivska, Volodymyr Kuprii, Roman Kuybida, Mykola Khavronyuk, Volodymyr Dubrovskyi, Andrii Zablotskyi, Valentyn Badrak, Hlib Kanevskyi, Zoriana Chernenko, Oksana Kuziakiv, Olena Pavlenko, Vitalii Kravchuk Design and page proof Yuliia Chernous Editing and correction Peter Dutczyn Additional work on project: Nataliia Sad, Tetiana Matychak Photo materials Photographs used in the publication were provided by the Government portal and regional representative offices and departments. This publication was created with the financial support of the Embassy of Finland in Ukraine. Contact us NGO Internews Ukraine 04112, Kyiv-112, Ryzka St, 15 e-mail: info@internews.ua +38 044 458 44 40 +38 095 85 707 13 www.internews.ua


From the Editor The Guide is the most important book for a traveler, a helper for anyone who has come to this country for the very first time, and is still wandering strange streets, and meeting people he or she has never seen before. So the first mission of the guide is to introduce a new world. Thinking about the project of the Reforms Guide and this book in particular, we thought as travelers or even explorers: so, we see a new country, strange streets, and unknown faces. All this, young and fresh, was pushed from darkness to light by ourselves three years ago. So we, Ukrainians, became creators of the new. New processes, changes, the speed and scale of which are impossible to either embrace or comprehend if we find ourselves alone. And that is the second mission of the guidebook, to show the common way in the new world. The reform process is never simple: the widespread truism “quickly, quality, cheaply — choose two of the options” perfectly describes the very essence of any reform. Furthermore, the truth is we cannot build our country using other hands. The reforms began with the Revolution of Dignity, changes we owe to ourselves, to our children and our parents; depend not on the people sat in offices but on us, the creators and consumers of these changes. That’s why we have to put up with a pace so those we have chosen to rule the country don’t turn our Changes into other Promises, failed attempts, lost opportunities. The book you have in your hands is only a tiny part of the great movement, the will of millions. We hope that you’ll understand the sense of reforms better, research reform processes deeper, and watch local authorities responsible for the execution of changes while reading it. But most importantly, that you yourselves will become change.

About the project of the Reforms guide

An informational and analytical project about seventeen key reforms, which helps to understand the complicated process of the political and social changes that started in Ukraine in 2014. The project consists of an online part, the website reformsguide.org.ua, where journalists collected information about the progress of reforms in the country over a period of more than 7 months; and the paper edition you hold in your hands. The project is provided by NGO Internews Ukraine as a result of the support of the Embassy of Finland in Ukraine.

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The project’s team of experts

Yevhen Radchenko — the development director of NGO Internews Ukraine, main expert of the group of Reanimation Package of Reforms on issues of electoral legislation. Yuliia Kyrychenko — the head of projects on constitutional rights at the Centre of Policy and Legal Reform. Oleksandr Liemienov — the head of the anti-corruption reform group in the Reanimation Package of Reforms, the head of the coalition department of non-government organizations ‘Declarations under control’. Zoia Zvyniatskivska — co-creator of the non-government organization ‘Parental control’ Volodymyr Kuprii — a member of the Commission on issues of the highest body under the National Agency of Ukraine on the Civil Service. Roman Kuybida — deputy chairman of the board of the Centre for Policy and Legal Reform, a member of the Public Integrity Council and the Judicial Reform Council. Mykola Khavronyuk — the science development head of the Centre for Policy and Legal Reform. He represents the interests of the Supreme Court of Ukraine in the Constitutional Court. Volodymyr Dubrovskyi — a senior economist of the Centre for social and economic researches CASE Ukraine, an expert in reform of the tax and budget spheres in the Reanimation Package of Reforms. Andrii Zablotskyi — a head of the ‘Agriculture’ sector, Better Regulation Delivery Office, an advisor to the Sayenko Kharenko law firm. Valentyn Badrak — a director of the Center for Army, Conversion and Disarmament studies. Co-author of the first book in Ukraine about the arms business ‘Cult: The Arms Business Ukrainian Style’ Hlib Kanevskyi — a head of the corruption prevention department at the public organization Eidos Centre for Political Studies and Analysis. Zoriana Chernenko — a head of the board of the Ukrainian medical and legal association. The leading expert on issues of medical reform at the Reanimation Package of Reforms. Oksana Kuziakiv — an executive director of the Centre for Contemporary Society Studies, a structural unit of the Institute for economic research and policy consulting. Olena Pavlenko — a president of the DiXi Grouр analytical center, founder of the website Ukrainian Energy. Vitalii Kravchuk — a senior research fellow at the Institute for economic research and policy consulting.

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About Internews Ukraine

A non-government organization providing democracy and civil society development through support of independent and pluralistic mass media. The mission of Internews Ukraine is to promote the spread of European values in Ukraine by producing successful media. The main goals of Internews Ukraine are the empowerment of independent and pluralistic mass media, improving journalistic standards; making the legal basis of media regulation in Ukraine better; promoting the use of new media (online ones and social networks); achieving efficient cooperation between media, NGOs and the authorities as well as supporting European integration for Ukraine. To achieve these goals Internews Ukraine provides effective assistance to develop proper democracy and civil society in Ukraine. Current Internews Ukraine projects and events can be found on the site Internews.ua.

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rrupm Ren of Gove nance anti-co Renewal of Governance and anti-corruption reforms. Background

Corruption could be considered a disease of Ukrainian politics if it wasn’t its typical feature. The authoritative international organization Transparency International gave this term a definition — ‘corruption’ is an abuse of power for personal goals. At the end of 2016, Ukraine had no political leader who was more trusted than mistrusted.

on refo


tion newal ere and orruptiorms Opinion poll results provided by the Ilko Kucheriv Democratic Initiatives Foundation from December 2016 tell us that this is so. The statistics of Transparency International on Ukraine from 1998 are undeniable proof of stable, high performance of corruption at the time of independence.


Transparency International Corruption Perceptions Index Place of Ukraine in rating

Number of countries in rating

1998

69

85

1999

75

99

2000

87

90

2001

83

91

2002

85

102

2003

106

133

2004

122

146

2005

107

159

2006

99

163

2007

118

180

2008

134

180

2009

146

180

2010

134

178

2011

152

183

2012

144

174

2013

144

175

2014

142

175

2015

130

168

2016

131

176

Year

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In 2016, Ukraine occupied 131st spot out of 176 places in terms of corruption levels, alongside Russia, Kazakhstan, Iran, and Nepal. That year, the first place went to the Kingdom of Denmark. Meanwhile, according to Eurostat data, the number of people who use the Internet to communicate with state services is 88%. It’s the highest index among European Union countries. And it is no coincidence. Countries demonstrating low indexes of corruption in their authorities usually have high indexes of e-Government use. The less contact that a citizen has with civil servants and the greater the number of processes that are done by an objective computer program, the lower the chances that there are for officials of any level to use their positions for personal benefit, manipulate state funds or demand bribes.

Place in ‘Corruption Perceptions Index’ rating *

Percentage of people using the Internet to communicate with public services **

Denmark

1

88%

Norway

6

85%

Finland

3

82%

Sweden

4

78%

Netherlands

8

76%

Country

* Transparency International data in 2016 ** Eurostat data in 2016

spot out of 176 places occupied Ukraine in 2016 in terms of corruption levels, alongside Russia, Kazakhstan, Iran, and Nepal.

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The real number of people involved in corruption relationships: 2015 2011

72,4% 70,7%

It should be noted that a high level of corruption is demonstrated in all ex-Soviet republics. The reason is the command centralized system of public administration, which nurtured several generations of officials who got used to their privileged position in society. On the other hand, the shortfall of everything made the working class with no privileges act cunningly to get material benefits. So, the system grew where people were forced to support corruption in the authorities and feed officials with bribes. These officials, in their turn, multiplied legislative collisions and complicated all administrative processes to the maximum in order to hide abuses of power. The system didn’t disappear with the fall of the USSR but, on the contrary, business mixed with politics creates a remarkably durable symbiosis. Public opinion polls researching the level of corruption in various Government bodies show not only mistrust on the part of society, but also the services that people are used to bribing, and use personal contacts to get help from, so-called ‘nepotism’.

60,6% of people

polled think the President of Ukraine is the most responsible for fighting corruption.

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As for the level of trust in the Government in 2015, the lowest indexes show: Prosecutor's Office 3,5% Committee on Prevention

of Corruption

National anti-

corruption Bureau

6,1% 6,9%

Lustration Committee

7%

Security Service of Ukraine 7,7% Court system

3%*

Verkhovna Rada of Ukraine

5% **

Cabinet of Ministers of Ukraine Regional authorities

5,9%*** 6,4%****

President

10,3%*****

Of course, the views of Ukrainians on the general level of corruption level and its tendencies are changing. Some think that bribery is continually growing, other believe that this system of relationships is stable, and some even suppose that the fight for honest Government was not in vain. Anyway, the majority of adult Ukrainians who were polled (85.5%) are convinced that there is too much corruption in society.

* in 2011 this index was 7%; ** in 2011 — 7,7%; *** in 2011 — 9,2%; **** у 2011 — 10%; ***** in 2011 — 14%

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The most corrupted state institutions, in the opinion of people (the leaders of the rating remained almost unchanged through the years of the research, which is evidence of how deep the level of corruption became in these fields):

2007

2009

2011

2015

49%

59,3%

60,3%

66%

Police

54,2%

65,4%

59,1%

63,1%

Prosecutor’s Office

42,9%

51,6%

51,1%

62,4%

Medical institutions

54%

54,2%

60,3%

58%

42,8%

38,6%

42,1%

53%

Court system

Customs Service

According to data for 2015, 65.5% of people come face to face with corruption at least once a year. In fact, there’s good news too: this index dropped from 2007 on. So, people faced corruption in:

2009

2011

62,5%

60,1%

These numbers are given in research carried out by the Kyiv International Institute of Sociology in July-October 2015 entitled ‘The Corruption situation in Ukraine. Comparative analysis of nationwide research: 2007, 2009, 2011 and 2015’, These sad statistics show that all previous efforts to fight corruption have been unsuccessful. And there have many of them in the years of independence. In May 1993, the Verkhovna Rada issued a decree called ‘About high priority measures for fighting organized crime and corruption’, which should have been followed by a bunch of laws for fighting corruption in various fields. However, a part of them was only issued in 2002, and none of them was efficient. Over the next few years, there was a series of presidential decrees signed and issued on fighting corruption in different fields, as well as about establishing investigation groups and demands that officials should declare their income, as well as other anti-corruption measures. But the first big anti-corruption program was the National Program for Fighting Corruption, confirmed in April 1997 by the then president Leonid Kuchma. This program was the first to confirm that previous

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Renewal of Governance and anti-corruption reforms


attempts to fight corruption had failed, laws adopted earlier had not worked, and bribery was such a big problem that it had become a danger to national security. It should be noted that corruption was considered part of organized crime for a long time, and it was only the program of 1997 that recognized the existence of high-level corruption. In the concept of fighting corruption in Ukraine called ‘On the path to virtue’, as approved by President Viktor Yushchenko in September 2006, the systematic nature of corruption and unsuccessful attempts to fight it in the previous years were also admitted. The next anti-corruption program, approved in October 2011 by the then president Viktor Yanukovych, was even more acute in judging high-level corruption. This was stated in the National Anti-corruption Strategy for 2011–2015. It’s important to mention that concepts were improved, and with every subsequent document describing the problems arising from corruption, its forms and methods became more and more concrete. Although programs were created which included recommendations from international institutions, these programs had no solid plan of measures, monitoring systems or evaluation of results.

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Current state of reform

In October 2014, a new Anti-corruption strategy for 2014–2017 was adopted, which contained elements that were missing in previous programs: execution indexes of anti-corruption measures, monitoring, and a system of control. The strategy points out the following problems related to corruption. The inefficiency of anti-corruption bodies. In fact, the Security Service of Ukraine, Prosecutor General's Office, and the National Police all possess anti-corruption functions. Furthermore, the National agency on prevention of corruption, the National Anti-corruption Bureau of Ukraine, the Specialized Anti-corruption prosecutor’s office have all been created. Besides, there is the Verkhovna Rada Committee on the Prevention and Countering of Corruption too and the National Council for Anti-Corruption Policy; the Cabinet of Ministers has its own Government commissioner on anti-corruption policy. But the functions of those people participating in the fight against corruption do not meet international standards. These institutions are not completely independent from political influence, and some anti-corruption measures are not controlled by any office. In addition, the public doesn’t take part in the implementation of anti-corruption policy. Corruption-prone elective people. Elected officials who came to power in a dishonest way, by bribing people and rigging election results, has shady data about the political party’s financing and campaign, and in the end, he lobbies his own business interests and ignores the interests of the state and the people. Dishonest elections — the first and most important phase where corruption has a chance to get into the state machine. Legislation regulating the funding of political parties has to minimize all the ways corruption gets into bodies of power along with dishonest people. You can see details of this in the part called ‘Reform of electoral legislation’.

functions of anticorruption fight participants’ do not match with international standards

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Dishonest public servants. The standards for going into public office and serving should be improved in order to not allow public servants to abuse the power given them by the Government. Also, the classification of posts, delimitation of political and administrative positions, salaries, and disciplinary responsibilities should all be reformed. So as to bring Ukrainian legislation closer to international legislation, a new law was adopted in December 2015. The absence of transparency in the work of the central executive authorities as well as in state enterprises. In fact, the public lacks information about their activities. Also, there is currently no monitoring of anti-corruption measures introduced by these structures. See more in ‘Public administration reform’ and ‘Reform of management of state property and privatization’. Corrupted courts, the Prosecutor’s Office, and bodies of Ministry of Internal Affairs. If we take anti-corruption reform as mostly reform of ideology and conscience, a physical foundation for it is reform of the courts and the Police. To renew trust in the court system, to build an independent and fair court system can be a guarantee of compliance with laws, whether the issue relates to a state official or an average member of the public.

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Anti-corruption strategy has exhausted itself in three years

Amending laws regulating the Prosecutor’s Office and bodies of the Ministry of Internal Affairs work in accordance with international standards is also important. See more about this in ‘Judicial reform’. Union of business and power. Corruption in Ukraine will last as long as politicians are still businessmen, whether directly or indirectly through their relatives and figureheads. And as long as business influences political processes using power secured through money, especially influence over legislation. It is possible to divide politics and business by creating proper laws, providing transparent use of public resources, free competition, transparency of business, ownership relationships, etc. The invisibility of corruption. Access to information is the most efficient way to fight corruption; it allows journalists to conduct independent investigations and activates society. Current legislation about access to public information is confirmed as progressive by international experts, but its execution is at a rather low level. As a matter of fact, access to public information is really limited. Reversal of punishment for corruption. In May 2014, the law ‘On making changes to some legislative acts of Ukraine in the sphere of state anti-corruption policy due to the Action Plan on the European Union’s liberalization of the visa regime for Ukraine’ was adopted. Due to this law, the system of prevention and counteraction was improved and now it matches international standards in the main. But the current legislative base is missing proper implementation. Public tolerance of corruption. Corruption blossoms, perhaps primarily because of Ukrainian society’s tolerance to the fact of its existence; people agree with abuses of power and breaking of laws if the result is that a citizen gets a meagre profit from doing so. That is why forming a negative attitude in people to corruption is essential in the Anticorruption strategy and in the entire anti-corruption reform, as it will not be possible without society being hostile to corruption. Unfortunately, the Anti-corruption strategy has exhausted itself in three years. It should have been structurally changed, given new approaches, and again, guaranteed with the implementation of new laws. For example, the law about access to public information is progressive and relevant, but the human factor puts the brakes on its implementation.

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Corruption increased: 2015 2011 2009

56% 42%

34%

Corruption level didn’t change: 2015 2011 2009

29% 39% 45,5% Corruption level dropped: 5% 11%

2%

2015 2011 2009

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Report about facts of corruption:

0-800-507-001 — Prosecutor General's Office of Ukraine hotline on violation of rights of individual entrepreneurs and business entities 0-800-501-482 — Security Service of Ukraine hotline on especially dangerous violations against the country 0-800-507-309 — Government phone hotline (044) 256-11-10 — Ministry of Internal Affairs of Ukraine reception (044) 256-00-31 — National Agency of Ukraine on Civil Service direct phone line Also, there’s a list of phone numbers on the Anti-corruption portal acrc.org.ua. of regional services to inform about corrupt actions In 2016 the European Union decided to give about 16 million euros for anti-corruption measures in Ukraine. At the same time, in April 2017 the International Monetary Fund once more approved the program the Ukrainian Government approved for fighting corruption, and informed, that, unfortunately, no concrete results have been achieved at the present time, and the corruption level, according to the data of international organizations, is increasing. As is society’s displeasure.

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Specialized anti-corruption bodies and the field of their remit There’s a process going on of reforming old and creating new anticorruption bodies and state structure components as part of anticorruption reform. These processes are not going smoothly because of scandals and intrigue, attempts at manipulation, multiple violations and conflicts of interests present between organizations and representatives of the judiciary, the Prosecutor’s Office and the highest authorities.

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Supreme Anti-corruption Court

In July 2016 the law On the Judicial system and Status of Judges was adopted which provides for the creation of the Supreme Anti-Corruption Court. The new court must begin its work by March 2018, and this obligation is set in the memorandum with the International Monetary Fund. For now, this process is on hold as there are some laws that need to be adopted. Remarcably, that one of the IMF’s demands is the presence of international experts on the qualification board that will choose judges to the team of the Supreme Anti-Corruption Court. The results of the work of the Special Anti-corruption Prosecutor’s Office and the National Anti-corruption Bureau depend on the functioning of the Supreme Anti-Corruption Court, so until it’s created, the work of these bodies is in vain. Also, EU representatives and a head of the EU anti-corruption initiative support the idea of creating the Supreme Anti-Corruption Court. On the other hand, the Supreme Anti-Corruption Court is just a part of structure fighting corruption, as well as the National Anti-corruption Bureau and the Specialized Anti-corruption Prosecutor’s Office. And this agency is yet to be built.

Specialized Anti-corruption Prosecutor’s Office

In February 2015, the law on the Prosecutor’s Office was amended and allowed the forming of this special division inside the system of the Prosecutor General's Office of Ukraine. According to the law, the functions of the Specialized Anti-corruption Prosecutor’s Office are the following: to monitor the National Anti-corruption Bureau’s observing of the law during the holding of judicial investigations; to support prosecution on behalf of the state in corresponding cases; to represent a citizen’s interests or state ones in the court in cases provided by this law and connected to corruption or corrupt violations. The IMF and the Ukrainian Government have some arrangements in place on the Specialized Anti-corruption Prosecutor’s Office, which have to provide for the independence of the anti-corruption institution. They were written into the law adopted in January 2016 on amendments to the law ‘On the Prosecutor’s Office’, about providing transparency in the work of the Specialized Anti-corruption Prosecutor’s Office in accordance with IMF recommendations. The head of the Specialized Anti-corruption Prosecutor’s Office, Nazar Kholodnytskyi, is subordinated directly to the ProsecutorGeneral of Ukraine and, he is his deputy. Official page of SAP on Facebook: https://www.facebook.com/sap.gov.ua.

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National Anti-corruption Bureau of Ukraine

In April 2015, the president signed a decree on the creation of the National Anti-corruption Bureau. It is a law-enforcement agency which has responsibilities to investigate and prevent corrupt violations committed by authorities. The current head of NABU is Artem Sytnyk. In May 2017 the bureau was investigating 333 criminal cases. The bureau reports effective work, which stops being effective at the stage when criminal cases find their way into judicial institutions, where they are stuck for months. The bureau’s phone hotline — 0 800 503 200, website — nabu.gov.ua.

National Agency on Prevention of Corruption

In October 2014 they passed the law ‘On Prevention of Corruption’, which, among other things, provided for the creation of the National Agency on Prevention of Corruption. But officially, the NACP started working only in August 2016, and under pressure. The most important function of the agency is checking the income declarations of civil servants and revealing information about the fact of operations involving corruption. The NACP is the agency that provides the sole state register of declarations. The NACP should be a preventive institution, but it is not at present. The head of the NACP is Nataliia Korchak, website — nazk.gov.ua.

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State Bureau of Investigation

The law on the State Bureau of Investigation was passed in November 2015, but an anti-corruption law-enforcement agency able to investigate crimes of the highest level still doesn’t exist. According to the Criminal code of Ukraine, it must come into existence by November 2017. The SBI will carry out investigations of crimes by figures in authority: judges, ministers, servicemen, enforcement officers, workers of the NACP, the Specialized Anti-corruption Prosecutor’s Office, etc. After the SBI is created the investigative functions of the Prosecutor’s Office will be passed to it. Ukrainian experts unanimously tell us that the creation of the SBI is crucial for fighting corruption at the highest level, but to be effective it must be independent. The functions of the SBI are currently being performed by the Prosecutor General's Office of Ukraine.

There's a process of reforming old and creating new anti-corruption bodies and state structure components, as part of the anti-corruption reform

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Renewal of authorities

In 2014, in accordance with the demands made by society, the Verkhovna Rada passed the law ‘On Lustration of the authorities’. Some of its points were already in laws passed before the Revolution, but generally, it is a unique document for Ukraine, the first of its kind. This law defines the rules on leading lustration among people whose actions or negligence helped President Yanukovych to usurp power, imperiled the national security of Ukraine, and violated people’s constitutional rights and freedoms. The law is applied to those people who work in government and it lists the reasons why government employees can be subjected to lustration. MPs and judges do not come under this law. The process of checking will last ten years from the day the law comes into force. The order of inspections and list of inspection bodies are approved by the Cabinet of ministers of Ukraine decree from 16th of October 2014 — “Some issues on implementation of the Law of Ukraine ‘On Lustration of the authorities’. Current inspections and their results are published on the Government portal kmu.gov.ua. The Ministry of Justice is responsible for the lustration process. In May 2017, the head of Department on lustration of Ukraine, Anastasiia Zadorozhna, informed in an interview with Deutsche Welle, that the authorities are 98% clean. As she said, 5,000 people should have come under lustration after the law come into force. But what proportion of the authorities have really been cleaned up is still a rhetorical question, those the average citizen feels less corruption in these examples: while drawing up documents for a building, or while communicating with representatives of the authorities — enforcement officers or patrolmen.

The process of checking will last ten years from the day the law takes the action

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1993 May

the Verkhovna Rada passed a decree On measures of high priority on fighting organized crime and corruption

1994 August

Ukrainian presidential decree The Issue of stepping up the fight against corruption and other economic crimes

1998 April

Ukrainian presidential decree On the Concept of fighting corruption in 1998–2005

2006 January

Ukrainian presidential decree On the Plan of measures on the responsibilities and obligations of Ukraine arising from its membership in the Council of Europe

September

1995

Ukrainian presidential decree On the Concept of fighting corruption in Ukraine “On the path to virtue”

October

the law ‘On fighting corruption’ came into effect

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2010 2015 February

Ukrainian presidential decree On Creating the National Anti-corruption committee

2011

April

National Anti-corruption Bureau of Ukraine created

September

Specialized Anti-corruption Prosecutor’s Office under the Prosecutor General's Office of Ukraine created

October

Ukrainian presidential decree On the National Anti-corruption Strategy for 2011–2015

2014 October

Anti-corruption strategy for 2014–2017 approved, as well as anti-corruption laws On the National anti-corruption bureau of Ukraine, On Prevention of Corruption, etc. National Council on Anti-corruption Policy created as advisory body for the President of Ukraine

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rm Cons t nal r fo Constitutional reform. Background

The Constitution of Ukraine (June 28, 1996) regulates the rights, freedoms, and duties of a person and a citizen, holding of elections and referendums, the activities of the Verkhovna Rada, the President, the Cabinet of Ministers and other supreme executive bodies, the activities of courts, territorial organizations, and local self-government. Work on the Constitution of Independent Ukraine began with the adoption of the Declaration on State Sovereignty on July 16, 1990. In October 1990, in order to establish the Basic Law, the Verkhovna Rada of Ukraine established a constitutional commission, headed by

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nal r f stitutioreorm the then-chairman of the Ukrainian SSR Leonid Kravchuk. The first version of the concept of the Constitution included the establishment of a bicameral Parliament and a presidential republic, but this draft was not supported by either MPs or civil society. In October 1993, the committee introduced a new concept; however, due to political disagreements between different parties, this version was not supported either. In November 1994, a new constitutional commission was created and headed by the newly-elected President Leonid Kuchma and the Chairman of the Verkhovna Rada Oleksandr Moroz.

податкова система

029


Since the future form of government was the main issue of concern, the chairmen of the commission were unable to reach common agreement. The concept proposed by Leonid Kuchma gave significant rights to the President, and it was not supported by parliamentarians; only a document developed by a special working group of the commission was finally put to the vote and approved. According to the Constitution of 1996, Ukraine has become a presidentialparliamentary republic with broad powers invested in the President. This form of government was retained until the amendments adopted in December 2004. During this time, several attempts were made to amend the Basic Law in order to reduce presidential powers, but none of them proved to be successful. In April 2000, at the initiative of President Leonid Kuchma, who was re-elected for a second term, an all-Ukrainian referendum was held to strengthen presidential powers. Voting on the following proposals was proposed: the formation of a bicameral parliament (supported by 81.68%); broadening of the grounds for early termination of powers of the Verkhovna Rada of Ukraine (84.69%); restricting parliamentary immunity (89%); reducing the total number of MPs from 450 to 300 (89.91%). 79% of citizens took part in the voting, but neither the results of the will of the people nor the high turnout (in some regions more than 100%) helped to introduce any of the proposed changes. The President's initiative was criticized as unconstitutional. Opposition MPs applied to the Constitutional Court with appeals. In the end, the results of the referendum were turned into a sphere of sociological research. According to a ruling made by the Constitutional Court, no amendments to the Basic Law could be made without parliamentary approval. In 2000–2001, Leonid Kuchma's popularity ratings were falling steadily: the "cassette scandal" and the killing of journalist Georgiy Gongadze were directly linked to Kuchma. The opposition and civil society organizations launched a series of protests called Ukraine without Kuchma. In December 2002, a temporary special commission of the Verkhovna Rada was established in order to process draft bills amending the Constitution. On December 8, 2004, one of these bills was adopted, providing a reduction in presidential powers. Such an about-face is explained by the fact that Leonid Kuchma's second presidential term was reaching its end, and he wanted to strengthen his influence on the political situation in the country after leaving the presidential chair. Ukraine became a parliamentary-presidential republic.

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Constitutional reform


The Revolution of Dignity and the overthrow of the Yanukovych led to another significant change in the Constitution The change of power led to another attempt to change the law, which is traditionally considered the most stable. In December 2007, at the proposal of President Viktor Yushchenko, a National Constitutional Council was created. But the concept developed by the council was not supported by Parliament, and after that the council itself ceased to exist. However, an attempt by the next President of Ukraine, Viktor Yanukovych, was successful. In September 2010, at the request of 252 MPs, the Constitutional Court repealed the amendments introduced to the Basic Law in December 2004 and reinstated its previous version. Thus, the previous Constitution was restored. It should be noted that the authority to amend the Constitution belongs to the exclusive competence of Parliament and the Ukrainian people and not the authority of the Constitutional Court. In March 2014, the Prosecutor General's Office initiated a criminal proceeding for the seizure of power by Viktor Yanukovych in 2010. The explanation to the case says: "It was established that the Constitution of Ukraine was changed by Viktor Yanukovych in 2010 through unconstitutional means, thereby seizing power." So, in 2010, Ukraine returned to the presidential-parliamentary form of government with broad presidential powers. During the presidency of Viktor Yanukovych, the Constitution of Ukraine was facing challenging times. Thus, in February 2011, the term of office of the President, MPs of the Verkhovna Rada and deputies of local councils was extended to 5 years. In September 2013, regular changes were made in the part of the regulation of powers of the Accounting Chamber. As a result, it received the right to control the flow of funds to the state budget, and not only its expenditure side. The Revolution of Dignity and the overthrow of Yanukovych led to another significant change in the Constitution: on February 21, 2014, the Verkhovna Rada recognized the decision of the Constitutional Court of 2010 as unconstitutional. In practical terms, the Constitution of 1996, as amended in 2004, 2011, 2013, and 2014, was restored. The form of government was again changed to parliamentary-presidential.

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The current course of reform

The Strategy for Sustainable Development Ukraine–2020, presented by the Cabinet of Ministers in January 2015, identifies constitutional reform as one of the 62 necessary reforms. According to this document, the ultimate goal of the reform is the adoption of a new Constitution and the appropriate changes to all legislation. As a result, the form of government and the administrative-territorial structure should be changed. This is reform of the so-called power triangle (President — Government — Parliament): delimitation of their responsibilities and a list of duties, as well as decentralization of power. Moreover, constitutional reform is identified as a top priority in the treaties concluded between Ukraine and the European Union, the European Atomic Energy Community and their Member States. That is, the implementation of this reform is one of the conditions for Ukraine's accession to the EU. In March 2015, Ukrainian President Petro Poroshenko signed a decree on the creation of a constitutional commission. Volodymyr Groysman, the Speaker of the Verkhovna Rada at the time, was nominated as its chairman. In June 2015, this commission agreed on a draft Constitutional Reform on Decentralization. In actual fact, the creation of amalgamated territorial communities began at the end of 2014, and the first elections of heads were held. That is, the reform of decentralization had begun. But there is no constitutional ground for these actions, as the corresponding changes to the provisions of the Basic Law on the administrative-territorial division of Ukraine, local self-government and the executive organization on the ground have not yet been adopted. In June 2016, constitutional changes in the area of justice were adopted, which are the basis for judicial reform and reform of the Constitutional Court. Parliament is now working on the legislative regulations for these constitutional changes. In addition, the Constitutional Commission has developed a draft amendment to the Constitution with regard to human rights. In May 2017, the President instructed the Constitutional Commission to initiate work on the drafting of amendments relating to the status of the Autonomous Republic of Crimea.

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Constitutional reform

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The power triangle and the distribution of powers

The Revolution of Dignity made a lot of demands for power as such. In particular, the issue was about the reform of governance and the redistribution of powers of the President, Parliament, and Cabinet of Ministers, which have to democratize power in Ukraine and bring it closer to the best standards seen in EU member countries, where officials of any rank serve not their personal interests, but the interests of each person, as the entire Government does, and power belongs to the people and can’t be usurped by state bodies. So far, no constitutional changes in the powers of Parliament, the President, the Cabinet of Ministers have been implemented. Let us consider what powers they have now.

The powers of the President

The President is the head of state and the guarantor of the Constitution, the term of his authority is five years for no more than two consecutive terms. According to the current Constitution, the main powers (and hence the area of responsibility) of the President of Ukraine are the following: • To represent the country in international affairs, to manage the foreign policy activities of the state, to conduct negotiations and sign international treaties. • To decide on the recognition of foreign languages. • To appoint and dismiss heads of diplomatic missions of Ukraine. • To decide on the holding of an all-Ukrainian referendum on constitutional amendments. • To decide on holding early parliamentary elections. • To terminate the powers of the Verkhovna Rada. • To make a submission on the appointment of the prime minister at the proposal of the parliamentary coalition.

The Revolution of Dignity has made a lot of demands for power as such

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• To appoint and dismiss the Prosecutor-General with the approval of the Verkhovna Rada of Ukraine. • To appoint and dismiss half of the Board of the National Bank of Ukraine. • To appoint and dismiss the High Command of the Armed Forces and other military formations, to administer the national security and defence sector. • To head the National Security and Defence Council of Ukraine. • To appoint one third of the composition of the Constitutional Court. • To sign laws passed by the Verkhovna Rada. • To veto laws adopted by the Verkhovna Rada (except for constitutional amendments), and their subsequent return for reconsideration.

The powers of the Verkhovna Rada

The Verkhovna Rada is the sole legislative body of Ukraine. Under the Constitution, Parliament consists of 450 MPs of Ukraine; their term of office is 5 years. Members of Parliament may not hold any another representative mandate, be in the civil service, occupy other paid positions, be engaged in other paid or business activities (except for teaching, scientific and creative activities), be a member of the governing body or supervisory board of a profit-making enterprise or organization. In the Verkhovna Rada, according to the results of elections, a coalition of parliamentary factions is formed. It includes the majority of MPs from the constitutional composition of the Ukrainian Parliament. The coalition proposes to the President the names of candidates for ministers and the prime minister. The main powers of the Verkhovna Rada: • Pass amendments to the Constitution. • Adoption of laws. • Appointment of a referendum. • Approval and oversight over the fulfillment of the State Budget. • Definition of the principles of the country’s domestic and foreign policy. • Approval of nationwide programs for economic, scientific and technical, social, national cultural development and environmental protection. • Convene presidential elections in Ukraine. • Declaration of a state of war and peace at the proposal of the President; approval of the President's decision to use the Armed Forces of Ukraine. • Removal from office of the country’s President via impeachment. • Consideration and adoption of a decision on the approval of the action program of the Cabinet of Ministers of Ukraine. • Appointment at the proposal of the President and approval of decision on the resignation of the Prime Minister and other members of the Cabinet of Ministers of Ukraine; control over the activities of the Cabinet of Ministers. • Adoption of decisions on the granting and procurement of loans and economic aid, control over its use.

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• Appointment and dismissal at the proposal of the President of the Chairman of the National Bank of Ukraine and half of the composition of the National Bank Board. • Appointment and dismissal of members of the Central Electoral Commission at the proposal of the President. • Approval of the overall structure, size, and functions of the Security Service of Ukraine, the Armed Forces of Ukraine and other military units established in accordance with the laws of Ukraine and also the Ministry of Internal Affairs. • Granting consent for the appointment and dismissal by the President of the Prosecutor-General; expressing no confidence in the Prosecutor-General, resulting in his resignation from office. • Establishment and dissolution of districts, establishment, and change of borders of districts and cities, changing the hierarchy position of settlements to cities, the naming and renaming of settlements and districts. • Appointment of regular and special elections to local selfgovernment bodies.

The powers of the Cabinet of Ministers

The Cabinet of Ministers is the supreme body of the state executive power, subordinated and accountable to the Verkhovna Rada. The Prime Minister, as well as the Minister of Defence and the Minister of Foreign Affairs, is appointed by the Verkhovna Rada at the proposal of the President. The main powers of the Cabinet of Ministers are: • To maintain the state sovereignty and economic independence of Ukraine; fulfillment of the state’s domestic and foreign policies. • To make provisions for the protection of human and civil rights and freedoms. • To ensure the implementation of financial, pricing, investment and taxation policies, policies in the areas of labour and employment, social security, education, science and culture, environmental protection, environmental security and environmental management. • To develop and implement national programs on the economic, scientific and technical, social and cultural development of Ukraine. • To manage state-owned facilities in accordance with the law. • To develop a draft law on the State Budget and ensure its implementation. • To direct and coordinate the work of ministries and other bodies of executive power.

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Adoption of laws in Ukraine

According to the Constitution of Ukraine, the right to legislative initiatives in the Verkhovna Rada belongs to the President, MPs and the Cabinet of Ministers. After Parliament adopts a law, it is sent to the President for signing. The head of state, within fifteen days of receipt of the law, signs it and officially promulgates or returns it with his grounded and formulated proposals to the Verkhovna Rada for reconsideration. If the President does not return the law for reconsideration within the established term, the law is deemed to be adopted. If during reconsideration the law is once again approved by the Verkhovna Rada by at least two-thirds of its constitutional composition, the President is obliged to sign it and promulgate it within ten days. In case this law was not signed by the President, it will be promptly promulgated by the Chairman of the Verkhovna Rada and published bearing his signature.

According to the Constitution, the right of legislative initiative in Verkhovna Rada belongs to the President, People's Deputies and the Cabinet of Ministers

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Forms of government around the world

A presidential republic is a popular form of government among Latin American and African countries, where authoritarianism has led to low living standards and numerous human rights violations. Practically the only exception to this rule is the United States of America. The US Constitution gives broad rights to the President in terms of appointing and dismissing civil servants of all ranks, as well as concluding international treaties. The noteworthy presidential election system takes place through indirect voting. That is, Americans do not choose the future President, but state representatives do, who will vote for the candidate elected by the community. In fact, there have only been 27 amendments made to the Constitution of the United States, which was adopted in 1787; and none of them related to change in the form of government. The feature of the semi-presidential republic is the equal rights of Parliament and the President. States with this form of government are often in a transitional phase with a tendency toward the gradual transfer of powers to Parliament. France is also a semi-presidential republic, just like Ukraine. The President doesn’t need parliamentary approval to appoint the prime minister and, on his proposal, other ministers. He has the right to impose a state of emergency and, under certain conditions, to dissolve the National Assembly (one of the houses of the bicameral Parliament of France). Compliance with the Constitution of France is ensured by the Constitutional Council, whose members are elected for 9 years without the possibility of re-election. One third of the Council is renewed every three years. The Council’s decisions are not subject to appeal by any government agency. Parliamentary republic. Finland is one of the states which at the end of the 20th — early 21st century began to gradually limit presidential powers, giving more powers to Parliament. The Constitution of Finland was adopted in 1999. At that time, the Republic switched from the presidential to parliamentary form of government. The President of Finland is elected by direct ballot for a period of 6 years. He has the right to veto, legislate, and exercises executive power jointly with the Government of Finland, which is called the Council of State. The Eduskunta (Unicameral Parliament of Finland) consists of 200 deputies.

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The position of Speaker of the Parliament goes to the leader of the second largest party. Eduskunta elects the Council of State, adopts laws and the State Budget, and has the full right to constitutional control. That is, in Finland, there is no judicial body to declare the law unconstitutional. When the law contravenes the provisions of the Constitution, it is changed in favor of the latter. The parliamentary form of government also operates in the following European countries: Estonia, Austria, Bulgaria, Greece, Iceland, Italy, Germany, Poland, Croatia, Czech Republic and others. However, the scope of presidential powers in these countries is not the same. For example, in Germany, which is also a parliamentary republic, the functions of the President are purely representative, he has no real power. He is not elected by popular vote, but by deputies in the German Parliament and representatives of local councils.

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1996 June 28

adoption of the Constitution of Ukraine

2004 December

the Constitution was amended; Ukraine became a parliamentarypresidential republic.

2010 September

the changes made in 2004 were canceled, the previous version of the Constitution was restored; accordingly, Ukraine became a presidentialparliamentary republic once again

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2014 February

the Constitution of 1996 was restored; the form of government was changed again to the parliamentarypresidential model

2015 June

the Constitutional Commission agreed on the draft on constitutional reform on decentralization

2016 June

amendments to the Constitution of Ukraine were adopted in the section on justice


Constitutional податкова система reform

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REFORM JUDI CIAL JUDICIAL REFORM. Background

When it comes to the judicial authorities, Ukrainians have almost the same associations — skepticism, distrust, and sometimes disappointment. This is not surprising because, despite the fact that the courts are a separate branch of power, their independence has almost always been neglected by the “judges” themselves: either MPs, or presidents, or oligarchs, or those who have more money in their pockets "to get things done. " The history of court reform dates back to even before Ukraine's independence. In particular, the Declaration on State Sovereignty of 1990 consolidated the provision that state power in Ukraine is exercised through the division into the legislative, executive and judicial branches of power. After independence, Parliament approved the Concept of

FORM JUDI042

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REJUDI- FORM judicial reform in Ukraine in 1992, which was aimed at establishing truly independent courts and implementing their specialization, adopting new legislation, and, most important of all — ensuring that citizens have the right to a fair trial. Before the adoption of the new Constitution in 1996, the Verkhovna Rada of Ukraine managed to adopt only a number of laws, which partially ensured the functioning of the court. Only 2001 was the beginning of the first judicial reform in Ukraine, which in pundit circles was called "small" since changes were adopted not by means of new complex laws on the judicial system, but by the minimal changes to existing legislation.

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At the same time, over the course of a year Parliament has barely adopted a new law On the Judiciary of Ukraine, while in 2004–2005 MPs even managed to adopt a new Civil Procedure Code (to replace the Code from 1963) and the Code of Administrative Legal Proceedings of Ukraine. However, all these changes have had no effect. Public distrust increased. The next President of Ukraine, Viktor Yushchenko, picked up the baton of changing the judicial system, who in 2006 declared his intentions with the Concept for improving the legal system to ensure a fair trial in Ukraine in accordance with European standards. Actually, this document ended on the bookshelf because no changes occurred. It was only after Viktor Yanukovych came to power that the court system underwent significant changes and was controlled by the Presidential Administration on Bankova Street. The court system сhanges of 2010 have become evident, but their ultimate goal was completely different from that required by society. In particular, implementing the right to a fair trial. The Law On the Judiciary and the Status of Judges ignored international standards and aimed to create a court dependent on the state’s key persons. Europe condemned the negative aspects of Yanukovich’s judicial reform, in particular, the European Court of Human Rights (Oleksandr Volkov vs Ukraine case). The courts continued to be mired in corruption schemes. Court bureaucracy became routine for Ukrainians, as proceedings could last for years, mutual responsibility was legalized, resulting in judges, prosecutors and law-enforcement agencies cooperating not for the implementation of the principles of the rule of law but for the benefit of interested parties. The Institution of public trust in the courts gradually leveled off.

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the new government is putting judicial reform at the forefront in its “Strategy 2020”

At the time of the Revolution of Dignity, the judicial branch once again confirmed its absolute dependence on the regime and approved verdicts depriving people of liberty without a reasonable base of evidence, deprived activists of their driving licenses; throughout Ukraine judges prohibited peaceful assemblies, which provoked even greater distrust. However, even after the overthrow of the regime, it is not so easy to eliminate the effects of Yanukovych's pseudo-reform, because the resistance to the old political elite is still felt and, at the same time, there is the inexpugnable desire of the new Government to take advantage of "manual" justice for their own needs. Therefore, in 2014–2015 there were only certain piecemeal changes that did not produce a placebo effect. At the same time, the new Government in the guise of Petro Poroshenko is putting judicial reform at the forefront in his Strategy2020. For this purpose, he even created a special Judicial Reform Council, headed by Oleksiy Filatov, the Deputy Head of the Presidential Administration of Ukraine. The chosen pace of judicial reform in 2015 needs to be more dynamic. The only change in that year was the adoption of the Law On ensuring the right to a fair trial. Besides, delays and flagrant disregard by Parliament in the appointment/dismissal of about 800 of Yanukovych’s judges has cost Ukrainians about UAH 250,000 every single day. According to the international human rights organization Freedom House, over the past 8 years, the effectiveness and independence of the Ukrainian judicial system has deteriorated, or rather stuck, at the 2013 level. In 2016, GFK research commissioned by the USAID project Fair Justice, once again revealed that 69% of Ukrainians do not trust the judicial authorities. However, the demand by society to clean up the judiciary is rather high. Moreover, foreign investors have emphasized that the main obstacles to investments in Ukraine are large-scale corruption and distrust of the judicial system. This is evidenced by the results of the poll conducted by the investment company Dragon Capital and the European Business Association on the eve of judicial reform in 2016. Changes were inevitable.

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Key bodies responsible for the implementation of judicial reform The Supreme Council of Justice (formerly the High Council of Justice, the law of December 21, 2016) — a new collegiate, independent, constitutional body of state power and judicial administration in Ukraine, which has the final decision in the dismissal of judges, and the President appoints judges upon its recommendation. The High Qualifications Commission of Judges (HQCJ) is a state body of judicial administration responsible for the formation of judiciary establishment, the transfer of judges, and ensuring their proper qualification level. The Public Council of Integrity is a public collegial body created to assist the HQCJ in determining the suitability of judges (candidates for the position of judge) for the criteria of professional ethics and honesty with the purpose of qualification assessment. The National School of Judges is a state institution with special status that provides training for highly skilled personnel for the judicial system and conducts research activities. The State Judicial Administration of Ukraine is a body of judicial power that carries out the organizational and financial provision of the legal authorities within the limits of its powers.

A three-level judicial system of Ukraine:

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instance

instance

district economic courts, district administrative courts, district general courts, the Supreme Court on Intellectual Property, the Supreme Anti-corruption Court.

commercial courts of appeal, administrative courts of appeal, general courts of appeal

JUDICIAL REFORM


instance the new Supreme Court, which consists of 4 cassation courts: commercial, civil, criminal, administrative

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What does the reform envisage?

—To create a truly independent judicial branch of power, henceforth judges will be appointed by the President upon submission of the High Council of Justice; — turn the four-level judicial system into a three-level one, creating local courts — appellate courts, the new Supreme Court, which includes the Grand Chamber, the Administrative Court of Cassation, the Commercial Court of Cassation, the Criminal Court of Cassation, the Civil Court of Cassation). All other higher courts — the economic, administrative, specialized court for civil and criminal cases are liquidated, the specialization of legal proceedings remains; — the introduction of competitive selection of judges according to new qualification requirements of judges (a judge shall be a citizen of Ukraine, who is not younger than 30 years old and has 5 years of experience in the field of law, assistants of judges with 3 years of experience can also become judges). From now on, professionals outside the system with appropriate work experience may become higher-level judges, and appointments are perpetual; — the completion by judges of the declaration of integrity and declarations of family ties; — creation of a Public Council of Integrity; — creation of the Higher Anti-corruption Court and the Intellectual Property High Court; — new procedure for the establishment of the High Council of Justice; — restrictions on judicial immunity, in particular, a judge caught in a serious crime, can be detained without the consent of Parliament and the High Council of Justice; — remuneration of judges significantly increased; — expansion of grounds for dismissal of judges (if the illegitimate source of their property is proved); — enlargement of the grounds for disciplinary liability of judges, qualification assessment; — constitutional complaint — henceforth any citizen of Ukraine may apply to the Constitutional Court; — the gradual introduction of the lawyers monopoly on representation in courts.

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From now on, professionals outside the system with a suitable work experience can become higher-level judges

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Realization of judicial reform: the current situation

Fact 1. Filtering of Judiciary staff. After the adoption of new legislation on the judicial system, the Ukrainian Themis experienced significant losses of personnel. En masse resignations of judges began. In July-August 2016 alone, about 1,000 judges submitted letters of resignation, which were approved by Parliament in September. These judges probably tried to avoid anti-corruption checks and re-certification. Besides, resignation provides judges with a lifelong financial allowance. Fact 2. Dismissal for breaking the oath. Judicial reform began officially on September 30, 2016. On September 29, Parliament met at an extraordinary session to dismiss 20 judges who took decisions against Maidan activists. The dismissed judges included Judge Svitlana Volkova (released Berkut unit officer Sadovnik, who is suspected of murdering 39 Maidan activists), Alla Demydovska and Andriy Makukha (they adopted decisions on the detention of activists). The President of Ukraine supported the trend of filtering the Judiciary from unjust judges by signing the release of Oksana Tsarevych, an odious judge in the days of the Revolution of Dignity. Fact 3. An attempt to block the reform. It is impossible to ignore the fact that after the start of judicial reform, judges of the current Supreme Court of Ukraine appealed against it to the Constitutional Court of Ukraine. In particular, they appealed against the liquidation of the current Supreme Court of Ukraine and the fact that judges appointed for life should pass the competition. But the most interesting thing is that despite their appeal against judicial reform, they still applied for the contest to the new Supreme Court.

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Competition to the Supreme Court

On November 7, 2016, the High Qualifications Commission of Judges announced a competition for the replacement of 120 vacant positions in the new Supreme Court. According to optimistic forecasts, the Supreme Court should have been started its work in April of this year, but the process was delayed. It is noteworthy that the nominees for the positions of judges could be professionals outside the system, including lawyers and scholars. A total of 846 candidates submitted their documents to take part in the contest to the Supreme Court, and more than 60% of whom are current servants of Themis. After the examination, 653 candidates continued their participation in the competition. Afterwards, candidates were expecting to sit an individual examination (in particular, set by anti-corruption authorities). In February, 643 candidates passed the anonymous testing and wrote a practical part (a court decision). The examination of the case study of judges significantly delayed the contest to the Supreme Court. During this period, NGOs picketed the HQCJ for them to release a dossier of candidates. Even after the publication of the results of the written practical part of the competition to the Supreme Court the HQCJ could not avoid manipulation. As the points for the practical part of the competition were not high, they decided to summarize them with scores for anonymous testing. Thus, another 44 candidates received a "new lease of life" for participation in the competition. A total of 382 candidates have passed moral and psychological tests, while neither the practical work nor the methodology of their assessment was released by the HQCJ, which provides reason for doubt in the transparency of the competition. It importance of the work of the Public Council of Integrity should also be noted, as it analyzed the activities, lifestyle and income of candidates, and assessed integrity in accordance with the rules of judicial ethics. Out of the 382 candidates who were admitted to interview, 140 of them received a negative conclusion, which means the public’s "veto" to their further participation in the competition. After the interviews with candidates, the HQCJ agreed only with 25 negative conclusions of the Public Council of Integrity, which means that these candidates automatically ceased their participation. A total of 308 applicants were successfully interviewed, and 115 of them received negative conclusions from the Public Council of Integrity.

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The HQCJ considered the cases of these candidates in plenary meetings, where members of the HQCJ should receive 11 out of 15 votes to overcome the conclusion of the Public Council of Integrity. The HQCJ does not support the conclusions of the Public Council of Integrity since only 16 out of 69 already examined candidates have ceased their participation; others will be included in the general ranking. Candidates who rank first are likely to become new judges of the Supreme Court. Therefore, one should not be too surprised if only “ minor repairs” will be carried out in the new Supreme Court, since the current chairman of the Supreme Court Yaroslav Romanyuk (stood up for draconian laws on January 16, 2014), the Head of the Council of Judges Valentyna Symonenko (known for her ties with occupied Crimea, and when occupying the post of Head of the Council of Judges countered judicial reform) still have actual chances of becoming a judge, as does Judge Pavlo Vovk (who has close ties with political circles, especially with Serhiy Kivalov and –MP Oleksandr Hranovsky, curator of the legal system from the Petro Poroshenko Bloc). Unfortunately, there is no common vision of how the work of the new Supreme Court will look like and how court cases will be handled, because Parliament delayed the consideration of new procedural codes, in which the key points of transition to the three-tier judicial system should have been outlined.

nominees for positions of judges could be professionals outside the system, including lawyers and scholars

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The selection of judges for 600 vacant posts

Starting from April 2017, the HQCJ announced the selection of candidates for local court judges. Since judicial authorities are experiencing a significant shortage of Judiciary staff (one third of justiceships are vacant) and about half of the courts are understaffed, dragging on litigations and becoming irrelevant, the selection of new judges is extremely important. However, there are a few admonitions. Despite the fact that lawyers above 30 years of age with 5 years of experience in the field of law can take part in such a selection, which envisages an upgrade of the judiciary, in fact, deputy judges above 30 years old with 3 years of experience in this position take part in the same selection. Interestingly, both categories of candidates must be selected and trained at the National School of Judges. The biggest manipulation is hidden in the fact that deputy judges will study at the school of judges for just 3 months, they say they have a much better understanding of the judiciary, and lawyers for 12 months, including training in courts and independent work. According to many experts, such unequal access to the judiciary and the lengthy contest process may hamper the rapid renewal of the judiciary, which is greatly anticipated by society.

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unequal access to the judiciary and the long process of the contest may impede the rapid renewal of the judiciary

NGOs

• CHESNO movement, CHESNO campaign. Filter the judiciary! • Centre of Policy and Legal Reforms • All-Ukrainian Public Organization AutoMaidan • Judicial group of the Reanimation Package of Reforms • Center for Combating Corruption

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2014 2016 October

president Petro Poroshenko created the Judicial Reform Council, which was supposed to develop the necessary laws to launch judicial reform

20142015 functioning of the Interim Special Commission for the Verification of Judges of General Jurisdictions of the High Council of Justice. The commission was created within the framework of the law On restoring confidence in the judiciary

2015 February

the Verkhovna Rada adopted a law On ensuring the right to a fair trial

8 April

the Verkhovna Rada approved the law On Restoring Confidence in the Judiciary (law on lustration of judges)

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податкова JUDICIAL REFORM система

June

the law On the Judiciary and the Status of Judges and the amendments to the Constitution of Ukraine in terms of justice were adopted

JulySeptember

purification of the judiciary (341 judges were released for breaking their oath, 1320 voluntarily resigned) / renewal of the judiciary (218 judges appointed by the President)

September

launch of judicial reform through amendments to the Constitution in the sphere of justice

November

competition to the Supreme Court began the Public Council of Integrity was formed judges began to fill in the declaration of integrity and the declaration of family ties


NovemberDecember

submission of candidates' documents to the Supreme Court checking of compliance of candidates' documents

December

the Law On the High Council of Justice was adopted

20162017 DecemberFebruary

special examination of candidates for the Supreme Court

2017 February

anonymous testing of candidates for the Supreme Court — the first stage of the written part of the competition to the Supreme Court

FebruaryMarch

verification of the practical part by the members of the HQCJ

April

he HQCJ announced the selection of candidates for the posts of local court judges

The beginning of April

testing of moral and psychological qualities of candidates for the Supreme Court, interviews with psychologists

April-May

candidates for the posts of local court judges able to submit their documents for participation in the selection (5,336 candidates)

April-July

interviews with candidates to the Supreme Court, and holding of plenary sessions with those candidates who received the negative conclusions from the Public Council of Integrity

June

The Verkhovna Rada of Ukraine adopted the first reading draft amendments to the procedural codes

practical work — the second stage of the written part of the contest to the Supreme Court, in which the candidates write a court decision

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tem

Refo the nation curity defen sy Reform of the national security and defense та system. Background

In 1991, after the dissolution of the Soviet Union, Ukraine acquired a capable army with relatively modern armaments and a developed infrastructure: about one million military personnel, more than 20,000 land-based units and more than 10,000 pieces of air force equipment, a separate air force, as well as its own nuclear weapons.

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defe s orm of nal sey and nse ystem Thus, Ukraine became the third most powerful nuclear country in the world after Russia and the United States. Ukraine had 176 intercontinental ballistic missiles, more than 2,500units of tactical nuclear weapons, and dozens of strategic bombers. Although the suitcase with the red button was located in Moscow, the Ukrainian Government could solve that problem too. In 1995, after the division of the Black Sea Fleet of the USSR, Ukraine also received about 18% of its capacity.

податкова система

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Thus, just 25 years ago, Ukraine had one of the strongest armies in the world and was able to respond adequately to any external threat. At the same time, this was also a problem: the million strong armed forces were simply unnecessary for the young state, which had chosen the path of democratic values. Moreover, it was an incredible economic burden. Furthermore, none of the super powers wanted a new competitor: after the Cold War, the world took an official course on disarmament. Ukraine has fulfilled its part of the deal — disarmament and the surrender of nuclear weapons — unlike Russia and the United States. In coming years, other countries have only increased their military potential. On December 5, 1994, Ukrainian President Leonid Kuchma and the Presidents of the United States, Great Britain and Russia signed the Budapest Memorandum on Ukraine's non-nuclear status. According to this document, the parties promised to respect the independence, sovereignty, and borders of Ukraine; refrain from threats or the use of force, not to use any weapons against Ukraine, refrain from economic pressure, not to use nuclear weapons against Ukraine, and pursue urgent assistance from the UN Security Council in the event of Ukraine being subjected to military aggression. Ukraine, in its turn, refused not only to manufacture, use and store nuclear weapons on its territory, but to also withdraw from membership of any military bloc. This beautiful and important step as a symbol of improvement in relations between nations was taken in exchange for peace guarantees for our country, destroyed by Russia 23 years later. The non-nuclear status of Ukraine remains unchanged in March 2016, President Petro Poroshenko confirmed the chosen course. As for the regular army, by 2014, there were at least three attempts to create a professional army. However, on every occasion the reforms ended with a delay or termination in their implementation due to a lack of funding. A fully-fledged contract army was never created, new military equipment was not procured in sufficient quantities, old equipment was becoming obsolete, and educational institutions were closing. Due to corruption and low discipline in an unstable system, the level of trust and the status of servicemen were on a downward spiral. Young Ukrainians began to avoid military conscription en masse, which became a national trend. The reluctance to serve in the Armed Forces of Ukraine created one more opportunity for corruption to grow in all related areas: from public administration to medical institutions. It came to the point that in October 2013 the then President of Ukraine, Viktor Yanukovych, completely canceled conscription from 2014, in accordance with the State Program on reform of the Armed Forces until 2017, which provided for another attempt to create a contract army. The regular army was actually repealed. Following the annexation of Crimea, already in April 2014, the decisions that led to the loss of the Ukrainian Army’s combat readiness were transferred to the remit of the Prosecutor-General's Office, military service was restored, and the previous reform program was canceled. With the outbreak of hostilities in Ukraine, it became clear that the army was completely unprepared to protect the borders of the state and its citizens from Russia’s military aggression.

060

Reform of the national security and defense system


Reform of the national security податкова and defenseсистема system

061


Volunteer Movement

The spontaneous recovery and maintenance of the Ukrainian Army began with the Revolution of Dignity and, to a large extent, this remains the merit of the large-scale volunteer movement. In May 2015, the founder of the People's Project platform, the Coordinator of the Volunteer Council at the Ministry of Defense, David Arakhamia, said that 14,500 volunteers and more than 2,500 organizations are helping the army on a constant basis. In March 2015, the law On Volunteer Activity was adopted, legalizing fundraising by volunteers, in particular for the army’s needs. At the beginning of December 2014, GfK Ukraine conducted a study on the state of the volunteer movement in Ukraine. The results showed that:

62% 81% 85%

believing that volunteering helps to strengthen peace of people tend to regard volunteering as an obligatory part of civil society

of Ukrainians recognize the role of volunteers in last year's political changes

062

billion UAH

billion UAH

raised by volunteers for the needs of the military over the course of two years of the war (as of April 2016)*

has amounted the war tax (1.5%), which has been collected since August 2014

податкова Reform of the система national security and defense system


Also, since the very start of the conflict, there are public organizations active in assisting Internally Displaced Persons, providing psychological support to soldiers, taking care of the wounded, the disabled, and families left without a breadwinner because of the hostilities, organizing searches for the deceased and helping to exchange captives. Volunteers work in close cooperation with the new Government: in October 2015, the Council of Volunteers was created under the Ministry of Defense of Ukraine. The relevant presidential decree gave the council the right to dispose of budget funds for financial support of the army. Also, participants of the volunteer movement joined the Reform Project Office, established in 2016 under the Ministry of Defense of Ukraine. The biggest volunteer organizations and associations: People's rear, Come Back Alive, Wings of Phoenix, “Army SOS. Since the outbreak of hostilities, around 100,000 volunteers have joined the ranks of the Armed Forces of Ukraine, Defense Minister Stepan Poltorak reported in March 2017. This has had a significant influence on the composition of the troops and the attitude of civilians. Serving in the army has become an honour, and in a short space of time, the ordinary warrior has become the hero of Ukrainian society. Thus, the new reform of the Ukrainian Army began spontaneously, not through the adoption of a new doctrine, but with the Revolution of Dignity and the creation of volunteer battalions to participate in military actions in the east. Officially, the reform of the Armed Forces of Ukraine began with the adoption of a number of key documents: National Security Strategies (May 2015), Military Doctrine (September 2015) and the Strategic Defense Bulletin (May 2016).

million UAH raised for the Ministry of Defense the fundraising through the SMS-service 565, which lasted until October 2015 (the message to this number cost UAH 5).

*According to Vitalii Deineha, head of the volunteer group Come Back Alive

Reform of the national security and defense system

063


The objectives of the new reform in the main State documents National Security Strategy of Ukraine:

Restore the territorial integrity of Ukraine. For this purpose, powerful Armed Forces of Ukraine equipped with modern weapons and military equipment, as well as other effective intelligence, counterintelligence, and law-enforcement agencies should be created. The creation of an effective security and defense sector by improving legislation, raising the effectiveness of centralized management, upgrading the state system of strategic planning, introducing an integrated system of education and training, improving budgetary policy, improving the system of democratic civil control, stepping up oversight by Parliament, developing a system of patriotic military education. Increase the state's defense capability. First and foremost, this is modernization and priority development of the military-industrial complex, the production of competitive weapons and military equipment, import substitution and increase in domestic production of critical components and materials; deepening of cooperation with other states, first of all NATO member states, the EU; achievement of full independence from Russia in terms of the manufacture of military equipment; actual defense reform and creation of a powerful military-trained reserve. According to the Strategy in the medium-term perspective, the Armed Forces of Ukraine will be staffed on a fixed principle with a gradual increase in the army’s contractual component. The Strategy also provides for the creation of Military Police and the transfer of a majority of law-enforcement functions from the Security Service of Ukraine to lawenforcement agencies, except for combating crimes committed against the basis of national security. To deprive the Ministry of Internal Affairs of unusual control and permissive functions and to turn it into a civil central executive authority. Give more rights and responsibilities to the National Guard to increase its capabilities for providing public safety and supporting the operations of the Ukrainian Armed Forces in a crisis environment. Develop the State Border Guard Service of Ukraine as a military formation. Create a State Bureau of Investigation responsible for conducting criminal investigations.

064

Reform of the national security and defense system


Reform the Prosecutor-General's Office in accordance with the norms and standards of the European Union. Reform the system of public administration with anti-corruption policy of a new quality. Attain the full compatibility of the security and defense sectors with the relevant structures of NATO member states and ensure NATO membership in the future. The top priority of Ukraine’s foreign policy is, according to the document, strategic partnership with the USA as a guarantor of international security in the Euro-Atlantic area by the Ukraine-US Charter on Strategic Partnership of December 19, 2008. The Strategy is the main document for strategic planning, on the basis of which all other papers in the field of protecting national security are developed.

Military doctrine of Ukraine:

Repulse the armed aggression of the Russian Federation. Ensure the defense capability of Ukraine. Ukraine’s participation in the implementation of the common security and defense policy of the European Union. Worthy perception of Ukraine at international level. Compliance with the criteria for EU and NATO membership. Eliminate illegal Armed Groups. Restore the credibility of military service. Provide social security guarantees to servicemen. Improve state information policy. Increase the effectiveness of the domestic military-industrial complex. In the face of real threats of aggression, preservation of the mixed principle of manning the Armed Forces of Ukraine with a gradual increase in the number of soldiers serving on a contract basis. Integration of volunteer formations into the Armed Forces of Ukraine, the Ministry of Internal Affairs and the National Guard. Prevention of new armed conflicts, systemic strengthening of the national defense capability, raise the image and role of Ukraine on the international stage. Maintaining the level of defense capacity, which, alongside with taking the full advantage of the opportunities for peaceful settlement of interstate controversies, will correspond to the level of military threats and will ensure military-strategic parity in the region. Restoration of military infrastructure, redeployment of military units and defense forces, taking into account the strengthening of the permanent military presence in the eastern and southern regions of Ukraine.

The Strategic Defense Bulletin:

is a roadmap for the reform based on the Military Doctrine and in line with Ukraine’s objectives to meet NATO requirements.

Reform of the national security and defense system

065


Authorities responsible for implementing the reform The President of Ukraine as the Supreme Commander-in-Chief of the Armed Forces of Ukraine. National Security and Defense Council of Ukraine, which is responsible for the coordination and monitoring of the activities of executive bodies in the field of national security and defense. The Ministry of Defense and the General Staff of the Armed Forces. In accordance with Euro-Atlantic norms and standards, the duplication of functions by these bodies will be excluded by 2018. In addition, it is planned to establish the separate positions of "The Commander in Chief of the Armed Forces of Ukraine" and " Chief of the General Staff of the Armed Forces of Ukraine" by 2020.

066

Reform of the national security and defense system


Military budget of Ukraine In 2015, the provisions of the National Security Strategy of Ukraine and the Military Doctrine of Ukraine provided for the annual allocation of budget funds of at least 5% of GDP to finance the security and defense sector, including at least 3% of GDP for defense. In previous years this indicator was as follows:

2004 1,8% 2005 1,4% 2006 1,2%

2009 1,1%

UAH 6 billion

UAH 6 billion

2007 1,3% 2008 1,2%

UAH 6 billion

UAH 9 billion UAH 12 billion

UAH 10 billion

2010 1%

UAH 11 billion

2011 1%

UAH 13 billion

2012 1%

UAH 14 billion

2013 1%

UAH 15 billion

2014

1,7%

2015

UAH 27 billion

2,6%

2016 2,5% 2017

UAH 52 billion UAH 59 billion

2,7%

UAH 69 billion

Reform of the national security and defense system

067


The current situation

According to the Strategy for Sustainable Development Ukraine–2020, the reform of the national security and defense system is of paramount importance. Since the beginning of hostilities in the east, 2,629 servicemen have been killed (officially). More than 600,000 have been forced to abandon their homes and leave the war zone in the Donetsk and Luhansk Regions, and about 20,000 from Crimea and Sevastopol. Therefore, the situation requires strong and urgent action by the Ukrainian Government. The system changes began with the introduction of the three-level command system of the Armed Forces of Ukraine: General Staff, Crosssectoral Institutions’ Management and Military Unit Command. These changes helped to manage army administration. There is a gradual increase in the technical base. In 2015, under state defense orders, the army received 1,711 units of weaponry and equipment, more than 400,000 units of missiles and ammunition. In 2016, the State Concern Ukroboronprom handed over more than 6,200 units of military equipment to the army. At the beginning of 2017, a record number of military contractors were registered in Ukraine — more than 70,000 people. In order to get rid of corruption in the system of Government orders, the Ministry of Defense has used an electronic procurement system since 2015. Also, some success had been achieved in the reform of food supplies to the army: in October 2016 a new concept of the food system was developed. It has so far only been introduced in two military units on an experimental basis. The gradual transition to a new food system is scheduled for 2017–2020. The number of training operations and joint training of Ukrainian military personnel with servicemen of other countries and NATO has risen significantly. Since 2014, military numbers have increased to 250,000 people. According to the international rating Global Firepower–2016, Ukraine ranked 30th in the world and 8th in Europe in terms of military power. According to this rating, Russia ranks 2nd in the world. In 2016, Ukraine has risen in the overall ranking of militarization from 23rd place in 2015 to 15th. This is evidenced by the Global Militarization Index (GIM). Furthermore, Special Operations Forces and a training center were created in 2016. Even today, Ukraine can independently supply the needs of the army by 40%, while earlier this figure was 8–12%. And to a large extent — thanks to private companies. However, the Government, which monopolized the market, is not interested in their development. Hands-on management of the security sector is also a big problem. At the beginning of the war, this was well grounded. However, after three years of the war it only hinders the development of reform, making it

today, Ukraine can independently supply the needs of the army by 40%

068

податкова Reform of the система national security and defense system


almost impossible to resolve such issues as system rearmament and system military cooperation. This is a huge white spot that does not enable the taking of steps in all areas of the reform: the concept of the army, the military-industrial complex, military-technical cooperation. Also, due to the lack of definition of the Army's concept and refusal to create a professional army, we actually get a situation where front-line troops almost do not receive modern weapons and do not have proper social security. Considering the fact that Ukraine is embarking on a course of creation of a Western-type army, this is unacceptable. In order for the reform to actually take place, it is necessary to abandon hands-on management and to adopt a number of laws, under which the defense-industrial complex will be developed, a system of rearmament will be created. Despite the fact that all issues related to the development of the army and the defense industry have to be resolved by the Government, today they are taken outside of the Government, where there is only one sectoral deputy minister of the Ministry of Economic Development and Trade. It is extremely important to eliminate that version of Ukroboronprom created by the team of former President Yanukovych, where managers hold two offices at the same time as officials and businessmen. This situation contributes to the fact that concluded contracts are not beneficial to the army, but those which are beneficial to financial and industrial groups. There is a need to change the situation with monopolization of the arms market, which prevents private companies from developing and attracting foreign investors. This reform is also significantly hampered by the lack of parliamentary and public control.

Reform of the national security and defense system

069


Interesting Facts

According to the new Military Doctrine of Ukraine, adopted in September 2015, Ukraine will deepen its cooperation with NATO to achieve full compatibility with the Alliance's forces. This means that for now Ukraine retains its non-aligned status and focuses on creating conditions for membership in the future. The active process of training and exchange of experience between Ukrainian and NATO military is under way. According to a survey conducted by the Kyiv International Institute of Sociology at the end of 2016, the church and volunteers are the most trusted groups among Ukrainians:

070

Reform of the national security and defense system


government

church

8,7%

58,8%

president

volunteers

16,8%

57,6%

media

32,3%

Reform of the national security and defense system

071


Attitude of the Ukrainian Population towards the country joining NATO: Date

For

Against

2011 April

25 %

60%

IFAK Ukraine

2012 April

15 %

62%

Democratic Initiatives Foundation

19 % 15 %

66% 60%

Sociological group Rating Democratic Initiatives Foundation

2013 October

20 %

66%

Sociological group Rating

2014 March

44 %

47%

1+1

April

36 %

48%

May

37 %

42%

Razumkov Center and s ociological group Rating Razumkov Center

June

47 %

36%

Gorshenin Institute

June

41 %

40%

Razumkov Center

July

44 %

35%

Sociological group Rating

March

44 %

—

September

52 %

19%

The Democratic Initiatives Foundation together with Kyiv International Institute of Sociology GfK

October

53 %

34%

Gorshenin Institute

November

51 %

25%

Sociological group Rating

2015 March

43 %

33%

March

43 %

31%

Kyiv International Institute of Sociology Razumkov Center

March

47 %

29%

Sociological group Rating

May

37 %

36%

June

53 %

32%

Kyiv International Institute of Sociology Pew Research Center

June

41 %

30%

International Republican Institute

August

64 %

28%

Democratic Initiatives Foundation together with Razumkov Center

2016 May-June

44 %

38%

2017 June

43%

30%

Kyiv International Institute of Sociology Sociological group Rating

October December

072

Agency

Reform of the national security and defense system


Reform of the national security податкова and defenseсистема system

073


2013 October

abolition of conscription in accordance with the new State Program for the reform of the Army until 2017

2014 March

National Guard of Ukraine was re-established — military formation with law- enforcement functions (established in 1991, disbanded in 2000)

April

conscription was renewed, and the previous reform of the Armed Forces of Ukraine was canceled

2015 March

the Law On Volunteer Activity was adopted

May

the National Security Strategy was adopted

September

a New Military Doctrine was adopted

October

A Volunteer Council was created at the Ministry of Defense of Ukraine

2016 May

the Project Office of Reforms under the Ministry of Defense of Ukraine was established, the Strategic Defense Bulletin was adopted

August

a nationwide military duty of 1.5% of personal income was introduced. Taxation will be continued until a decision is adopted by the Verkhovna Rada on the completion of reform of the Armed Forces of Ukraine

October

February

the Ministry of Defense has started a fundraising campaign for the needs of the army called "Support the army, save the country: call 565"

074

податкова Reform of the система national security and defense system

the structure of the Ministry of Defense of Ukraine was changed, which enabled the management of the Ministry to be renewed and brought closer to NATO standards


2017 February

president Petro Poroshenko promised UAH 9 billion to finance the development and purchase of new weapons and military equipment for the Ukrainian Army in 2017

March

the Law On the Unified State Register of Persons liable for military service was adopted, which would prevent people avoiding being called up

Reform of the national security податкова and defenseсистема system

075


Rerm Ref of Law nforceReform of Law-enforcement. Background

After the collapse of the USSR, the system of the Ministry of Internal Affairs, the main element of which was the militia, did not actually undergo significant changes in the period from 1991 until 2014. The biggest problem was the repressive activity and the paramilitary format of the militia, and not law-enforcement activity and the civilian format, as is so in the civilized world. The other problem was that the Ministry of Internal Affairs remained an interdepartmental monster, which combined functions starting from the migration service and right to the fire department, which was undoubtedly a post-Soviet rudiment. The state wanted to control every step of its citizens and tried to centralize as much as

076

податкова система


Refo form r possible of the governance of society in several huge enforcement bodies. In addition, this situation led to duplication of many functions between the various structural units of the Ministry of Internal Affairs and bloated staff numbers. Tellingly, in 2014, the militia still continued to be guided by the Law On the Militia, which was adopted in 1990, during Soviet times. In addition, the structure and number of militia personnel were regulated by a separate Law of Ukraine entitled On the general structure and size of the Ministry of Internal Affairs of Ukraine, the issue of disciplinary proceedings and punishment for violations — by the Law On the Disciplinary Statute of the Internal Affairs Institutions of Ukraine.

w-enment

податкова система

077


078

Reform of Law-enforcement


Besides, there was no depoliticization of this body. Every new Interior Minister became a toy in the hands of the then president. The Ministry of Internal Affairs increasingly began to serve the incumbent authorities, which quickly led to the deprofessionalization and corruptness of the body. The militia turned into a kind of "oprichnina," whose purpose was to keep society tied to a leash to suit the prevailing authorities. All attempts of reforms — which were announced up to 9 times with different ministers — in fact, reduced to the renaming of units or departments, in no way relating to the essence of the system. Apparently, the most failed were the much-publicized reforms over the course of two terms of Yuriy Lutsenko as head of the Ministry of Internal Affairs in the 2000s, during the presidency of Viktor Yushchenko. The process of the militia’s degradation took particularly grotesque forms during the presidency of Viktor Yanukovych. Events in the town of Vradiyivka, and later in Independence Square in November 2013 — February 2014, showed that the militia had lapsed to a point when it was hard to any longer call it a law-enforcement agency. The main symbol of this process was the atrocities carried out by the Berkut special unit (now formally disbanded, but renamed) and their final chord — the shooting of unarmed protesters on February 20, 2014. Another piece of evidence of the complete ineffectiveness of law-enforcement bodies was the collaboration of a large part of the militia with the Russian aggressor during the annexation of Crimea and aggression in Donbas. Whatever political force came to power, they all used a simple and effective method — constant underfunding of law-enforcers, especially in terms of salaries. According to experts, in the best of times, the Ministry of Internal Affairs was financed by 50–60%, in the worst by 20–30%. Instead, so-called "corruption in law" was cultivated. That is, the militia had to raise at least half of the funds for its functioning themselves. Consequently, bribery, extortion, and abuse of power have become codified principles of the Ministry of Internal Affairs system. At the same time, the professional level of the MIA as a body of criminal justice was falling consistently every year. All the above-mentioned can also be extrapolated to the Security Service of Ukraine, which has not undergone any “deKGBizing.” In addition, it became the object of increased attention from the Russian intelligence services, which actively incorporated their agents into its ranks. Of course, this body became the most politicized of all law- enforcement bodies, sometimes acting as political police. The entire tax militia was born and lived with a “birth corrupted injury.” The Migration Service got used to earning from every piece of paper and document issued. An analog of the FBI of the United States has not yet been created, although this was discussed during the first term of Leonid Kuchma in the mid-1990s. The anti-corruption fight was spread to all law- enforcement agencies, and was, in fact, reduced to the arrest of "buck passers." Therefore, the creation of an appropriate body, which had to combine these functions, had become more crucial than ever. As a result, in 2014, Ukraine had a situation whereby there was almost absolute distrust of citizens in their own law-enforcement agencies. And after the Revolution of Dignity, they were perceived as enemies.

Reform of Law-enforcement

079


080

Reform of Law-enforcement


Key authorities The Ministry of Internal Affairs of Ukraine still considers itself the successor of the Ministry of Internal Affairs of the USSR. Created on December 20, 1990. Currently, it is a civil governing body of the lawenforcement agency. The State Border Guard Service is the central executive body within the Ministry of Internal Affairs, which implements state policy in the field of integral control of the state border. The State Migration Service is the central executive body within the Ministry of Internal Affairs system, which implements state policy in the field of combating illegal migration. The State Emergency Service is a central executive body within the Ministry of Internal Affairs, which implements state policy in the field of civilian protection from fire and emergency protection. The National Guard — a military formation in the system of the Ministry of Internal Affairs with the functions of ensuring law and order. The Security Service of Ukraine — created on March 25, 1992, a special purpose state law-enforcement paramilitary agency, which guarantees the state security of Ukraine. Subordinated to the President of Ukraine. Financial Intelligence Service — a law-enforcement organization in the field of protecting the economic security of the state is under formation. The purpose is to counteract economic crimes. It should be subordinated to the Cabinet of Ministers. The successor of the tax Militia. National anti-corruption bureau of Ukraine (NABU) — is a lawenforcement agency with broad coercive powers, responsible for the prevention, detection, termination, and disclosure of crimes of corruption. It was created by the President of Ukraine on April 16, 2015, and headed by Artem Sytnyk. The Bureau investigates corruption cases involving A category civil servants.

The Ministry of Internal Affairs of Ukraine is a civil governing body of the law enforcement agency

Reform of Law-enforcement

081


IMPORTANT GOAL OF REFORMS — The introduction of a European model of training and advanced training of personnel

The objectives of the reform

(according to the Concept of the priority measures of reforming the system of the Ministry of Internal Affairs and the Strategy for development of bodies of internal affairs of Ukraine) — demilitarization of the Ministry of Internal Affairs; — reduction of many institutions, units, and services with related tasks and functions; — ensuring effective coordination of activities and coordinated interaction between the National Police, the National Guard, the Border Guard Service, the Migration Service, and Emergency Service under the political guidance of the Ministry of Internal Affairs; — legislative definition of the updated general structure of the Ministry of Internal Affairs, structure and number, tasks and powers of the bodies of internal affairs and other conditions of their activities, whose priorities are the fulfillment of social service functions; — de-politicization of the activities of bodies and services subordinated to the Ministry of Internal Affairs, their autonomy and optimization; — elimination of functional doubles of establishments, departmental enterprises, institutions, and organizations; — the introduction of a European model of training and advanced training of law-enforcement personnel, application of common unified standards of law-enforcement training, aimed at increasing the effectiveness of interaction between the internal affairs bodies of different European Union member states; — development of effective means and mechanisms for monitoring the activities of law- enforcement agencies and a separate law-enforcement officer; — increase in public confidence in the activities of internal affairs bodies, as well as the authority of internal affairs officers; — enhancement of the role of civil society institutions and local self-government bodies, in measures of enforcement of the rights and freedoms of the population; — establishment of close cooperation with society and local communities.

082

Reform of Law-enforcement


Challenges for achieving these goals:

— full re-qualification of personnel; — changes in management of central and regional departments of the Ministry of Internal Affairs; — reduction of administrative apparatus (city departments); — reorganization of the special assignment unit; — creation and deployment of patrol police as a fully-fledged structure of public order recurrence; — formation of a unit for fighting cyber crimes based on new principles; — reorganization of the unit for combating economic crimes; — liquidation of the unit for combating illicit drug trafficking; — creation of an expert service independent of regional and district chiefs in the vertical power structure, that is, fully subordinated to the minister; — the reform of the National Guard, which will be completed based on professional requirements and composed solely of volunteers; the transformation of the MIA’s volunteer battalions that emerged in 2014, into professional staff units of the Ministry of Internal Affairs or joining of fighters to other staff units of the MIA; — creation of a municipal militia, with transferred the functions of protecting public order; — wage increase and improvement of social security provision for Interior Ministry staff to reduce corruption risks and encourage the best personnel to serve in the police and departmental services.

Reform of Law-enforcement

083


084

It is illustrative that the latest news on the "Reform" topic page on the official website of the Ministry of Internal Affairs dates back to December 2015. Similarly, the only inactive page in the MIA’s structure on the same website is the "implementation of reform" податкова система


Implementation of the reform According to experts, it is possible to speak today if not about complete failure, then about the serious slowdown of reform of the Ministry of Internal Affairs. Due to vague time frames (according to the Concept, the reform should be completed by the end of 2018), many processes were delayed, but the MIA's management can maneuver, appealing to citizens with references to war and shortage of money. In addition, certain pitfalls were not eliminated at the very beginning. For example, the independence of the head of the National Police from the Ministry of Internal Affairs in personnel issues was not ensured. That is why the head of the National Police still cannot approve estimates, the structure of the central office, appoint and dismiss heads of regional departments and their deputies, etc. That is, the primary condition of the reform was bungled — the depoliticization of the body. However, the main problem is a lack of political will to radically change the system of law- enforcement and actual sabotage of reform by current law-enforcement heads. This was repeatedly stressed by members of the Attestation Boards at the Ministry of Internal Affairs, who were forced to walk out in protest (, activists Roman Synytsyn, Kateryna Butko and journalist Olha Khudetska). Many experts associate the final slowdown of the reform with the resignation of the Head of the National Police, Hatiya Dekhanoidze. At the same time, the MIA’s leadership in the person of Minister Arsen Avakov repeatedly stated that reform is being implemented in accordance with the adopted concept.

Reform of Law-enforcement

085


Reform of the Ministry of Internal Affairs was begun in April 2015. The Cabinet of Ministers recommended 4 key bills for Parliament to vote on — "On the bodies of internal affairs," "On the National Police," "On services and service centers of the Ministry of Internal Affairs of Ukraine," "On Amendments to certain legislative acts of Ukraine on improving the regulation of relations in the field of ensuring road safety." During JulyAugust 3 of the 4 documents were approved by the Verkhovna Rada and signed by the Cabinet. The process of creating the police was under way during September-October, and finally, on November 7, 2015, the militia turned into the police, as a new piece of sectoral legislation came into force. In addition, the personnel certification process was launched in autumn 2015. A total of 71,828 police officers passed their competency tests. According to the results of the certification boards, 4,160 employees were dismissed from the police service due to incompetence. Thus, only 5.8% of the old law enforcement officials were dismissed after the certification process. In addition, according to the ex-head of the National Police, Hatiya Dekhanoidze, the certification was blocked by the courts. Experts also note that the favorite tactics of bypassing attestation and lustration are the transfer of an employee to a similar position in another office. Most of the law-enforcement officers involved in crimes against members of EuroMaidan successfully passed the board. The investigation of crimes committed by the MIA’s officers during the Revolution of Dignity came to a dead end. This was stated by the head of the Department of Special Investigations of the GPU Serhiy Gorbatyuk in an interview with the Ukrayinska Pravda site. According to him, half of the Berkutunit who beat up students on November 30, 2013, continued to work in the police. Moreover, only 10 persons out of the 15,000 lawenforcement officers who "passed the Maidan," testified to investigators. Most of the members of the Berkut unit continue to serve in similar departments of separate special detachments of the police under the MIA’s regional departments.

As for progress

086

cities

thousand people

introduced the new patrol police

work in the new structure in total. Most of them are new employees

Reform of Law-enforcement


Also, the process of establishing Service Centers of the Ministry of Internal Affairs is under way. The road traffic police has been created. The salaries of police officers and the National Guard were significantly increased. Reform of the Migration Service was launched and its eventual transfer to the Ministry of Justice is scheduled. The Border Guard Service has increased its numerical strength, received heavy weapons and disposed of its status as being part of the civil service, considering the military conflict with the Russian Federation. The National Anti-Corruption Bureau of Ukraine, the main body that fights corruption, was formed. Although it is still difficult to determine the result of its work, the fact is that this body began to act vigorously and has already become a significant factor in the law-enforcement field. The tax police were disbanded and the next body — the Financial Intelligence Service — should be removed from the control of the MIA and instead placed under the auspices of the Cabinet of Ministers. The process of its creation was slowed down due to legal casuistry. The Department for Combating Organized Crime and the Department for the Suppression of Illegal Drugs Trafficking was disbanded, although it is worth considering the enormous growth of these types of crimes, as stated by senior officials at the Ministry of Internal Affairs. Apparently, most of the innovations were launched at the beginning of the reform. The patrol police became a the “spokesmodel” of new reform, say former members of attestation boards under the Ministry of Internal Affairs from the public organization AutoMaidan and Combat-UA. However, the reform actually stopped there. When you look at what has been done from the things stated by the concept, then there is no progress on most points, as evidenced by Oleksandr Banchuk, an expert of the Center for Policy and Legal Reform. The key issue with the identification of the police is still not resolved. The system of a single document flow of the Ministry of Internal Affairs has not been created; the police training system has not been reformed, they are still trained at academies which are Soviet by their essence and spirit. Although from July 4, 2016, the automatic recording system for traffic violations with the help of video cameras on the roads was launched in test mode, it still does not operate in a constant mode. The structure and work of the police have not yet been improved and the number of employees has not been reduced. There is constant manipulation of terms of the reform and their scope. Thus, it can be stated that at present the process of changing the system of the Ministry of Internal Affairs is close to deadlock. As for the reform of the Security Service of Ukraine, it has not begun yet. Although all experts stress the need for this body to concentrate on counter-intelligence and anti-terrorist functions, the Security Service of Ukraine workflow has remained almost unchanged since the pre-war situation.

regions has been established a special force unit KORD since November 2015

Reform of Law-enforcement

087


2014 October

the Cabinet of Ministers approved the Concept of Priority Measures for the Reform of the Ministry of Internal Affairs System for 2015–2016

2015 April

the Cabinet reviewed and approved 4 bills on the reform of the Ministry of Internal Affairs: On bodies of internal affairs, On the National Police, "On Services and Service Centers of the Ministry of Internal Affairs of Ukraine, On Amendments to Certain Legislative Acts of Ukraine on improving the regulation of relations in the field of provision of road traffic safety.

088

податкова Reform of Law-enforcement система

July

the Verkhovna Rada adopted in the second reading draft bill 2822 On the National Police. This bill defines the legal principles of the organization and activities of the National Police of Ukraine, the status of police officers, as well as career structure in the National Police. On July 4, the work of the first police patrol was initiated in Kyiv

August

Ukrainian President Petro Poroshenko signed the law On the National Police, and on August 6, the law was published in the parliamentary newspaper Holos Ukrayiny. The law came into force three months after the day of its publication


September

the Cabinet of Ministers of Ukraine issued a resolution establishing a central executive body, the National Police of Ukraine, subordinated to the Ministry of Internal Affairs of Ukraine. After the creation of the National Police as a separate body, the MIA performs the functions of political governance, political coordination and, to a certain extent, ensures the day-to-day running of this body. That is, the Ministry of Internal Affairs has turned from the Ministry of Militia into a civilian body. An actual division of the National Police and the Ministry of Internal Affairs has come into being Ukrainian Prime Minister Arseniy Yatsenyuk said that the Cabinet of Ministers adopted a decision on the liquidation of all territorial units of the Ministry of Internal Affairs, and that territorial units of the National Police would be established in their place

November

the Law of Ukraine On the National Police and the Regulations on the National Police, approved by the Cabinet of Ministers on October 28, 2015, came into force. From that day on, the militia officially ceased to exist in Ukraine

Reform of податкова Law-enforcement система

089


on rerm Pub administ on refo Public administration reform. Background

Ukraine suffered 72 years under a communist totalitarian regime. In the last years of the empire, during the period of “perestroika,” there were attempts to change the one-party command system, adding elements of civil society, a multi-party system, and market relations. But all the reforms undertaken by the then Government were doomed to fail because they had neither the political time nor economic space left to implement them.

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trao blic r tratiorm In 1991, with the proclamation of Ukraine's independence, a patriotic and somewhat spontaneous construction of a new state began, which had room for everything: both the remains of the Ukrainian SSR, the workers' movement, dissidents, new democrats, and old communists. It is indicative that the Communist Party was banned only in December 2015, and up till then it continued to be an influential part of the political process and the system of public administration. One way or another, since independence and up till the present day the new system of public administration is constantly changing under the pressure of harsh criticism from society.

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Labor strikes preceding the collapse of the USSR were temporarily halted, but eventually resulted in massive unprecedented protests: the Orange Revolution took place because of mass vote rigging during the 2004 presidential election, and the refusal to sign the Association Agreement with the EU led to the Revolution of Dignity, initiating fundamental changes in all areas of life of the state and its citizens. Whatever the authority, trust in both state institutions and politicians has always been extremely low. So, according to research by the Razumkov Center on the level of Ukrainians' trust in the Government in 2000–2015, the authorities were supported:*

December 2000 December 2001 December 2002

10,3% 6,3% 5,6%

December 2003

5,3%

December 2004

13,6%

December 2005

8%

December 2006

9,2%

December 2007

12,2%

December 2008 4,3% October 2009

5,6%

November 2010 December 2011 December 2012

13,2% 4,6% 5,9%

March 2013 December 2014 March 2015

8% 5,1% 4,5%

December 2016 1,7%

*the study was carried out by the Ilko Kucheriv Democratic Initiatives Foundation together with the sociological service of the Razumkov Center

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At the same time, according to the corruption index from 1 (the lowest indicator) to 7 (the highest indicator), the statistics on Ukraine for 1999– 2017 according to Freedom House are as follows:

1999–2002 2003–2011 2012–2013

6.0 5.75 6.0

2014 2015–2016 2017

6.25 6.0 5.75

The low level of trust combined with high level of corruption shows the fundamental problems of the state apparatus and the lack of communication between the authorities and citizens. At the same time, trust in the institutions of state power is a cornerstone of the effectiveness of these institutions and their efficiency.

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Current state

According to the Ukraine–2020 strategy, the objective of this reform is to build a transparent, professional and effective public administration system using the latest e-government technologies. The provisions of the reform are agreed with European standards and are reflected in the Association Agreement with the EU. The complexity of the reform is that the state apparatus must reform itself. In December 2015, a new law On the Civil Service was adopted. For its effective implementation, the staff of the National Agency of Ukraine on Civil Service has been increased by 30 employees. In May 2016, the Cabinet of Ministers of Ukraine set up the Coordination Council of Public Administration Reform, approved the Reform Strategy and created working groups. In August 2016, the Departments of Public Administration and Strategic Planning and State Policy Coordination were set up within the structure of the Secretariat of Cabinet of Ministers. Aside from the Secretariat of the Cabinet of Ministers and the National Agency for Civil Service, the implementation of the Strategy is entrusted to the Ministry of Economic Development and Trade, the Ministry of Regional Development, the Ministry of Finance, the Ministry of Social Policy, the Ministry of Justice and the State Agency for E-Governance. An important stage of the reform process is the continuous monitoring of both international and domestic legislation and the international obligations undertaken by Ukraine within the framework of agreements with the IMF, the EU, the World Bank, EBRD and other international organizations, as well as the involvement of international and independent experts for appropriate consultations. One of the main aspects of the new reform is the increased demands on the professionalism of civil servants: under the new conditions envisaged by the Law On the Civil Service, competitions for announced vacancies at state bodies were held in 2016. Furthermore, in cooperation with the World Bank, the gradual filling of the modules of the information management e-system of human resources has begun.

The complexity is that the state apparatus must reform itself

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There have also been changes in the area of civil servants' wages. In the budget for 2017, the payroll fund for civil servants comes to UAH 29.7 billion (against UAH 19.2 billion in 2016). EU financial support under the new budget program "Support for Implementation of Public Administration Reform" in 2017 foresees an additional UAH 300 million for the remuneration of civil servants in key positions, which have the most influence on the successful implementation of all reforms. Although the reform does not include an ambitious plan of transition to e-government, some steps towards improving administrative services are still observed. One of the most significant achievements of the reform is the creation of a network of Centers for the provision of administrative services. At the beginning of 2017, 682 centers were created. Currently, such centers provide the most popular administrative services among the population. They include registration of residence, real estate, business, issuance of extracts and certificates from the land cadastre. It is also planned to shortly transfer the authority for registration of civil status acts, land plots, vehicles, as well as the issue of driving licenses. The Administrative Services Centers (CNAP) should, under the reform plan, receive even more opportunities through the decentralization of power (for more details see the chapter on decentralization). It is planned that the centers will soon provide many services electronically.

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The Ministry of Economic Development and Trade, with the participation of the Office of Administrative Services, is developing 15 administrative services, which are intended to be optimized: registration of births, child support assignment, residence registration and drop registration, issuance of family composition certificates, a passport of a citizen of Ukraine (ID), foreign passport, a taxpayer card, driving license, state registration of land with extracts from the State Land Cadastre, state registration of rights to real property, state registration (re-registration) of vehicles, registration of a declaration of readiness of an object’s use, assignment of housing subsidy, state registration of a legal entity, a person intending to become an entrepreneur, a permit allowing nonstandard vehicles to participate in road traffic. The Unified State Portal of Administrative Services (poslugy.gov.ua) has started its work on the test mode; and the possibility already exists to apply for the registration of about 20 documents related to construction, foreign economic activity, and land title. However, online you can receive only a confirmation of the right to receive a document, the very procedure of submission and receipt remains unchanged: on a first-come-firstserved basis. The situation with an online child care assistance service is very indicative: you can undergo the entire procedure online, but you need to have an Electronic Digital Signature, and to get it you should visit one of the offices of the Accredited Keys Certification Center. Another innovation is also working in test mode only. This refers to Bank ID (id.bank.gov.ua), which is an electronic identification of citizens through Ukrainian banks for the provision of administrative services via the Internet. A Bank ID is set up within the National Bank of Ukraine. But it is supported by only a few state institutions: The Ministry of Justice, the Unified State Administration Services Portal, the Public Services Portal, Lviv City Council, the Public Project Budget of City Initiatives and the independent platform of civil initiatives MiyGolos.org.ua. All services and facilities provided by a Bank ID or any of the abovementioned online services are insignificant and are more of a consultative and informational nature: which documents are necessary for obtaining a certificate, exactly where can a document be obtained? Unfortunately, none of the services gets around the need for direct contact with public services.

An important step in the reform process is the continuous monitoring

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Therefore, the reform of public administration in Ukraine Still continues. And while the world is rapidly approaching the introduction of Electronic government, our country is also Gradually taking minor steps in the direction of e-government

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E-Governance in Ukraine

In September 2016, the Ukrainian Government approved the Provision on Electronic Interaction of State Electronic Information Resources. It is about creating a virtual data exchange system between different registries of various public institutions. In the long run, this will allow the automation of the processes of verification and comparison of data so that the user of the services has no need to receive the certificate in one institution to submit it to another, which would reduce the opportunities for corruption. In November 2016, the Concept of electronic services provision was approved, defining the list of services and their priority, the stages of introduction and the basic principles of functioning. The exchange of electronic databases is carried out between the Secretariat of the Cabinet of Ministers of Ukraine, central executive authorities and regional state administrations. Work on synchronization of basic state registries has also begun. The 2017 budget includes UAH 235 million for the implementation of the E-Governance and the National Informatization Program. Last year only UAH 2 million was allocated for this purpose. In 2017, it is planned that the funds allocated are to provide for the fully-fledged work of electronic interaction between the authorities, the state portal of open data, and the national register of electronic information resources; to improve the e-governance portal, to create the basis for the implementation of a single format for the electronic document and the integrated electronic identification system (ID). An integrated electronic identification system is a person identification procedure that, in the future, when the fully-fledged electronic system is created, will allow the services of state institutions to be used online for maximum convenience. The issue of ID-cards has already begun, which are gradually replacing internal civil passports. But for the time being it is impossible to use all the capabilities of the ID-card as the system is not yet ready.

International organizations

Creating an efficient, transparent and reliable electronic government system is one of the essential requirements of the EU Association Agreement, as well as agreements with the European Atomic Energy Community and their Member States, the International Monetary Fund. In observing international agreements, the Ukrainian authorities should ensure reliable access to electronic services and electronic identification. The state has pledged to implement this reform by 2020, in accordance with the Concept for the development of the electronic identification system in Ukraine. The partners and consultants of Ukraine in this reform are EU Member States, where electronic systems have been successfully and widely implemented.

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Interesting Facts

The obligation to carry out reform of public administration is enshrined in the State Building Contract with the European Commission, the Strategy for Sustainable Development Ukraine–2020, the Coalition Agreement, and the Program of Activities of the Cabinet of Ministers of Ukraine. The biggest problem in the civil service is that the ministries manage enterprises: issue permits, regulate activities. This is not typical of a democratic system and gives rise to corruption. Because of the reform, the civil service should remain as a policy-making body, and all regulatory functions should be transferred to state agencies. The introduction of the post of State Secretary of the Ministry is aimed at differentiating political and administrative positions in the central executive authorities. According to the new law On Civil Service, civil servants of the highest A category have no right to be members of political parties, to occupy positions in the governing bodies of political parties or to be deputies of local councils. In addition, for implementation of the reform, expert support is provided to the ministries and the Reforms Office under the Cabinet of Ministers. Additionally, an EU Advisory Group on Public Administration Reform was established in 2016 consisting of high-level European experts on public administration.

E-government in the world

100

place

place

ranked Ukraine (out of 193 countries) in list of the five world leaders in e-Government: Great Britain, Australia, Singapore, South Korea, and Finland*

ranked Ukraine (out of 191 countries) in the ranking of e-participation, the leaders are Great Britain, Australia, Japan, South Korea and the Netherlands..*

Public administration reform


million EUR the EU decided to allocate in support of public administration reform. Ukraine received the first tranche of EUR 10 million in May 2017. *According to the E-Government Development Index for 2016

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2016 December

the Financial Agreement with the EU was signed to support Ukraine’s public administration reform

June

the Strategy for Ukraine’s Public Administration Reform for 2016–2020 was approved

May

the new law On the Civil Service came into force

September

the Government decided to join the International Open Data Charter

November

a memorandum on the implementation of the EGOV4UKRAINE project between the State Agency for E-Governance of Ukraine and the Estonian E-Governance Academy was signed

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2017 February

the Online Justice House service was presented

March

an electronic service for the assignment of child care assistance was presented


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gislan Refo of ele t Legis tion Reform of electoral Legislation. Background

The Ukrainian people lived in conditions of a political monopoly for almost seven decades. Elections in the USSR were held as a voluntarycompulsory practice and were not a civic responsibility or the right of free will but a demonstrative ceremonial event aimed at showing how much every Soviet citizen worships the Communist Party. Up till 1989 the elections were held in negative mold: a person had to cross out names or parties on a ballot paper he or she doesn’t vote for, leaving just one option, that of ‘I agree’. But Soviet ballots actually had just one option: depending on the district, voters got just one candidate, and there was no need to even put a mark against his

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Le orm t ectoral slaname. Those kind of elections had no real sense, but this farce was an important national holiday, which a person wasn’t allowed to miss as it was dangerous. That is why the presence at the election was always very high, and it is typically for authoritarian regimes, where the ‘people’s choice’ is unanimous. In 1988 Perestroika reached electoral legislation: alternatives to other parties besides the Communist one were allowed. Elections for a new executive power body, the Congress of People's Deputies of the Soviet Union, were already held on a competitive basis. But that freedom was

also just a declaratory one. One-third of candidates ran for positions on behalf of nongovernment organizations, they were chosen by allunion councils from those unions. So, people, in fact, couldn’t influence results, as the heads of unions had more than one vote. Elections were organized in the majoritarian (first past the post) voting system in single-member districts in two rounds. In the first round they had to get more than 50% votes, in the second to just get a majority. The elections were valid as long as least half the voters voted. Ukrainian electoral legislation started with this law.

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105


The following editions of this law reflected evolutionary changes in society and the country. In March 1994 they held other elections, supported by a new law: retaining the majoritarian voting system, elections went to two rounds, the 50% barrier was there as well. But now a candidate had to get an absolute majority of votes in both runoffs. For these conditions, after the parliamentary elections of 1994, the second convocation of the Verkhovna Rada could get only two-thirds of constitutional seats. But there were positive changes as well. Besides, the new law stipulated the participation of observers, international ones too. In 1997 they passed a new long-suffering law, which was given to revision on more than 10 occasions. The law canceled the condition of an absolute majority of votes and changed the election system to a mixed-member proportional one, so half of all MPs were chosen by a proportional system, and the other half were chosen by majoritarian one. Parties or blocs had to cross the 4% barrier in the multi-member nationwide constituency, also, 225 mandates were ‘played’ in single-member electoral districts. After the results of the elections, representatives of 8 political forces out of 30 parties who registered for the elections entered Parliament. The Communist Party got most of the seats (84), People's Movement of Ukraine got second place (32), and the Electoral bloc of the Socialist Party of Ukraine and the Peasant Party of Ukraine were third (29). In 2001, the Verkhovna Rada adopted a law which stated the use of the proportional system only, but the president used his veto on it a couple of times. So, the system didn’t change in the end. Anyway, they put a slew of other crucial changes to the law to make the election more democratic. For example, they bought in multiparty representation at the polls and proportional distribution of electoral commissions at polls between the representatives of the various political forces, carefully set the rights of observers, simplified the appeals procedure, expanded access to the media, etc.

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Election law in those times was rather weak which laid in dimly fixed responsibility forElection thelawviolation of it in those times was rather weak, which included poorly stated liability for violations of it. For example, the law wasn’t coordinated with the Administrative Code to ensure the placing of sanctions for violation of the law. Voters’ lists became an important factor which influenced the snap parliamentary elections in 2002: there were no centralized registers, mistakes in lists became a good target for ‘dead soul’ manipulations. These cases were brightly covered in the media and were the subject of complaints from international supervisors, but the elections were deemed valid in the end. Post factum, experts from Democratic Institutions and Human Rights by the Organization for Security and Cooperation in Europe recommended the development of an electoral code to unify and agree on the procedure of the elections various kinds with other legislative acts in Ukraine. In the 2002 elections, 33 parties took part in the nationwide multi-member constituency, and 6 of them crossed the barrier. Viktor Yushchenko’s Our Ukraine bloc got most of the seats in the Rada (70), followed by the Communist party (59), and the political alliance For a United Ukraine! (35). In 2005, the Rada passed another law, accepting a proportional system, independent candidates weren’t allowed to stand for elections, and only parties existing for more than a year prior to an election were able to submit lists of candidates. Additional terms were then soon added to the Constitution of Ukraine: a parliamentarian couldn’t leave his/her party and be in Parliament as an independent at the same time. The barrier for a political force to enter Parliament was lowered to 3%, and spoiled ballot papers and ‘against all’ votes counted, despite this being contrary to the recommendations of international experts. They put a term limit on making changes to election law: not more than 240 days before an election. This term was soon excluded though. Also, according to the new law, the convocation of the Rada was prolonged to 5 years. In the 2006 parliamentary election, 5 out of 45 registered parties passed the 3% barrier: the Party of Regions got 186 seats, the Yulia Tymoshenko Bloc — 129 seats, Our Ukraine bloc — 81, the Socialist Party of Ukraine — 33, and the Communist Party — 21.

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International experts rigidly criticized the elections of 2012 because of many falsifications As a result of the political crisis of 2006–2007 caused by disagreements between President Viktor Yushchenko, Prime Minister Viktor Yanukovych and the leader of the opposition, Yuliia Tymoshenko, the president dissolved Parliament and called snap elections for September 2007. The crisis reflected on election legislation too, as a series of important amendments were inserted: citizens lost the ability to vote with absentee ballot papers, certificate, the creation of new polling stations overseas was forbidden, the voting rules by location were changed (previously, if a person wanted to vote by location, he/she had to submit documents proving condition or health or invalidity, but in the 2007 election a statement with a request was sufficient). This addition created good conditions for rigging and manipulations with ballot papers.

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Furthermore, before the parliamentary elections in 2007 voters didn’t have access to information about candidates running for Parliament to help them make up their minds. Information on education, background, career, income and property declarations, and expired criminal records. Besides, the law on the Central Election Commission was amended. In particularly, the CEC could be dissolved on the basis of a grounded request from the president of Ukraine. The next elections to Parliament, which took place in 2012, were held with a new law and once again the system was changed. On this occasion the system was a mixed one: a list of 225 MPs in the multi-member nationwide constituency, and 225 via the majoritarian (first past the post) system. The barrier for parties to enter Parliament was set at 5% and blocs (alliances) of parties were forbidden to run. These changes reflected serious changes taking place in Ukraine’s political life: Viktor Yanukovych won the presidential election in 2010, the Party of Regions won a majority in Parliament, the Constitution was changed so that the country became a presidential-parliamentary republic (as it was till 2006), and the leader of the opposition, Yuliia Tymoshenko, was jailed, international experts openly spoke about the fall of democracy in Ukraine, and the country found itself between Iraq and the Israel territories in terms of level of freedom of speech. So, the direct correlation between election laws and leading political forces was once again demonstrated: the law was changed again by the wishes of the strongest party. International experts, independent Ukrainian election observers, and opposition representatives harshly criticized the elections of 2012 due to the presence of rigging. The then president also admitted the elections were held with violations, and passed the case to the Prosecutor’s Office for study. The media spread information about the rather high level of support for President Yanukovych among prisoners and patients of psychiatric hospitals; they were sometimes even higher than overall voting statistics for parties in the regions. Rerun elections were organized in December 2013 in five constituencies due to violations. 2014 was a crucial year for Ukraine. Snap presidential and parliamentary elections were held; they changed the mix of the political elite. The main election law wasn’t really changed, although there were discussions about giving political blocs the right to take part in elections, and about moving to a proportional electoral system. However, changes to the Constitution were canceled and Ukraine became Parliamentary republic again. .

2014 was a crucial year for Ukraine: it became Parliament republic again Reform of electoral Legislation

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Local elections in Ukraine In July 2015 the still valid law On Local Elections was adopted. According to paragraphs in the law: — village council deputies are chosen by a majoritarian system of a relative majority in single-member constituencies; — town/city heads are chosen by a majoritarian system of an absolute majority in only single-member constituencies; — village, town heads (in ones where there are less than 90,000 voters) are chosen by a majoritarian system of a relative majority in a singlemember constituency; — the heads of united territorial communities are chosen by a majoritarian system of a relative majority in only single-member constituencies of a united territorial community; — the Verkhovna Rada of the Autonomous Republic of Crimea, regional, district, town, district in towns councils are all chosen by a proportional election system in a multi-member constituency via lists of fixed territorial candidates.

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Current situation

After the elections held in 2014 reform of electoral law was a requirement of the time. It was announced along with other reforms in 2015, but as of May 2017 it had not been carried out. There are several reform options, draft bills, but none of them has been considered in the Verkhovna Rada yet. Draft bill on the election of MPs of Ukraine No 1068 from 27.11.2014 The initiator was Yurii Miroshnychenko of the Opposition Bloc party. In accordance with this bill, a proportional election system was proposed with closed party lists and a barrier of 1% for entering Parliament, permitting parties united as blocs to run , as well as the demand to provide public information about sources of funding, compile party lists and make them public no less than 7 days before the party’s constituent assembly. The Main Scientific and Expert Department noted in its conclusion on the bill that using a “proportional election system with ’closed’ party lists (either in parliamentary or local elections) displayed a bunch of crucial disadvantages criticized on many occasions by lawyers and experts inside the country and beyond it”. The main disadvantage of the aforesaid system (especially visible when holding elections in the nationwide multi-member constituency) is the absence of direct communication between voters and runners. On this basis, we believe that changing the proportional system from having ‘closed’ lists to one with ‘open’ lists would be a better alternative. In the end, experts recommended that this bill be rejected. Draft bill on the election of MPs of Ukraine (with open party lists) No 1068-1 from 02.12.2014 Initiators: Yuliia Tymoshenko, Serhii Soboliev, Ivan Kyrylenko, Ivan Krulko, Ihor Lutsenko, Borys Tarasiuk, Alona Shkrum, Hryhorii Nemyria, Vadym Ivchenko, Vladyslav Bukhariev, Oleksii Riabchyn, Oleksandra Kuzhel (all MPs from the Fatherland (Batkivshchyna) All-Ukrainian Union ". The bill proposes to hold elections using the proportional voting system with a nationwide voting list and with candidates fixed to territorial constituencies, and a 5% barrier for entering Parliament.

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The Expert Department recommends that this bill be sent for further work as, according to the bill, ‘the voter, in fact, doesn’t make a choice between certain alternative candidates, but he or she merely support the only candidate fixed to a respective constituency, and that doesn’t make the proposed system a proportional one with open lists’. Draft bill on the election of MPs of Ukraine No 1068-2 from 11.12.2014 Bill initiators: Viktor Chumak (unaffiliated), Nataliia Ahafonova, Nataliia Novak, Pavlo Rizanenko (Petro Poroshenko Bloc), Leonid Yemets (People's Front party). The MPs suggested a proportional system with nationwide and regional voting candidates’ lists. That is the system that international experts advised as it enables high demands to be made of candidates and needs to represent regional interests. The Main Scientific and Expert Department recommended that the bill be voted on at the first reading stage (considering advice).

experts think codification of an unstable part of legislation doesn’t make sense

Draft of Election Code of Ukraine No 3112 from 16.09.2015 Initiator MP Valerii Pysarenko of Revival MPs group. This draft puts forward a parliamentary election system similar to the local election system, which is said to be proportional, but it has no open lists. According to the Main Scientific and Expert Department’s conclusion, “the model on offer doesn’t allow voters to choose a candidate from the party list because the party offers just one candidate in a territorial constituency with no alternative. So, the election system in the bill cannot be seen as a proportional one with open lists”. Experts also believe that codification of an unstable part of legislation doesn’t make sense. This draft bill is full of other complaints, so experts recommend it be sent for further reworking. Draft of Election code of Ukraine No 3112-1 from 02.10.2015 Initiators: Andrii Parubii, Leonid Yemets (People's Front party), Oleksandr Chernenko (Petro Poroshenko Bloc). The bill offers a new model of the parliamentary election system: personified voting which allows the voter to vote for a particular candidate included in the regional party list. The eExpert Department believes the bill can be accepted for the first reading stage (considering advice). All the draft bills mentioned above were presented more than a year ago but submitted to the Verkhovna Rada only in March 2017. And the process has not moved further.

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After the elections of 2014 election law reform became the requirement of time

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Voters activity 1991 The All-Ukrainian referendum on the Act of Declaration of Independence of Ukraine and the presidential elections — 84.32% (percentage of voters who received ballot papers related to the total number of voters registered on the electoral rolls of constituencies). 1994 Ukrainian parliamentary elections — 76.07%. 1994 presidential elections — 70.62% (first round), 71.74% (second round). 1998 Ukrainian parliamentary elections — 71.21%. 1999 presidential elections — 70.19% (first round), 74.92% (second round). 2002 Ukrainian parliamentary elections — 69.39%. 2004 presidential elections — 74.56% (first round), 80.44% (second round), 77.20% (repeat second round). 2006 Ukrainian parliamentary elections — 67.58%. 2007 snap Ukrainian parliamentary elections — 57.94%. 2010 presidential elections — 66.76% (first round), 69.15% (second round). 2012 Ukrainian parliamentary elections — 57.98%. 2014 snap presidential elections — 60.29%. 2014 snap Ukrainian parliamentary elections — 52.42%.

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1989 October

1996

1993

1997

USSR (the Ukrainian Soviet Socialist Republic) election law on people’s deputies was passed. It remained valid until November 1993, was edited 4 times

November

a new election law of Ukraine about people’s deputies (MPs) passed. The law had 9 editions

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June

the Constitution of Ukraine (aimed to replace the Constitution of 1978) was adopted; as the Constitution took effect the law of 1993 lost its validity

September

a new election law on MPs of Ukraine was passed, it had 9 editions


2001 2011 October

a new election law on MPs of Ukraine was passed, it had 7 editions

November

a new election law on MPs of Ukraine was passed. The 13th edition of this law is in force at present

2004 2017 March

a new election law on MPs of Ukraine was passed, it had 14 editions

March

three draft bill on electoral legislation and two drafts of the Election Code at the first reading stage were submitted to the Verkhovna Rada

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117


ment rm Dece lizatio and of state manag Decentralization and reform of state management. Background

In Ukraine, discussions about the necessity for administrative-territorial reform started right after the Declaration of Independence in 1991, taking into account the special local features of each particular region. There was and still is a division of Ukraine into regions and districts and this was not only obsolete but also created deliberately in order to blur ethnic and traditional lines. New regions were often created only because a number of

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na entraon reform te ge- na ment ruling party members became too big for the “average district committee”, so had to create another one, and then another district committee, district executive committee and a whole “pack” of other bodies, district departments, district courts, etc. You can still find so-called “matryoshka doll”-like structures to this day in Ukraine where towns and villages are an internal part of a city. This means that during an election inhabitants elect two town or village heads, or one village head and one town head, and deputies to village, town and city councils.

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there is a lack of workable population in villages and towns capable of creating the additional value, GDP/GRP and income for budgets of all levels

But, the main thing is that since the 1990s, for almost more than a decade, the system of strict power centralisation inherited from the Soviet Union had not been changed in any way. However, in spite of the existence of local councils and declared selfgovernment, the real power of budget funds allocation was held by the district and regional state administration apparatuses, the heads of which were appointed directly by the president from the capital since 1995. This very approach to budget formation itself was being profoundly changed almost on an annual basis. This had lead to the further empowerment of central government and dependence of local selfgovernment on “the center� and the policies enacted at the time.

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All of the tax money was first dispatched to the general “Treasury” in Kyiv. After that, the funds were, in fact, manually allocated by the Verkhovna Rada and the Cabinet of Ministers. This system provided opportunities to create artificial difficulties in financing. A large number of local cultural, healthcare and education institutions that were maintained by the state were severely underfunded. Most importantly, this system ensured mayors were effectively “trained” and allowed to “give to this one, and give nothing to that naughty unpolite one” like in that children’s tale about Crow-piet. “Politeness”, of course, meant unconditional loyalty. This system had lead to a total absence of correlation between the economic advances of a city or territory and its local budget’s funding. Thus, the absence of the local elite’s interest in developing the economy and attracting investment had finally affected the whole country’s economy. Whole regions became a subsidiary, and a number of small towns and villages became economically depressed. The situation got a little better in 2002 after the Budget Code was approved. However, it did not create a system which allowed those who effectively attract draw investment and facilitate economic development to have more resources for development. Those problems were “heating up” due to the flaws in the administrativeterritorial system described above. There is a difference between administrative-territorial systems and this changed the reality of economic and social relations, and meant a totally different structure of production. All of this was accompanied by growing urbanization in the country during the last fifteen years. At the beginning of the 1950s Ukraine was mainly agricultural, but by the end of the 20th century the majority of the population had moved to cities. During the first decade of the last century, migration processes had also spread to small towns. Those processes took place at the same time as rapid changes in the age structure of the population of some territories. Therefore, there is a lack of a working population in villages and towns capable of creating additional value, respective economic product (GDP/GRP) and income for budgets of all levels. Villages in a lot of regions are now simply extinct. It’s clear that the weakened economy is not only unable to sustain the bulky bureaucratic system of numerous bodies, but also has trouble maintaining low capacity schools and hospitals that do not cure people, but rather account for each “housing bed space”. Gradually the absence of funds for the local needs of education, healthcare institutions, roads, communal infrastructure, cultural activities, and institutions was established. The image of “the Capital” taking away all the money from the regions and returning only crumbs was clearly engraved into the public consciousness. This stereotype was, in its turn, exploited by the Russian aggressor in 2014. Government from the centre also had one special treat: a very small amount of horizontal relations not only between regions but also between neighboring villages, since there was no need for cooperation as all major management decisions were not made locally. The majority of village councils were not the only subsidiary but also absolved from any real authority. It’s worth mentioning that the low activity of local communities did not make the situation any better: centralization, paternalism, expecting “the Centre” to be guilty of everything existed like a mindset and tradition. Therefore, in 2014 Ukraine had an archaic, unique and ineffective system of local self-government and governance of the regions. Every attempt to carry out this reform was incomplete and had never achieved any noticeable progress.

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The course of reform

In fact, the reform began on 1st April 2014, when the Cabinet of Ministers approved the Concept of reform of local self-government by its order No 333-r. The reform gained a legal basis when the Verkhovna Rada approved the law On cooperation of territorial communities in June 2014. The essence of the reform was described in the article by Prime Minister Volodymyr Groysman: “Powers, resources, and control are the three principles that an effective model of local self-government is based on. Our efforts are concentrated on those three areas today. Communities must be able to take broad powers in solving local problems by themselves. Once they have the appropriate economic instruments (taxes and deductibles) they have to gain all the required resources for themselves… In order to save the Ukrainian countryside we have created the mechanism of voluntary association of communities that will stimulate the development of new territories.” So, the declarative essence of the reform is providing local self-government bodies with the financial basis for them to solve their local problems. Finally, legislators created an environment that enabled the conversion of outcomes of economic development into incomes of local budgets through the approval of changes to the Budget Code. At the same time, the process of change in the administrative-territorial system was started, which allowed not only to increase revenues coming into budgets but to also use these funds more efficiently since the enlargement of communities optimized the bureaucratic apparatus. A simple example. Take the smallest village council in Ukraine in 2015 consisting of just 89 people. Obviously, this community has to elect the head of the village and 12 representatives. This council also had to have three employees. Therefore, one in every five people, including infants and seniors, had a direct relationship to the governing authority, having absolutely no resources for its enactment. Is this efficient? Readers are able to decide for themselves. Is a school or healthcare facility viable in this community? How can the infrastructure be create and maintained if incomes are not even sufficient to support the head of the village? The same problems also exist at the regional level. The smallest district in Ukraine has a population of 6,500 people, whereas the biggest has 180,000. Naturally, it is hard to imagine how such a region is able to be subsidiary and earn enough to maintain the entire managerial superstructure. Consequentially, there are plans to reorganize the sub regional (district) level. In discussions involving experts there are several options available, from the complete abolition of the district level of government (which is impossible to implement without changes to the Constitution of Ukraine) to its consolidation, by creating 3–6 larger regions or counties per area. In the long-term, the issue here is also about the possible enlargement of regions to the level of economically sound regions such as NUTS 1 Euroregions, but this issue is not even being developed in legislative documents. The main problem is that the public consciousness is not ready to accept these changes.

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the local governments mainly used funds to solve current problems. which can cause problems in future Reforms of the administrative-territorial system are not limited to just the "redrawing of boundaries". This is a set of changes, including the possibility to create a municipal guard or police within the communities — a body that should monitor compliance with the rules of improvement, the management of solid domestic waste, parking rules, building, and public order. Those bodies will obviously not be carrying out the functions assigned to the National Police, particularly investigating crime. Instead of the DSA (District state administration)/RSA (Regional state administration) system, a mechanism of state prefects has to be created in order to control observance of the law. Local budgets already received the first portion of grant funds in 2015. As a result of fiscal decentralization and reform of the tax database, incomes have increased by an average of 50%.

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The local budgets held onto revenue from personal income tax and from income tax for utility enterprises. Local budgets also received income from providing administrative services in local authority bodies and from state taxation, increased the percentage of the environmental tax that will be retained by local budgets from 35% to 80%, the retail sale tax on excisable goods at a rate of up to 5% of the value of goods sold, land payment, the single tax, property tax, etc. The result was instantly tangible.

The reformation process is a difficult one; there is a place for compromise for both “central power� and local communities

billions uah 49.6% increase in revenues to the general fund of local budgets during the first 10 months of 2016 in comparison to 2015 *

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However, according to opinion polls carried out by the Ilko Kucheriv Democratic Initiatives Foundation undertaken in 2016, local authorities used those funds to solve current problems in the main. While almost nothing is held back for the long run, which can cause problems in the future. However, while the process of transferring new funds was perceived as very upbeat, the process of community unification was slowing down significantly. The research by the Democratic Initiatives Foundation also found out local bodies that have acquired a significant profit are in no rush to associate with smaller, not so well off neighbors. The issue here is big cities that have significant revenue sources or large enterprises located within its borders. Not all local heads are interested in the unification of local communities since the unification could lead to new elections and to them losing their current positions. The fear of job loss also increases resistance among regional unit officials (district administrations and council officials) and deputies of regional councils, since if unification and regional enlargement are carried out, they will be out of a job. But the process of reform carries on regardless. At this time, a total of 1,970 communities function the old way, and 410 new amalgamated communities have been created. Also, almost 200 find themselves at different stages of reform, and if they proceed the process of reforming the country becomes irreversible. There are a number of bills registered in the Verhovna Rada that allow for the abolition of regions where the entire territory is covered by an amalgamated community, and there are also draft bills that will create the ability to unify communities around the cities of a region. The reform process is a difficult one; there is a place for compromise for both “central powers� and local communities. So in 2017, local communities not only obtained bigger budgets, but also additional payments that were new. The obligation to pay the utility bills for education and healthcare facilities was particularly hard to perceive at local level, just as the obligation to pay salaries to tech staff. The Government argued that this will allow local communities to use funds more efficiently. Secondly, the payment of utilities will pursue a responsible attitude towards the spending of energy and the implementation of energy efficient technologies and active participation in energy efficiency programs. The decision either to insulate school walls or to heat the air in the vicinity at the taxpayers expense will be made precisely at the local level.

billions uah residues on community deposit accounts * *according to the Ministry of Finance

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There is a lack of success stories in the implementation of decentralization policy The decision to put the toll of subsidies towards certain categories of people was also met critically. Sadly, today we can talk about a slowing down in the reform because of the lack of legislative support. The tempo of formation of the legislative base has slowed down significantly. At the beginning of 2015, the prime minister announced the approval of a series of bills: On the administrativeterritorial system of Ukraine, On local self-government, On local government bodies, On local referendums, On bodies of self-government, etc. Later the changes from those bills had to be added to the Constitution of Ukraine. However, those bills are yet to be approved. Some have been voted down by Parliament, some sent for reworking, some are unable to make it through because there are too many versions of them from different political powers, which make those bills impossible to finalize. Local amalgamated territorial communities have no comprehendible legal background for further unification and enlargement. Moreover, the communities are frightened by a simple inability to govern their lands outside the borders of their settlements and to plan their territorial development. Furthermore, due to the lack of a clear solution to some debatable points, the Central Election Commission was forced to deny the holding of elections in 28 already created amalgamated territorial communities that unite communities from different regions. We hope that the recently approved bill will change the way the Central Election Commission looks at this question.

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The State Fund for Regional Development is no longer guaranteed, as it has been divided into General and Special by changes to the Budget Code. A significant problem is the lack of skilled staff for newly-created territorial communities and their associations. Even employees who work in local self-government and district state administrations are often not competent on certain issues. In particular, considerable problems arose in the area of decentralization of the architectural and construction control systems. Some communities cannot be responsible for those subjects due to the lack of qualified specialists. There is a lack of success stories in the implementation of decentralization policy (even though they certainly exist), which could show the benefits of this reform. In relation to this, it is important to conduct information campaigns and establish quality feedback between the authorities and population. Positive feedback is delivered to people much less frequently than overall negative coverage, which mass media outlets attach to almost every Government reform.

The majority of Ukrainians have not felt any noticeable changes caused by the increase in local budgets during one and a half years of financial decentralization: * 8% experienced changes for the worse

16% 67%

felt changes for the better of Ukrainians did not feel any noticeable changes from the usage of new funds

*the research carried out by the Democratic Initiatives Foundation

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Interesting facts

It’s worth noting that according to opinion polls Ukrainians do support the idea of decentralization. The poll conducted by the Kyiv International Institute of Sociology, which was commissioned by the European Council Program in September-October of 2015, showed that the majority (59%) of Ukrainians regard reform of self-government as being necessary.

43% More than 40%

of Ukrainians expect the situation in Ukraine to improve after the reform is carried out consider the reform to be helpful in resolving the conflict in the East of the country

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Another study carried out by the TNS company, together with the National Council for Reforms, at the end of 2015, showed that most Ukrainians believe that decentralization will solve the problem of poor local infrastructure development. In second place, there was uneven funding in the regions: 47% of citizens believed that decentralization would eliminate this problem. About a third of respondents indicated that decentralization would overcome the problem of the decline in villages, destroy corruption schemes present in the allocation of funds and simplify the procedure for receipt of documents. At the same time, 14% of respondents said that decentralization would not solve any existing problem. More than half of those polled called the lack of agreement between the authorities on the implementation of reform as being one of the problems on the path of decentralization.

according to polls the Ukrainians support the idea of decentralization

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1990 2005 December

the Verkhovna Rada of Ukraine adopted the Law of Ukraine On local councils of People’s Deputies and local and regional self-government

1997 May

the Verkhovna Rada of Ukraine adopted the law On local self-government

April

the President of Ukraine issued Decree No. 706/2005 On the National Council on issues of public administration and local government

2009 July

the Cabinet of Ministers adopted Decree No. 900-р On the Concept of reform of local self-government

1998 2012 July

the President of Ukraine issued Decree No. 810 (810/98) On measures for implementation of the concept of administrative reform in Ukraine

June

2000 May

the Cabinet of Ministers passed resolution number 521 On the development of small cities

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the Verkhovna Rada of Ukraine adopted the Law of Ukraine No. 5003-VI On amendments to the Land Code of Ukraine and other laws of Ukraine on land works related to the establishment and modification of the borders of villages, settlements, cities and districts


2014 2016 April

the Cabinet of Ministers of Ukraine adopted Order No. 333-p On approval of the concept of reforming local self-government and territorial organization of power in Ukraine’

March

the first elections of local deputies to village, town, city councils and corresponding villages, towns, city mayors took place in 25 amalgamated communities

June

Verkhovna Rada of Ukraine adopted Law No. 1508-VII On cooperation between territorial communities

December

2017

2015

March

the Verkhovna Rada of Ukraine adopted Law No. 79-VIII On amendments to the Budget Code of Ukraine on the reform of fiscal relations between different levels of government

February

the Verkhovna Rada of Ukraine adopted Law No. 156-VIII On the principles of state regional policy

November

the Verkhovna Rada of Ukraine adopted Law No. 3490 On amendments to the Budget Code of Ukraine regarding the features of the formation and implementation of budgets of amalgamated territorial communities

February

the Verkhovna Rada of Ukraine adopted the number of Laws: On amendments to certain legislative acts of Ukraine; On amendments to certain laws of Ukraine regarding the acquisition of authority of village, settlement, city mayors; On amendments to certain legislative acts of Ukraine (regarding the voluntary adoption of territorial communities).

the Verkhovna Rada of Ukraine adopted Law On amendments to certain legislative acts of Ukraine regarding the features of voluntary unification of territorial communities located on the territories of adjacent areas

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on Refor manage of state pr and privatiza Reform of management of state property and privatization. Background

Since the Soviet era a stereotype has prevailed in society, that what is the states means it is nobody’s. The absence of a physical owner produced the corresponding attitude: if I steal, the state will not grow poor. Ukraine is experiencing the effects of such an attitude to this very day. This is most evident with respect to state enterprises.

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and p va rm of ement te roperty ation Re Numerous studies that cover different countries, not only post-Soviet ones, confirm that the state is an ineffective owner. The World Bank's research "Bureaucrats in Business: The Economics and State Administration Policy" has brought closure to this issue. Therefore, it has become clear that the problem of state-owned property is not a peculiarity of Ukraine. When it comes to enterprise development and investment, there are solutions based on intuition, and they are always risky.

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The general inefficiency of the state-owned enterprises requires radical changes. The first step is privatization All current decisions regarding enterprise management and its development — not to mention innovations where it is impossible to foresee anything at all — are too risky. It is hard to substantiate certain business movements and give them a clear explanation since it is impossible to prescribe how to take a decision. Therefore, if the decision is taken by bureaucrats who are not responsible for the consequences with their own property, in most cases it is not successful, or it is not made at all since bureaucrats are people who avoid risk. With rare exceptions, this is the reason for the decline of state-owned enterprises, and it works all over the world, regardless of the "quality" of the state. So far, people in Ukraine consider state-owned enterprises as nobody’s but on the other hand — as public, "the people’s," and accordingly, they begrudge them being sold off cheaply. This attitude is crucial for understanding what people think about the privatization and management of state-owned enterprises. Both the first and second statements are true, as this property is "nobody’s" and "public," but these are different aspects of property rights. Ownership rights have at least four aspects: legal possession, when the person is the owner, and the documents certify it; the disposition right; the right of operational management; the right to receive property income. In the case of state-owned enterprises, there are two problems: de jure, they belong to the state, and de facto, to those who control it. The people of Ukraine have no ownership rights to state-owned enterprises and possess these enterprises only to the extent that they control their own state. In its turn, the state has title rights, but, in fact, it does not manage the property. At least until 2014, there was a massive practice when there were "supervisors at all state-owned enterprises, ” “directors" or representatives of clan groups who received these companies to pump out funds. In fact, the right to manage and, accordingly, the right to receive income has been usurped until now and remains to be usurped by such groups. Thus, people do not own these enterprises, not only because they cannot control the state, but also because the state does not control these enterprises either. This situation existed even during Soviet times: the population did not control the Soviet state, and the state did not control the so-called "red" directors. Accordingly, during the privatization of the 1990s, people did not lose anything, since they did not have anything. Such management conditions are favorable for soaring corruption, the scope of which has only recently been measured in statistics. According to the National Anti-Corruption Bureau of Ukraine, in 35 state-owned enterprises, of which 15 are among the top 100 stateowned companies by size of assets (according to the Ministry of

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Economic Development and Trade), the losses alone from corruption offenses exceed UAH 20 billion. The most corrupted are companies in the fuel and energy complex, agro-industrial complex, mining and metals sector, chemical industry and transport industry. Among the most resonant investigations, it is worth mentioning cases involving the following companies: Ukrgazvydobuvannya, Zaporizhiaoblenergo, the State Food and Grain Corporation, Odessa Port Plant, and others. Existing schemes of corruption and the withdrawal of funds from state enterprises are not too intricate: selling products or providing services at low prices; carrying out deliberately unprofitable operations; providing prepayment for goods and services, following which the contractor disappears or becomes bankrupt; the purchase of goods and services at inflated prices; reduced Bank deposit rates, etc.

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In addition to the chemical industry, all sectors have shown positive dynamics of net income

At the same time, the state, in relation to loss-making assets, followed the philosophy of "a bag without a handle": it is hard to carry, but impossible to throw it away. There was not enough political will, understanding of the problem, or skilled personnel to carry out radical reforms. State property and financial flows of state-owned enterprises became another "honeypot" for sticky fingered dealers and officials. It should be noted that the total cost of keeping strategic state-owned companies afloat until recently was enormous. NJSC Naftogaz received the biggest amount of subsidies from the state, which in 2014 amounted to UAH 110 billion. However, with the beginning of reform of the monopolist its financial situation began to improve, the NJSC ceased to be a "yoke" for the state. In 2015, the deficit of the state-owned enterprise was reduced to 0.9% of GDP from 5.6% in 2014. According to the results of 2015, NJSC incurred a net loss of UAH 25.1 billion (in 2014 this figure amounted to UAH 90 billion) and earned an operating profit of UAH 4.5 billion for the first time in six years. While in 2016, Naftogaz earned a net profit of UAH 26.5 billion for the first time in the last five years. However, the improvement in Naftogaz’s performance was mainly because the company was obliged to supply gas to the population (and not only to the population) at bargain prices. Since this situation was improved, it is natural that Naftogaz began to earn profits. If we talk about the largest state assets, then the total losses of the top 100 largest enterprises in 2015 decreased to UAH 42.6 billion from UAH 119 billion in the previous year. Already in the first half of 2016, this group of state companies showed a profit of UAH 31.6 billion. In addition to the chemical industry, all sectors have shown positive dynamics of net income. Following the results of 2016, it is expected to receive UAH 20–23 billion worth of profit. This indicator was based on the NJSC’s indicators (due to price rises for energy products and tariffs for the appropriate services). The general inefficiency of the functioning of state enterprises requires radical changes. The first step is privatization. However, the privatization policy in Ukraine over the past three years can be considered a failure. For the third consecutive year, plans to earn UAH 17 billion from the privatization of state property (the funds will go to the state budget) have been postponed for the subsequent year. The nominal reason is noncompliance with the privatization revenue plan. Thus, privatization revenues received by the state budget in 2015–2016 amounted to UAH 151.5 million (3 times less than in 2014) and UAH 188.9 million (+ 25% by 2015), respectively. The actual reason is the disruption of privatization tenders and their delay. The privatization of Odessa Port Plant and other large energy facilities was postponed until 2017. The privatization of Oblenergo (regional power suppliers) in 2016 (Kharkivoblenergo, Zaporizhyaoblenergo, Mykolayivoblenergo, Khmelnytskoblenergo, Ternopiloblenergo and

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Centrenergo) failed to take place due to recommendations by advisers to sell these companies only after the adoption of new laws in the field of electrical energy industry (adopted in April 2017). A reminder that privatization by 2005 (the Rubicon was the sale of Kryvorizhstal for USD 5 billion) was carried out under non-transparent rules, the applicants for one or another asset were already fixed, the competitions were fictitious, with the participation of affiliated members who gave the appearance of competition. All of this influenced the value of state assets, which was not a market value. Privatization helped to form oligarchic groups; however, they already owned substantial assets at that time. Another way is to eliminate the state enterprise. In Ukraine, there are about 3,500 state enterprises, and only about 1,800 of them actually function. This figure does not include the separate assets of different state-owned companies but includes enterprises located in the ATO zone and Crimea. About 1,300 companies are in the process of elimination or on the verge of bankruptcy. At the same time, the Ministry of Economic Development and Trade had no data about more than 300 state-owned companies. Now, within IMF requirements, the Government is preparing for large-scale privatization or liquidation of unprofitable and formally existing state companies. However, enterprises of the military-industrial complex will not be enlisted in this process.

there is a list of state-owned objects that are not subject to privatization, but they could be corporatized

One more way is the corporatization of state-owned companies, which can be considered as preparation for the privatization of state enterprises In 2015, the Ministry of Economic Development planned to corporatize all state-owned enterprises from the top 100, later the mandatory corporatization of all public enterprises, except for Government facilities was mentioned in the coalition agreement. However, there is a list of state-owned objects that are not subject to privatization, but they could be corporatized, that is, there is a modification of the form of management of state-owned companies. In the draft bill On the list of state property facilities that are not subject to privatization, approved by the Government in April 2016, out of 705 state-owned facilities, 394 are subject to corporatization, that is, to the creation of a new transparent and publicly accountable management structure. In November of last year, the Cabinet of Ministers passed a package of decisions regulating the procedure for the corporatization of state-owned companies. It includes the appointment of independent supervisory boards, the procedure for the competitive selection of heads of state companies, improvements to the management structure, etc. Corporatization will affect the 46 largest state enterprises. In addition, there is an option with a concession, in which the Ministry of Economic Development considers 362 companies, including the two biggest airports in the country — Boryspil and Lviv, and possibly Ukravtodor too.

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The current situation

The reform was launched in May 2015 after the Cabinet approved the Strategy for Efficiency Improvement of the Business Entities of the Public Sector of the Economy. The main provisions of the approved strategy are as follows: — To increase the level of transparency in the activities of business entities (disclosure of information, financial audit by independent auditors); — To step up budgetary supervision; — To segregate the functions of the Cabinet of Ministries and the ministries as a management entity of state property facilities and the regulator; — To improve corporate governance by business entities; — To align the interests of executive staff and owners of business entities; — To introduce supervisory boards and independent directors; — To arrange detailed restructuring plans for business entities that are subject to the highest fiscal risks. Significant impetus to the process of reforming the management of state-owned companies was provided by the so-called law on corporate governance adopted in June 2016, which contained the following innovations: — It could create supervisory boards in unitary state companies and objects of communal ownership prior to corporatization; — The institution of independent directors was established, making up the majority of members of supervisory boards of all state companies; — The requirement for a mandatory independent financial audit of state companies was introduced, and more demanding standards of information disclosure about state companies and their management were established. Under the memorandum with the IMF, by the end of June 2017, independent supervisory boards should be appointed at the 15 largest Ukrainian state enterprises. According to estimates made by the Ministry of Economic Development, by the end of 2016, new supervisory boards with mostly independent members were required at 41 state companies (where the size of assets exceeds UAH 2 billion, and revenue exceeds UAH 1.5 billion). At the same time, the agency reported on the completion of the necessary regulatory framework. On the other hand, in April 2017, the Cabinet abolished the ratification of supervisory boards of state companies, including with the Ministry of Finance and the Ministry of Economic Development. That is, state enterprises received more powers. Other important changes include the introduction of a transparent process for the appointment of state-owned enterprise executives through competitive selection with the involvement of independent experts and the establishment of a market level of compensation. The current remuneration system and financial incentives do not correspond

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to the level of responsibility assumed by the top managers of state companies. Changes have already begun in at least some state-owned companies (Naftogaz, Ukrposhta, etc.). In 2016, Ukraine improved the conditions for privatization so as to attract more buyers, including foreign investors. Now the sale of 5–10% of shares on the stock exchange before an auction is not mandatory. In addition, there are plans to sell unprofitable and small state-owned assets through the ProZorro system, but it has not yet come to "big" privatization, and if it will, it would be considered a great victory. Unfortunately, that is not the case for now. It should be noted that, according to the recommendations of the Organization for Economic Cooperation and Development, the concept of the National Holding Company was developed to differentiate the functions of forming and implementing state policy with the management function of state-owned objects, that is, for transferring responsibilities from ministries and departments. The processes of reforming the management of state property provide that facilities that are part of critical infrastructure will remain in state ownership, including natural monopolies in the railway and energy sectors, defense and national security sector, and strategically important enterprises.

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The current situation is convenient for politicians whose corrupt interests are combined with political ones

By reducing the number of state-owned objects and increasing the operating efficiency of the remaining ones, the state will be able not to scatter existing investment resources, but to focus them exclusively on strategic projects of state and regional importance, which, due to low investment attractiveness, will not be appealing to private companies. Now the Government is forced to privatize in very unfavorable conditions: low assets value, low level of trust on the part of potential investors, push back from those Government departments who do not want to part with their assets, etc. To remove part of these obstacles, the Cabinet simplified the procedure for transferring property to the State Property Fund of Ukraine (SPFU) in January 2017: from now on, the absence of some individual documents cannot be a reason to suspend privatization. However, despite a slight increase in macroeconomic indicators, there is no reason to expect a significant improvement in the investment climate. The obligation to conduct privatization is "here and now," so the Cabinet must demonstrate political will, maximum openness, and transparency to increase the level of trust to investors. The current situation in this area is characterized by the fact that the IMF considers privatization as one of the three key reforms that should be implemented urgently. For its part, the Government recognizes delays in the reform of public property management and privatization, and the need to accelerate this process. To provide legislative support to the process of reforming the management of state property and privatization, many normative documents have already been adopted. In addition to that mentioned above, it is worth noting the Resolution of the Cabinet of Ministers On Certain Aspects of the Audit of Business Entities of the Public Sector of the Economy; on conducting a competitive selection of the heads of business entities of the economy’s state sector; bills on amendments to the laws On Privatization of State Property, On the List of state property objects that are not subject to privatization; a resolution on the protection of investors' rights, etc. At the same time, it is also necessary to adopt a new law on the state privatization program and create a regulatory framework for the implementation of corporate governance of state enterprises. In addition, the State Property Fund of Ukraine has, with the help of international experts, already developed a new privatization law, which, if approved, will contribute to improving the mechanism for determining the initial price of state property and proceed to the market pricing of stateowned assets. Large privatization facilities will be sold with the involvement of an investment advisor. The advisor will study the demand for the facility and suggest the starting price to the State Property Fund of Ukraine. The winner of the bidding process will be determined in a two-stage auction. A change in people’s attitude is necessary for conducting a successful and transparent privatization of a state enterprise. The current situation is convenient for politicians whose corrupt interests are combined with political ones.

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Privatization is not a popular reform; therefore, its implementation means a reduction in public support and the votes of voters. It is about choosing between a populism that is nice to hear and a reality that is sometimes difficult to accept податкова система

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International obligations

International Monetary Fund. At present, the primary factor in the reform of state property management and privatization is Ukraine's commitment to the IMF to receive another loan tranche from the fund. At this stage, the IMF's pressure on the Government is the most effective driving force for privatization. The memorandum of March 2, 2017, states the following: 1. Supervision of fiscal risks of state-owned enterprises. The financial risk management unit, whose task is to monitor and analyze fiscal risks within the Ministry of Finance will be strengthened. It is planned that a comprehensive report on the fiscal risks of the state-owned enterprises’ sector will be included in the documentation on the 2018 State Budget. 2. Governance and reform of state-owned enterprises. — Governance. After the adoption of the law on corporate governance of state-owned enterprises, the Cabinet of Ministers will adopt decisions regulating the creation of supervisory boards. By the end of June 2017, the appointment of independent supervisory boards in the 15 largest state companies and writing of audit reports will be completed. Also, the options will be explored for the creation of a single national holding company, whose task will be to manage strategic commercial state enterprises. — Classification of all state enterprises. Public enterprises without a clear national strategic interest will be privatized or liquidated. By the end of August 2017, the Cabinet of Ministers will approve the classification data and transfer state enterprises to the State Property Fund of Ukraine (SPFU). 3. Liquidation of state enterprises. Based on the results of the classification, it is planned to centralize the liquidation of non-operating state companies under the direction of the SPFU. A draft bill is currently being prepared, which will allow the SPFU to simplify the liquidation procedure of state companies with zero assets or whose assets are less than their liabilities. In addition, analysis of the Law On Bankruptcy regarding state enterprises will be carried out, and the necessary changes will be introduced (approval of the bill by the Verkhovna Rada is planned by the end of June 2017).

At present, the primary factor in the reform is Ukraine's commitment to the IMF

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4. Privatization. — Improving the legislative framework. The Verkhovna Rada will approve amendments to the Law On Privatization so as to improve transparency and further optimize the process of privatization of medium-sized enterprises by the end of August 2017. — Broadening the range of enterprises subject to privatization. Based on classification and approval of legislation on the reduction of the list of companies banned from privatization (expected by the end of June 2017), a schedule for the transfer of additional state companies to the SPFU will be developed. — Acceleration of privatization of small public companies and smallscale assets (real estate, equipment). There are plans to hold sales via electronic auctions through the ProZorro.Sales system. It is expected that the first auctions will be carried out by the end of June 2017. — Privatization of large state enterprises. The key task is the privatization of Odessa Port Plant (whose sales competition fell apart twice in 2016). For this purpose, the necessary measures on settlement of balance deficiencies were taken to attract international investors (the completion of privatization is scheduled for the first half of 2017). In addition, the privatization of many state enterprises will be initiated by the end of September 2017: Centrenergo, Turboatom, whose shares have already been transferred to the SPFU, and regional energy distribution companies, Oblenergo, whose shares will be transferred to the SPFU. To conduct the privatization of Ukrspyrt SE, it is necessary to approve amendments to legislation so that the competitive sale can be completed by the end of September 2017.

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The problem with privatization of state-owned enterprises From the political and economic point of view: the politics are driven by the interests of those who control the financial flows of enterprises. There is also an appropriate term — "privatization of financial flows." This is a very profitable business, and the one who is "sitting" on these flows has great interest in the enterprise not being privatized in any way whatsoever. On the other hand, there are the interests of the state to get money and plug the hole in the State Budget. In addition, there are the interests of the future buyer — who pays the market price for the company and receives marketing profit on invested capital. However, for him, this business is much less profitable than for those who have not invested anything. Accordingly, the privatization of state-owned enterprises takes place in two ways: non-transparent, as it was during the presidency of Leonid Kuchma when the right people received assets for a trifling sum; or when the state is strong enough to put the public interest above the personal interests of the "directors." In Ukraine, such a fair privatization happened once, in the case of Kryvorizhstal.

In Ukraine, such a fair privatization happened once — in the case of Kryvorizhstal

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NGOs

Independent experts from various organizations closely monitor the implementation of the reform of the administration of state property and privatization, among which the following can be noted: • Center for Social and Economic Research CASE-Ukraine — case-ukraine.com.ua • Center for Economic Strategy — ces.org.ua • Independent analytical platform VoxUkraine — voxukraine.org • Non-profit organization EasyBusiness — easybusiness.in.ua • Center of Reform Support — csr.kiev.ua • Institute for Economic Research and Policy Consulting — ier.com.ua

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2015 January

the Strategy for Sustainable Development Ukraine–2020 was adopted

May

the Strategy for improving the efficiency of business entities of the state sector of the economy was approved

2016 June

the Verkhovna Rada approved the Law On Amending Certain Legislative Acts of Ukraine on the Management of State-Owned Objects (On Corporate Governance)

June

the Supervisory Board for the reform of state-owned enterprises was created

146

податкова Reform of management система of state property and privatization


2017 March

a memorandum was signed with the IMF, in which one of the obligations undertaken by Ukraine is the reform of state property management and the privatization process

April

the Government approved the Medium-term Plan of Priority Actions for the Government until 2020

Reform of management of state property податкова and privatization система

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ment

De lation devel me entrepreneu Deregulation and development of entrepreneurship. Background The economic and political conditions created after the Revolution of Dignity and Ukraine's assumption of obligations under the Association Agreement with the EU and the IMF program, create huge space for

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податкова система


la Deregun and lop- sh ent of economic reforms. It is necessary to reform all the regulatory burden that has been in place since the days of the former Soviet Union. Excessive regulation is one of the biggest problems for investors in Ukraine. According to a survey by the American Chamber of Commerce, 97% of business people consider corruption as the biggest problem, while another 92% believe it to be the inefficient judicial system. Along with this, the top 5 investors' problems include taxes, excessive regulation, and bureaucracy.

urship податкова система

149


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Deregulation and development of entrepreneurship


And according to a survey by Dragon Capital and the European Business Association, the top 10 obstacles to investment in Ukraine include complex tax administration and unmanageable and unstable legislation. According to the data provided in the Deregulation Concept, developed by the Ministry of Economic Development and Trade in 2015, Ukraine loses up to USD 30 billion of investments annually due to the unfavorable regulatory environment. However, these big losses are caused by the unfavorable investment climate, and not because of regulatory norms in particular. Deregulation is a very broad concept. It provides for removing the obstacles to business development, eliminating inefficient regulatory procedures, obsolete legislation, abolishing unnecessary licensing, facilitating the administration of business procedures, etc. Deregulation is related to the introduction of changes to sectoral legislation. Among other things, this reform involves liberalization of mobile tower installation, simplifying the rules in the oil and gas industry, lifting the ban on blending types of grain and obligatory receipt of a quarantine certificate for transportation of domestic grain, etc. Working groups in 4 ministries are working on changes to the sectoral regulatory field: the Ministry of Agrarian Policy, the Ministry of Regional Development, Construction and Housing, the Ministry of Infrastructure and the Ministry of Energy. The schedule in 2017 is to review the regulations of about 70 markets in total. Business development is closely related, but not limited, to deregulation. The simplification of the regulatory environment, reduction in state control over business and the elimination of corruption are integral components of the business and investment climate in the country. The Government believes that the criterion of deregulation is Ukraine's entry into the international ease of doing business index, which is being prepared by the World Bank. Thus, in the medium-term plan of priority actions for the Government until 2020 in the field of "Economic Growth," the key performance indicators of achieving this goal are as follows: rank among the top-30 in the doing business index and the top-50 of the global economic competitiveness index. According to experts at the World Bank, one point in the doing business rating brings the state about USD 500–600 million worth of investment. There is still room for improvement in Ukraine’s rating. In “Doing Business 2017” Ukraine ranked 80th among 190 countries of the world, which is three positions higher compared to the previous study. Compared to 2016, Ukraine also improved its position through the following indicators: the registration of enterprises (from 30th to 20th place), connection to electricity grids (from 137th to 130th), taxation (from 107th to 84th). But some indicators have deteriorated or remained unchanged: dealing with insolvency problems (from 141st to 150th place), international trade (from 109th to 115th), registration of property (from 61st to 63rd), access to loans (from 19th to 20th) and obtaining construction permits (unchanged). Comparison with neighboring countries also shows that Ukraine has the potential to improve its position. Thus, in “Doing Business 2017,” Romania is in 36th place, Belarus at 37th, Moldova at 44th, Russia at 40th, Turkey at 69th. The Ministry of Economic Development and Trade believes that in 2018 Ukraine will enter the top-50 of “Doing Business” subject to the adoption of 15 bills simplifying business activities in the country. In particular, in terms of simplifying connection to electricity grids, registration of VAT and Single Tax payers, introducing an application principle for obtaining building permits, abolishing the mandatory use of seals, simplifying the use of residential property as commercial real estate, and abolishing the developer’s share participation in infrastructure development. Some of the above-mentioned decisions have already been adopted: seals have been canceled, state price regulation for socially important food products has been eliminated, etc.

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Key authorities The Cabinet of Ministers of Ukraine is the highest body in the system of executive power of Ukraine. The Ministry of Economic Development and Trade of Ukraine is the successor of the Ministry of Economy established in May 1991 by the law of the Ukrainian SSR. After it was renamed several times, the current title was issued by Presidential Decree in December 2010. The State Regulatory Service of Ukraine was established in December 2014 through reorganization of the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development.

Deregulation and entrepreneurship development is one of the most important reforms of the Strategy for Sustainable Development “Ukraine-2020�

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Deregulation and development of entrepreneurship

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The current situation

Deregulation and entrepreneurship development is one of the most important reforms (62 of them in total), whose implementation is described in the Strategy for Sustainable Development Ukraine–2020. This area is selected as one of the 10 priority ones. According to the plan of the Ministry of Economic Development, the strategic goals of reform are as follows: — reduce the number of regulatory procedures, inspections, and reasons for contact between business and Government, as well as their cost; — to strengthen the barriers ahead in creating new, excessive and economically unjustified rules; — to create and ensure the functioning of an efficient regulatory environment. According to the Government, the medium-term goal of reforms in this area is to create a favorable environment for doing business, developing small and medium-sized businesses (SMEs), attracting investment, facilitating international trade and improving labour market efficiency. It is necessary to reduce the number of permissive documents in the area of economic activity and types of economic activity which are subject to licensing; to abolish regulatory acts complicating business activity; to reduce the number of state supervision (control) bodies; to provide services for citizens and business in electronic form. As part of the development of SMEs and competition, the Government plans to achieve the following quantitative indicators by 2020:

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Number of employees in SMEs: 2017

6,7 million people

2020

7 million people

The ratio of enterprises operating in markets with a competitive environment: 2017 2020

55% 50% The ratio of SMEs in value added (in terms of production costs): 2017 2020

70% 60% Deregulation and development of entrepreneurship

155


In order to expand and simplify access for Ukrainian goods to markets of EU member states, it is necessary to bring the system of technical regulation in line with European requirements and to complete reform of the system of state control over the safety and quality of food products. In order to support investment activity and protect the rights of investors, it is necessary to ensure effective protection of private property rights, including through the judicial authorities; to harmonize the Ukrainian legislation on the protection of the rights of domestic and foreign investors and creditors, and the protection of economic competition with EU legislation; to introduce incentive mechanisms of investment activity, relying on successful world experience. It should be noted that deregulation proceeds with less pressure from Western partners and the IMF than, for example, pensions and land reform. Moreover, the authorities themselves are interested in creating a favorable investment climate. More than 360 acts were canceled in 2016 as a result of deregulation. None of them have been replaced with new ones. Already this year more than 100 normative acts, which do not meet the requirements of current legislation or have lost their relevance, have been canceled. In April 2017, the Ministry of Justice proposed a rather radical measure. According to a document already approved by the Cabinet of Ministers and to be considered by the Verkhovna Rada, all by-laws should be

Overall, international experience shows that successful deregulation brings spectacular results

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terminated within 6 months, all laws of the Ukrainian SSR and the USSR, which are currently in force in Ukraine, expire within 1 year, and all codified acts dating back to Soviet times should be canceled within 3 years. At the same time, the implementation periods provide sufficient opportunities for the development of a regulatory framework that should replace the abolished legislation. As for changing the business climate, recent developments include adopting amendments to the law on inspections in order to increase the transparency and effectiveness of inspections of companies; abolishing mandatory registration of foreign investments; simplifying registration of medicines and export of services; introducing a “single window� system in customs clearance of goods and vehicles, control over 30% of declarations is carried out electronically; creating the institution of private executors; adopting a number of laws on the reform of supervisory (control) bodies. In addition, the Cabinet of Ministers recently adopted a series of decisions abolishing a large number of regulatory acts, particularly in the areas of telecommunications and agriculture. It should be noted that the IMF’s lending conditions, on the one hand, involve deregulation but, on the other hand, limit the opportunities for business development and increase pressure on it. Thus, the Government promises to the IMF that it will accelerate the reform of tax administration, including strengthening the requirements for a simplified taxation regime and lifting the moratorium on tax audits and labour inspections of small businesses; increasing fines for off-the-book employment and improving the quality of inspections. More changes to legislation on deregulation of the economy should be adopted soon. At the same time, the significance of deregulation that has already been conducted should not be exaggerated. Part of the abolished norms were obsolete, that is, it was not executed and controlled by no-one. The abolition of such standards does not lead to a significant improvement in current business conditions. For example, until recently, some documents regulated sales, volumes, and prices for hay, regulated supervision over compliance with Soviet standards that had already been abolished a long time ago, and others. There are also some pitfalls in operating the policy of deregulation. The main problem is the necessity to coordinate drafts of normative legal acts with state authorities, including those whose interests are affected by deregulation innovations. They are not always aimed at the proposed innovations. At the same time, there are delays in consideration of bills already submitted to the Verkhovna Rada (several dozens are registered). The main reason for delaying the adoption of certain amendments to the legislation in the part of deregulation is the disorganized work of the Cabinet of Ministers and the Verkhovna Rada.

Deregulation and development of entrepreneurship

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In addition, it's still impossible to convince business people of the true achievements of deregulation. According to USAID's annual business climate assessment (ABCA), a major challenge for small and medium-sized businesses in Ukraine remain high tax rates and complex administration, as well as frequent changes in economic legislation. More than 73% of those company executives surveyed did not feel any effects from the deregulation activities that took place in 2016. It becomes clear that it takes some time for business to see the actual effects of deregulation. On the other hand, experts say that it is not about the real result, but the expectations of entrepreneurs. Although the effect of deregulation did not meet their expectations, we actually have the following results: the time of most regulatory procedures has been reduced, their cost has fallen. Challenges remain in the simplification of tax regulation and accounting. According to polls, the most expected change is the reduction in the number of documents they have to work with; then — simplification of tax administration. At the same time, absolute measures have increased, which means that deregulation is badly communicated with business. The biggest difficulties among the 15 reviewed scopes of regulation for medium-sized business are currency regulation, land use, price regulation, customs clearance and connection to electricity networks, to a lesser extent — registration. Here, after 2014, Ukraine has made visible progress — both at the legislative level and in practice. For small and medium-sized businesses to experience deregulation, this should primarily concern tax administration and accounting. This also concerns labour legislation: the Labour Code of 1971 has many excessive bureaucratic demands.

The effect for Ukraine can bring billions of dollars of foreign direct investment

In order to introduce e-governance, the procedures should be as clear and precise as possible. The cooperation of infrastructure is also needed for data transfer. It is impossible to provide all services electronically if everyone does not have access. It is necessary to teach those who provide these services and those who receive them, paying attention to that section of the population that does not have sufficient technical skills. For a period of time, paper-based processes should remain alongside the electronic form of governance. E-governance will become a way of life for all entrepreneurs in 10–15 years time. Overall, international experience shows that successful deregulation brings spectacular results. The effect for Ukraine as a country with a highly regulated economy can reach 10% of GDP by 2020 and bring billions of dollars worth of foreign direct investment. The overall effect of the deregulation strategy will be around USD 25 billion by 2020. The adoption of foreign ready-made solutions isn’t going to work. Firstly, each system describes certain laws and practices of a particular country. Secondly, there is an institutional difference, a difference in values, and in public opinion.

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This is not just about deregulation, but also about the best practices of regulation. New areas of activity and new professions will appear and would require regulation. It is necessary to create the rules of the game, but not multiple new unnecessary obstacles


the government periodically reviews regulatory burdens in all branches of the economy

International obligations

The European Union. The provision of macro financial assistance in the amount of EUR 1.8 billion (signed in May 2015) in terms of deregulation envisages the reduction of the number of permits and licensing procedures and the simplification of their issuing based on a thorough analysis of their value for enterprises and benefits to society. International Monetary Fund. Ukraine's commitments to the IMF (according to the latest memorandum) envisage approval of the law on the electricity market (approved in April 2017). The remaining items will be implemented following the commitments under the action plan. At the same time, the Government periodically reviews regulatory burdens in energy, infrastructure, construction, and agriculture. The Government planned to approve specific proposals on reforming each of these areas by the end of April 2017. It is also planned to take all the necessary steps to ensure that the Unified State Register of Legal Entities and Private Persons is fully operational by the end of June 2017.

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NGOs

Independent experts from different organizations closely monitor the implementation of the deregulation program, including the following: • Center for Social and Economic Research CASE-Ukraine — case-ukraine.com.ua • Center for Economic Strategy — ces.org.ua • Independent analytical platform VoxUkraine — voxukraine.org • Non-profit organization EasyBusiness — easybusiness.in.ua • Center of Reform Support — csr.kiev.ua • Institute for Economic Research and Policy Consulting — ier.com.ua

Deregulation and development of entrepreneurship

161


Fighting corruption is useless as long as officials take bribes and entrepreneurs give them

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Interesting Facts

Fighting corruption is useless as long as officials take bribes and entrepreneurs give them. According to research by EY (among 41 countries) on the level of corruption, Ukraine is at the lowest position:

37% 88% of respondents believe that corruption is at an unacceptably high level

of those polled are ready to offer a cash reward in exchange for the conclusion or prolongation of their contract in order to help business survive

Deregulation and development of entrepreneurship

163


2015 January

Strategy for Sustainable Development Ukraine-2020 was adopted Cabinet of Ministers resolution On certain issues of deregulation of economic activity was approved

February

the Verkhovna Rada adopted the Law On Amendments to Certain Legislative Acts on Facilitation of Business (Deregulation).

164 164

March

Cabinet of Ministers resolution On Approval of the Action Plan for Deregulation of Economic Activities was adopted

September

better Regulation Delivery Office was created

December

the Road Map for Deregulation was approved by the Cabinet of Ministers’ ordinance (The Cabinet’s Order On Approval of the Plan of Action for the Implementation of Best Practices for Qualitative and Effective Regulation, reflected by the World Bank Group in the Doing Business Ranking Methodology).

податкова Deregulation система and development of entrepreneurship


2016 August

Cabinet of Ministers ordinance On Approval of the Action Plan for the Deregulation of Economic Activities and the Recognition of some Decisions of the Cabinet of Ministers of Ukraine as invalid was adopted

2017 March

Ukraine signed Memorandum with the IMF, where one of the commitments undertaken by Ukraine is further deregulation

The National Council of Reforms approved the Concept of Effective Regulation

November

the road map on deregulation was updated (Cabinet of Ministers regulation On Amendments to the Decree of the Cabinet of Ministers of Ukraine of December 16, 2015, No. 1406).

Deregulation and development ofподаткова entrepreneurship система

165 165


urePubl m Pro ment Refo Public Procurement Reform. Background

In Ukraine, the purchase of goods, works, and services using funds from the State Budget was a problem area for the public administration system under all governments. Redirection of budgetary flows into their own pockets is a sad Ukrainian tradition. This is the source of corruption at all levels of government, from local to national. The difference is only in the amount of funds stolen from the state. And there is something to redeploy. The volume of public procurement in Ukraine is about 13% of

166

податкова система


Ref

lic ocureGDP per annum. In 2016, the potential volume of public procurement was about 250 billion UAH. Experts at the Ministry of Economic Development and Trade estimate the corruption component at 50 billion UAH a year. In past years, the cost of government contracts was often artificially overestimated. A large part was used for "kickbacks" to officials who directly decide on the purchase of goods or services from a company. So, the selection of suppliers was carried out on a noncompetitive basis. According to Transparency International, the amount of "kickbacks" reached 60% in 2012.

orm Public податкова система

167


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Public Procurement Reform


The public procurement reform and harmonization of Ukrainian legislation with EU legislation in this area are among the conditions under the EU Association Agreement

At the same time, the Ukrainian government has almost never been interested in reforming the public procurement system, they only changed the beneficiaries of this or that "carve-up" of budget funds or those with whom they had to share "kickbacks". Despite the change of political colors, every new official quickly mastered the practice of his predecessor: the old schemes were adopted by new "underbosses", other curators ran financial flows. After the Orange Revolution, the public procurement system was not changed at all. Governments led by Viktor Yanukovych and Mykola Azarov did not consider it necessary to make any radical changes in this area. Only the Revolution of Dignity has changed the situation in this matter. The new government has demonstrated its readiness for reforms; moreover, they were strongly demanded by the public and Ukraine’s international partners. Under so much pressure, it was simply impossible not to start radically changing the system. Since then, public procurements have become one of the reforms indicators for international partners of Ukraine. Looking ahead, we can say that Ukraine has created a product setting an example to other countries. Public Procurement Reform and harmonization of Ukrainian legislation with EU legislation in this area are among the conditions under the EU Association Agreement and the agreement on EU Macro-Financial Assistance to Ukraine of up to 1.8 billion EUR (signed on June 18, 2015). Improvement of public procurement procedures is one of the most important reforms (62 in total), which is described in the Strategy for Sustainable Development Ukraine 2020, adopted in January 2015.

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Reform objectives

• To minimize corruption in public procurements, and ensure transparency of the entire tender process. • To simplify tendering proceedings by switching them to online mode, fiscal austerity and time-saving. • To involve businesses in public procurements, raising the level of competition. • To ensure transparent public procurement procedures; provide the public with free access to all agreements for analysis and control. • To harmonize Ukrainian legislation with best European practices.

The implementation of the public procurement reform began in 2014

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Public Procurement Reform


Key authorities The Ministry of Economic Development and Trade of Ukraine is the successor to the Ministry of Economy, established in May 1991 by the law of the Ukrainian SSR. After the ministry was renamed several times it received the current name by presidential decree in December 2010. State Enterprise ProZorro was created by renaming the State Enterprise Zovnishtorgvydav and is managed by the Ministry of Economic Development. Antimonopoly Committee of Ukraine was created on the basis of the relevant law in November 1993.

Public Procurement Reform

171


New system

The implementation of public procurement reform began in 2014 with the Law of Ukraine On State Procurement. The key innovations are: the law reduced the list of grounds for the use of the noncompetitive procedure, adapted procurement procedures to European practice, and reduced the list of cases (from 44 to 10) which are not subject to the law. On February 12, 2015, the ProZorro public e-procurement system (ProZorro 1.0) was launched in test mode. The system allowed companies to submit their offers electronically and attracted a wider range of suppliers to public procurement. Initially, state institutions and state enterprises made their own decisions on whether or not to join the system. To popularize the ProZorro system among civil servants and potential suppliers, numerous seminars, training sessions, and online courses were held. In September 2015, the Verkhovna Rada adopted, and the President signed the Law On Amendments to Certain Laws of Ukraine concerning the Public Procurements for bringing them into line with international standards and implementation of anti-corruption activities (No. 679-VIII). The main fundamental changes to the above-mentioned law were as follows: 1. The introduction of the innovative electronic tendering system. 2. The increase in the minimum purchase cost for mandatory tendering: goods and services — from 100,000 UAH to 200,000 UAH, works — from 1 million UAH to 1.5 million UAH. 3. Customers are no longer obliged to send an annual plan and changes to it to the State Treasury. 4. To take part in a tender participants are not obliged to submit information and certificates that are in the public domain. 5. Now verification of references and other documents on the tender qualifications are required only for the winner. 6. The number of state bodies intervening in the tendering procedure has decreased. 7. The opening of the bid after the end of the bidding and free access to the assessment of offers. On December 25, 2015, the Verkhovna Rada adopted the Law On Public Procurement. The president signed the law on February 16, 2016. The main innovation is: procurement via electronic systems became mandatory in 2016 (for the purchase of goods and services amounting to more than 200,000 UAH, and works — over 1.5 million UAH): from April 1 — for central executive bodies and state monopolies, and from August 1 — for local authorities and public utilities. Other important changes in the procurement system should also be noted: 1. The tender committee for public procurement may include professional purchasers. 2. The introduction of the concept of a central purchasing organization, which is created in case there are several customers, simplifying the procurement system. 3. Verification of the final beneficiary of participating companies.

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Public Procurement Reform


4. Legal entities are denied participation if they do not have an anticorruption program or authorized person to implement the corruption program, while the price of the tender exceeds or equals 20 million UAH. 5. Public procurement procedures are divided into open tendering, competitive dialogue and negotiating procedure. 6. Open tendering is conducted in the form of an auction, considering non-price categories. 7. The customer should definitely provide a report on the conducted procurement without the use of the electronic system if the cost of the contract tendered is from 50,000 UAH to 200,000 UAH. The current practice of ProZorro’s work has shown that the adoption of necessary laws and launching of the system is not the end but rather the beginning of public procurement reform. So as to minimize corrupt practices, the ProZorro system is constantly improving. Thus, a library of specifications for goods and services was created, a minimum amount and a purchase period were set (expected value — at least 3,000 UAH, duration of the tender — no less than two days), additional tools for procurement monitoring are introduced, payment control function was implemented, etc. ProZorro 2.0 (launched on April 1, 2016), has made it possible to contest the tender results electronically. The system tool allows monitoring online not only of the correctness of customer actions but also competitor activity. During the tenders, the system enables consideration not only of the cost performance of the offers submitted by different suppliers but also non-price criteria: the attractiveness of payment terms, the term of contract performance and warranty service, etc. However, the implementation alone of the system cannot eradicate all corruption: it cannot be eliminated either by regulatory acts or by increased criminal liability or by modern IT systems. The bidders are facing challenges that were also typical of procurement practices in the past: prescribing conditions for a single supplier, groundless bidding cancellation or disqualification of the supplier (for example due to “incorrectly completed documents”, non-conformance with the " tender specifications " or other formal reasons), low professional level of workers responsible for procurement procedures, low level of competition, connected with certain barriers to participation in tenders, particularly the need to obtain references in power structures and the low level of trust between business and the public procurement sector, etc. However, ProZorro makes such violations noticeable. For example, the system discloses information on procurements where the requirements are prescribed for a specific supplier. This enables other tender participants to fight for their rights through appeals. The ProZorro system will be further developed. The main problem is belowthreshold bidding, which is almost half of all government procurements in the country. Therefore, it is necessary to transfer the below-threshold procurements on a competitive basis, reducing the amount of speculation. Moreover, the ProZorro system needs to be integrated with open state registers. As part of the harmonization with EU legislation, the provisions of Directive 2014/24 /EC and Directive 89/665 /EEC as amended by Directive 2007/66 /EC, as defined in Annexes XXI-B, XXI-C to the EU Association Agreement, should be implemented in the legislation of Ukraine.

Public Procurement податкова Reform система

173 173


encountered corruption: * before advent of ProZorro after advent of ProZorro

29% 54% ProZorro system ensures: * 57% 68% 80% ensures the simplicity of documents handling* largely solves the problem of openness, accessibility, and clarity of tender details* largely solves the problem of openness, accessibility, and clarity of choice of the winner *

* an opinion poll of entrepreneurs conducted in May-June 2016 (supported by USAID)

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Results of implementation During the pilot stage, the ProZorro system saved about 600 million UAH worth of public money in one year (February 2015 — February 2016). The total sum of tenders (about 50,000) announced during the year amounted to 9 billion UAH. In 2016 there were already 366,000 procurements for the total amount of 274 billion UAH, and 101,000 of them were above-threshold (22,000 passed through the ProZorro system), 136,000 — below-threshold, and reports on another 128,000 procurements were downloaded into the electronic system. Total budgetary savings came to almost 10 billion UAH. One of the most important tasks of the reform was changing business attitudes towards participation in government procurement. Research conducted by Respro at the end of 2015 showed that 71% of businessmen did not consider themselves to be potential state suppliers, and only 12% tried to bid through the ProZorro system (functioning in test mode at that time). However, the main motivation for those who were ready to try was assistance in combating corruption in the country, rather than profit from increased sales. Suppliers reasonably considered the state to be not the best partner for business. The business sector was afraid of corruption, delayed payments, cross-checks with power and controlling bodies, difficulties in appealing against unlawful actions of unscrupulous customers, and evasion of officials’ responsibility for misconduct. In May-June 2016, an opinion poll undertaken of entrepreneurs supported by USAID, showing that the use of the ProZorro system reduced corruption in public procurement:

partially

significantly

27%

53%

In addition, the reform of the public procurement system has opened doors to Ukrainian suppliers of works and services to the relevant markets of other countries. On March 16, 2016, the Verkhovna Rada adopted a law under which Ukraine has joined the WTO’s Government Procurement Agreement. This decision opens the public procurement market of all participating countries, which is estimated at 1.7 trillion USD per year.

Public Procurement Reform

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NGOs

Experts, journalists, and the public are closely following the implementation of public procurement reform. The following can be distinguished as among the organizations which are monitoring the implementation of the reforms: • Independent analytical platform VoxUkraine — voxukraine.org • Civic Platform Nova Kraina — novakraina.org • Civic Organization Center for Political Studies and Analysis Eidos

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Interesting Facts

The ProZorro project was launched as a volunteer initiative, that is, by the efforts of civic activists, and it has only subsequently gained significant support from the management of the Ministry of Economic Development and international donors. ProZorro's success has not gone unnoticed by the international community. Last year Ukraine ranked first in the world in government openness and received an annual Open Government Awards 2016 for implementing the system. Moreover, in 2016 ProZorro won the most prestigious international award in the procurement field, the World Procurement Awards 2016. Already this year, ProZorro has been rewarded at the Davos Awards 2017 contest in the nomination of Trust of the Future. In other words, the success of ProZorro is confirmed by international recognition. Several states have expressed their interest in using ProZorro as the basis for developing their own public procurement systems. Development of the system based on open source software was carried out in partnership between the authorities, business sector, and civil society; at the first stage, it was administered by Transparency International Ukraine. In December 2015, all ownership and the relevant intellectual property rights for ProZorro system were “transferred to the people of Ukraine (state)�, namely to the State Enterprise Zovnishtorhvydav; later it was renamed the State Enterprise ProZorro, managed by the Ministry of Economic Development and Trade. The ProZorro system was created and launched only thanks to donor but not public funds. The following donors should be noted: the European Commission, the EBRD, the United States Agency for International Development (USAID), Western NIS Enterprise Fund, UK Department of International Development (DFID), Transparency International Ukraine, the International Renaissance Foundation, etc. Furthermore, a significant amount of free assistance such as consulting, training, work, and resources, has been received. Related projects were created within the system. For example, a monitoring portal called Dozorro was created to monitor procurements and report suspicious transactions. The ProZorro.Sales system was also launched, which is a platform for selling the property of insolvent banks and state enterprises.

Public Procurement Reform

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2014 March

the first meeting of the initiative group on the creation of the public e-procurement system

April

the Verkhovna Rada adopted the Law On Public Procurement (the validity of the law ceased with the adoption of the Law of Ukraine on December 25, 2015, No. 922-VIII)

July

a working group on implementation of the public e-procurement system was set up in the Ministry of Economic Development

2015 January

strategy on Sustainable Development Ukraine-2020 was adopted

February

launch of the ProZorro pilot version

178 178

податкова Public Procurement система Reform

March

ordinance of the Cabinet of Ministers On experimental use of electronic means in a procurement negotiated procedure (was repealed under the ordinance of the Cabinet of Ministers No. 610-r of August 23, 2014); a pilot project on above-threshold procurements for the Ministry of Defense

September

the Verkhovna Rada adopted the Law On Amendments to Some Laws of Ukraine in the Field of Public Procurement for bringing them into line with International Standards and Taking Measures to Combat Corruption (No. 679-VIII) the President signed law No. 679-VIII

December

the Verkhovna Rada adopted the Law On Public Procurement (No. 922-VIII); MPs voted in favor of amendments to the law on February 4, 2016, and it was sent to the president for signing

November

during the meeting of the WTO Committee, it was decided that Ukraine would accede to the Government Procurement Agreement


2016 February

the President signed the Law On Public Procurement the Cabinet of Ministers adopted a resolution on the functioning of the e-procurement system and the authorization of electronic platforms

March

the Verkhovna Rada adopted a law under which Ukraine joined the WTO’s Government Procurement Agreement

April

all purchases by the central executive authorities and state monopolies were transferred to the electronic platform

August

all purchases by local authorities and public utilities were transferred to the electronic platform

Public Procurement податкова Reform система

179 179


Rerm Fin cial Se Financial Sector Reform. Background

A trigger for reform of the financial sector was Ukraine’s signing of the Association Agreement with the European Union. The key document o f financial sector reform is the Comprehensive Program of the Ukrainian Financial Sector Development until 2020, which was approved in June 2015 and updated in January 2017. The program is based on the following fundamental principles: — European integration; — Liberalization of financial markets and acquiring an internal market regime with the EU in the field of financial services;

Refo

180

податкова система


tor Re nanfo Sector — Balance of economic interests through the establishment of a competitive market environment; — Independence and efficiency of regulators’ operation, supervision based on risk assessment; — Transparency and high standards of information disclosure by financial sector participants and regulators; — Responsibility and trust between financial sector participants and regulators; — The integrity of the financial system, comprehensive protection of the rights of creditors, consumers and investors.

orm Fi податкова система

181


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The adoption of the program has given a real start to reform of the banking system, which must revitalize the economy and create a competitive environment under EU standards, restore the confidence of Ukrainians in national banks, renew lending, make non-cash payments attractive, affordable and secure. The program includes measures in the following areas: financial stability and sustainable development, financial sector infrastructure, consumers and creditors protection, and institutional capacity of regulators. A comprehensive program plan contains a list of specific items regarding measures, actions, start and completion dates, responsible persons and institutions. The program will be implemented in three stages: I. Purification of the financial sector: the tough solution to the problem of "ballast" of the past, withdrawal of unscrupulous players from the market, the disclosure of shareholders of financial sector participants. II. Reboot of the financial sector: ensuring transparency and equity in the "shareholder — management — client" chain, removing all administrative constraints caused by the crisis, increasing the capitalization of financial sector participants, stepping up the rights protection of borrowers, lenders, and investors. III. Creation of the prerequisites for long-term sustainable development of the financial sector: ensuring the sustainability and reliability of the financial sector in the long-term, approximating the standards of solvency regulation and liquidity of banks to the recommendations of the Basel Committee, introduction of accumulative pension provision, stimulation of the market of insurance and other financial services and development of infrastructure and financial sector instruments, creation of additional guarantees of financial reliability in case of economic recession, increasing the reliability of systemically important banks, increasing the institutional capacity of regulators. The IMF carefully assesses the course of financial sector reform. In the last memorandum (March 2017) a significant part of the activities is devoted precisely to this aspect. It should be noted that measures for the 1st stage have already been implemented and implementation of the 2nd stage is under way. The banking market has got rid of "ballast." For 2014–2016, the number of banks in Ukraine decreased from 180 to 100. In 2016, more than 20 banks, mostly small ones, were recognized as insolvent, while in 2015, 33 financial institutions left the market. With the closure of insolvent institutions in the country, the consolidation of the banking system kept going. While in 2013 the top 10 banks accounted for 54% of assets, in 2016 the figure was 72%. Following the results of the first quarter, after the consolidation and nationalization of PrivatBank, the share of state-owned banks exceeded 50%. Such a situation is abnormal, but the Government plans to sell stakes of at least 20% in both Oschadbank and Ukreximbank to international financial institutions (for example, the EBRD) by the middle of 2018.

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The IMF carefully assesses the course of financial sector reform

Key authorities The Ministry of Finance of Ukraine was created in 1991 and is the successor of the Ministry of Finance of the Ukrainian SSR. The regulation on the Ministry of Finance was approved by a presidential decree in April 2011. The National Bank of Ukraine. The country’s Central Bank was created on the foundation of the Ukrainian Republican Branch of the State Bank of the USSR. The legal basis was the law On Banks and Banking, adopted by the Verkhovna Rada in March 1991. The National Commission for Regulation of Financial Services Markets (NCFS) was established by a presidential decree in November 2011, in compliance with the law On Financial Services and State Regulation of Financial Services Markets in place of the liquidated State Commission for Regulation of Financial Services Markets of Ukraine. The National Securities and Stock Market Commission (NSSMC) was established in June 1995. In November 2011, it was reorganized on the foundation of the State Commission on Securities and Stock Market. Deposit Guarantee Fund (DGF). This institution carries out special functions in the field of guaranteeing the deposits of individuals and the withdrawal of insolvent banks from the market. DGF was created within the framework of the Presidential Decree of September 10, 1998. The functions of the Fund were sharply expanded in 2012 with the adoption of the Law On the system for guaranteeing the deposits of individuals. That’s when the DGF became responsible for managing insolvent banks.

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Financial Sector Reform

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The current situation

Based on current realities, the primary task of reforming the financial system is to restore confidence in the banking system, lending setup, strengthen the rights protection of financial services consumers, etc. The next steps towards reform of the financial sector will be gradual, but steady fulfillment of obligations under the IMF memorandum. The passing of bills submitted in Parliament is still a sticking point of the reform. In January of this year, the NBU updated the Comprehensive Program of Ukraine Financial Sector Development by 2020. The main changes can be divided into three areas: new measures and actions were added in response to the challenges arising in the financial market, the detailed and consolidated measures of the program, as well as the revised timing of the implementation of certain measures. ĐĄhanging the period for the program’s implementation period was also due to a delay in the adoption of bills. Among the least successful projects are the creditor rights provisions, the resolution of bad debts and the implementation of the project on redistribution of NCFS functions. In 2017, the National Bank should present a strategy for development and a road map for harmonization of banking regulation with the recommendations of the Basel Committee and EU directives; complete the development of a new bank liquidity standard following the Basel III recommendation. And in the future, the development of the capital market should be ensured by the adoption of the law on derivative financial instruments and regulated markets, approval of the law on the consolidation of the functions of state regulation of financial services markets, the creation of new currency legislation with the ongoing course for currency liberalization, ensuring an efficient financial restructuring process. Along with the reforms aimed at problem-solving in the banking sector, it is imperative to bring standards regarding pensions and insurance systems into line with the world. The balance sheets of insurance companies require the "purging" of toxic assets no less than banking. It is necessary to legislatively ensure the creation of a transparent market for insurance services. The draft revision of the law on insurance proposed by MPs in February 2015 is under consideration by the Verkhovna Rada, and in March 2016, the first reading took place. Transfer of regulatory functions from the NCFS Ń an have a negative impact on the insurance reform. The question of how the market will respond and whether its own regulatory and oversight procedures will be improved remains an open one. The problem of reforming non-state pension funds is also very important. It is necessary to provide conditions for the development of non-state pension provision through the introduction of incentives for legal entities and individuals, and the introduction of European standards of governance, transparency and reliability in non-state pension funds.

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Financial Sector Reform

187


International obligations

The European Union. Conditions for granting macro financial assistance in the amount of EUR 1.8 billion (signed in May 2015) in the part of financial sector reform, envisaged the adoption of a regulation on the recognition of individuals and legal entities associated with banks on the basis of determined features (approved in May 2015) and the creation of a central credit register at the NBU (in process). International Monetary Fund. Ukraine's commitments to the IMF (according to the latest memorandum) include the following: 1. Events involving PrivatBank. The focus area is the restructuring of the bank's debts. For this purpose, PrivatBank signed an agreement with a consortium of international companies headed by Rothschild & Co to negotiate a restructuring of loans of the bank’s former owners. The next step should be an approval by the bank's supervisory board of the restructuring strategy of the loans mentioned above, which is scheduled for completion by the end of June 2017. The restructuring will provide for raising a level of provision or collection of "PrivatBank’s bad loans. Full completion of the audit and the drawing of conclusions on possible offenses in the bank prior to its nationalization is scheduled for the end of September 2017. 2. General banking supervision. Further actions are planned to monitor the activities of banks, which primarily include the submission of restructuring plans or the assessment of the level of their recapitalization. Also, efforts will be made to strengthen all the banks remaining in the banking system. The diagnostic studies of remaining banks will be completed by the end of September 2017. And by mid-July 2017, all banks will have a minimum authorized capital of UAH 200 million. Banks which cannot meet this requirement will be removed from the market. Strict compliance will also be provided by all banks with the goals of reducing and limiting the volume of transactions with related parties. It is planned to establish a list of measures necessary for the implementation of the basic Basel principles, by which an action plan will be prepared by the end of 2019. 3. Proceed with the establishment of a credit register in the NBU. To this end, the Verkhovna Rada should provide the NBU with powers to obtain information from banks by the end of September 2017 and, by the end of December 2018, start to provide information to improve the efficiency of lending.

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4. The operations of state-owned banks. The implementation of the reform strategy for the state banking sector will be continued (approved in February 2016). A bill will be submitted to Parliament promoting adoption of a new approach to the corporate governance of state banks. A memorandum of understanding will be prepared by the end of June, determining the structure of relations between the Cabinet of Ministers and state banks. The supervisory board of each bank will be selected in accordance with the above-mentioned strategy. 5. Work of the DGF. A bill will be submitted to the Verkhovna Rada, which will strengthen the ability of the DGF to work with assets. By the end of June, it was planned to sell assets to the value of at least UAH 10 billion on international platforms. 6. Consolidation of the regime for corporate debts restructuring and protecting the rights of creditors. By the end of September, it is expected that the Verkhovna Rada will adopt amendments to the law On restoring the debtor's solvency or recognizing it as a bankrupt to facilitate the restructuring process and increase the effectiveness of the liquidation process, and the law, which strengthens the legislative provisions on the automation of collection and enforcement of debt. It is also planned to make changes that will enable the writing off of bad debts without initiating or completing the procedure. 7. Creation of a legal framework for the functioning of the financial market. It is planned to introduce bills, which will increase the powers, independence and institutional capacity of the NSSMะก. The National Commission must also reform its internal structure and procedures. The responsibilities for supervision of a range of financial intermediaries will be transferred from the NCFS (to be liquidated by the end of 2017) to the NBU and the NSSMC. The NBU will be responsible for the regulation and supervision of insurance and leasing companies, credit unions, and credit bureaus and other non-bank lenders, pawn shops, etc.; and the NSSMC will be responsible for regulating and supervising private pension funds, issuers of mortgage certificates, construction financing funds and real estate funds. A new law on auditing and a revised accounting law, developed on the basis of EU standards will also be approved (by the end of July 2017).

Further actions are planned to monitor banks activities, which primarily include the submission of restructuring plans or the assessment of the level of their recapitalization

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Interesting Facts

In January 2015, the National Bank of Ukraine established the Financial Stability Board, the first meeting of which took place on January 12, 2015. At the same time, President Poroshenko signed a decree on the creation of the eponymous body within the National Bank only in March 2016. The Financial Stability Board is an interdepartmental body. It is composed of the head of the National Bank of Ukraine, the Minister of Finance, the chairman of the NSSMC, the chairman of the NCFS, DGF managing director, one of the deputy chairmen of the NBU and the Deputy Minister of Finance. The Board’s decisions are of a recommendatory nature, and its task is to minimize the risks that threaten the stability of the Ukrainian banking and financial system. Dissolution of "ballast" (in accordance with the implementation of Phase I of the Comprehensive Program of the Ukrainian Financial Sector Development until 2020) has not proceeded in the way it was expected. Banks began to resume their activities through the courts. As of May 1, 2017, the courts decided to restore the activities of 12 financial institutions. According to estimates made by the National Bank of Ukraine, all these actions reduce the efforts aimed at improving the Ukrainian banking system.

the restoring the activities of financial institutions. reduce the efforts aimed at improving the Ukrainian banking system

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NGOs

The implementation of financial sector reform is closely monitored by independent experts from various organizations, among them are the following: • Center for Economic Strategy — ces.org.ua • Independent analytical platform VoxUkraine — voxukraine.org • Non-profit organization EasyBusiness — easybusiness.in.ua • Institute for Economic Research and Policy Consulting — ier.com.ua • Ukrainian Federation of Insurance — ufu.org.ua

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2015 January

the Strategy for Sustainable Development Ukraine–2020 was adopted the Law On Amendments to the Law of Ukraine "On Financial Services and State Regulation of Financial Services Markets" on the Disclosure of Information was adopted

March

the Law On Amendments to Certain Legislative Acts of Ukraine on the Responsibility of Persons related to a Bank was adopted

May

the Resolution of the NBU On Approval of the Regulation on the Identification of Persons related to the Bank was adopted

June

the Comprehensive Program of Ukrainian Financial Sector Development until 2020 was approved the Law On Amendments to Certain Legislative Acts of Ukraine on the Development of the Institutional Capacity of the National Bank of Ukraine was adopted the Law On Financial Restructuring was approved

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податкова Financial Sector система Reform

2017 March

a memorandum was signed with the IMF, where one of the commitments undertaken by Ukraine is the further implementation of reform of the financial sector

April

the Government approved the medium-term Plan of Priority Actions for the Government until 2020


Financial податкова Sectorсистема Reform

193


rem Tax Tax reform. Background

The modernization of the tax system began with the independence of Ukraine. In every approach to tax reform, the motives of stakeholders (participants to the process) were a set of extremely controversial interests. For example, the main factor was the attempt to get maximum budget revenues. The second key point was the attempt to create or retain certain "loopholes" in tax legislation. The third main factor was the attempt to reduce the tax burden. In general terms, both businesses and citizens were interested in this issue, but their efforts up till 2014 were diffused and unstructured. The most negative factor in the development of the Ukrainian tax system was and remains its subordination to the provision of the growing appetites of the state without considering the require-

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for податкова система


for

x rerm ments of economic growth or the needs of sustainable development. For this reason, the requirement on approval of any tax changes by July 1 is continually ignored, preceding January 1, which is when these changes should be introduced. In addition, a good illustration of this approach is the regular adoption by Parliament of a certain list of tax changes in one package with the Law on the State Budget for the coming year. Therefore, the Ukrainian tax system is one of the most burdensome in Central Asia and Eastern Europe — 51.9% (taxation of business establishments with various taxes, according to Paying Taxes research, conducted jointly with the World Bank and PwC — Former PricewaterhouseCoopers).

податкова система

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From decrees to1991–1996 the Tax Code

The Law On the Taxation System of the Ukrainian SSR was adopted even before independence. It was introduced on June 25, 1991. At the same time, the following nationwide taxes, fees, and compulsory payments were initiated: 1. Corporation tax; 2. Tax on income of foreign legal entities for their activities in the Ukrainian SSR; 3. Turnover tax; 4. Excise duty; 5. VAT; 6. Export-import tax; 7. Income tax; 8. Collective farmers payroll tax; 9) Income tax for citizens; 10. Charge for natural resources; 11. Land fee; 12. Income from timber; 13. Ecological tax; 14. State duty; 15. Vehicle owners tax; 16. Duty (for goods crossing the state border). For example, Corporation Tax was 30%, while personal income tax was 28%. High rates and double taxation were largely offset by non-payment of taxes. The system was weak, and therefore unable to charge such high taxes. Also, a wide range of privileges was introduced for enterprises with foreign investments, which subsequently gave the opportunity for these privileges to be used to avoid the excessive tax burden. During its operation, this law also introduced a system of charges on payroll and contributions to the Chornobyl and Pension Funds, the Employment Fund, and other social funds. All of this put heavy pressure on business and citizens and contributed to the development of inflation. The situation became critical, and led to an early presidential election in Ukraine. Leonid Kuchma ran and came to power on July 19, 1994, and immediately initiated negotiations with the International Monetary Fund to support Ukraine. In October 1994, the IMF approved for Ukraine the first loan of the Systemic Transformation Facility (STF) of about

196

Tax reform


392 million dollars for systemic transformations in the economy. Within the framework of Ukraine's commitments under the Memorandum, for example, export duties had to be abolished as a general tax instrument. This law, with significant amendments, remained in force until the Tax Code of Ukraine came into force in 2011. In accordance with this law, value added tax was introduced in Ukraine on January 1, 1992 (The Law On Value Added Tax) at a rate of 28% (22% for products sold at regulated prices). This law was only until June 1993, and was replaced by the Cabinet of Minister’s decree On Value Added Tax of December 26, 1992, according to which the VAT rate was reduced to 20%. The Law On Corporation Tax of December 28, 1994, was the most modified tax law. Over six years of its operation, it was amended by more than 140 laws of the Verkhovna Rada (Parliament) and decisions adopted by the Constitutional Court of Ukraine. In the first revision, the standard tax rate was 30%, and rates for some activities were set at 45% and 60%. Of course, it could not last too long. Therefore, the rate was reduced — for the first time since January 1, 2004.

The Law of the Ukrainian SSR "On the Taxation System" was adopted even before independence

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1997–1999

In 1997, the Law of Ukraine On Amendments to the Law of Ukraine On the Taxation System was adopted, which introduced a new version of the Law of Ukraine On the Taxation System. According to the new version, national taxes and duties (compulsory payments) consisted of the following: 1. Value added tax; 2. Excise duty; 3. Corporation tax; 4. Personal income tax; 5. Duty; 6. State duty; 7. Real property tax (real estate); 8. Land fee (tax); 9. Rental payments; 10. Tax on owners of vehicles and other self-propelled machinery and mechanisms; 11. Crafts tax; 12. Fee on geological exploration, performed at the expense of the state budget; 13. Fee on the special use of natural resources; 14. Environmental pollution charge;

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15. Duty on the Fund for implementation of measures on elimination of the consequences of the Chornobyl catastrophe and social protection of the population; 16. Duty on compulsory social insurance; 17. Duty on compulsory state pension insurance; 18. State Innovation Fund Tax; 19. Fee for a trade patent for certain types of business activities. In addition, a list of local taxes and duties (mandatory payments) was regulated. Local taxes: 1. Advertising tax; 2. Council tax; Local duties: 1. Hotel tax; 2. Car parking charges; 3. Market charge; 4. Fee for the issuance of an authorization certificate for an apartment; 5. Resort fee; 6. Fee on participation in horse racing 7. Fee on winnings in horse racing on racetracks; 8. Fee on persons who take part in the parimutuel betting on the racetrack; 9. Fee for the right to use local symbols; 10. Fee for the right to conduct cinema and television filming; 11. Fees on conducting local auctions, competitive sales, and lotteries; 12. Fee on transit on the territory of border areas of motor transport going abroad; 13. Fee for the issuance of a permit for the placement of trade objects and services; 14. Levy on dog owners. This system, with some modifications, lasted up to 2010. Actually, because of the new edition of the law on the taxation system, the Law of Ukraine On Value Added Tax, which came into force on July 1, 1997, was adopted. This law was repealed pursuant to the new Tax Code of Ukraine dated December 2, 2010. However, the most powerful influence during this period belonged to the Decree of the President of Ukraine On the Simplified System of Taxation, Accounting and Reporting of Small Business Entities dated July 3, 1998, No. 727/98. According to this Decree, taxpayers pay a single tax (instead of a series of taxes and fees) and have the right to simplified accounting and reporting procedures. For employees, these enterprises must pay personal income tax and a unified social tax (UST). The introduction of a simplified system — a single tax — compensated pressure from corrupt auditors on small business and significantly reduced reporting costs. Due to this simplified system, the Ukrainian economy began to quickly recover after the financial crisis of 1998. Among the most powerful steps in the development of the financial infrastructure was the introduction in 1997 of the Taxpayer Identification Number. The numbers began to be issued from January 1, 1998.

accounting and reporting procedures have become much simpler Tax reform

199


2000–2010

This period is characterized by cosmetic changes and the final dismantling of specific privileged schemes. For example, from January 1, 2004, the rate of Corporation Tax was reduced from 30% to 25%, in accordance with the Law On Amendments to the Law of Ukraine On Corporate Profit Tax of December 24, 2002. Dismantling touched, or rather, liquidated tax loopholes, which emerged due to the introduction of overly massive privileges for enterprises with foreign investments (hereafter — Joint Venture). The prime for tax schemes with the participation of enterprises with foreign investments in Ukraine began with the adoption of the Law On Foreign Investments of March 13, 1992. At the beginning of the 2000s, the current system of granting privileges for enterprises with foreign investments was established by the Law of Ukraine On the Regime of Foreign Investment of March 19, 1996. However, with the adoption of the Law of Ukraine On the elimination of discrimination in the taxation of business entities created using assets and resources of foreign origin of February 17, 2000, schemes with the use of a JV started to fall out of use. Powerful JV groups even resorted to obtaining decisions from the Constitutional Court, but they could not help it. Another phenomenon appropriate for this period was the gradual increase and narrowing of the application sphere of the simplified taxation system for small businesses.

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cosmetic changes and the final dismantling of specific privileged regimes took place

Tax reform

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Attempts to codify tax legislation occurred in the early 2000's, but it was only at the end of 2010 that this was accomplished. During the final approval of the Tax Code of Ukraine, there was an unprecedented confrontation between small business and the Government


2011–2013

Mykola Azarov's Government steamrolled many anti-business regulations into the draft Tax Code, which led to the Tax Maidan — mass rallies and protests in Ukraine against the adoption by the Verkhovna Rada of the new draft Tax Code. Under the pressure of the protests, the Tax Code approved by the Verkhovna Rada was vetoed by President Viktor Yanukovych and returned to MPs with remarks. The requirements of the Tax Maidan were partly considered. Most importantly, the simplified taxation system was maintained, although its value for business was increased, and the scope of application was narrowed. According to the Tax Code of Ukraine, national taxes include: 1. Corporation tax; 2. Income tax; 3. Value Added Tax; 4. Excise tax; 5. Ecological tax; 6. Rent; 7. Duty. Local taxes include: 1. Property tax; 2. Single tax. Local duties include: 1. Car parking charges; 2. Tourism tax.

the Verkhovna Rada has adopted more than 50 legislative acts with amendments to the Code

Despite the negative standards, the adoption of the Tax Code was still a step forward — at least due to a significant reduction in the number of taxes and fees. Although the Tax Code of Ukraine could not avoid the frequent disease of Ukrainian tax legislation: from its entry into force (January 1, 2011), by the end of February 2014, the Code underwent significant changes — the Verkhovna Rada adopted more than 50 legislative acts with amendments to the Code. In the same period, the Ministry of Incomes and Charges of Ukraine was created through the reorganization of the State Customs Service of Ukraine and the State Tax Service of Ukraine, and their integration into a single body. The Ministry of Incomes and Charges was established as a central executive body under the Decree of the President of Ukraine on December 24, 2012. During this period, the tax system was transformed by the Azarov-Yanukovych Government into a distorted fiscal double taxation system. That is, business was forced into "platforms" to allow a significant part of turnover to be taxed at shadow rates during the companies’ cash out transactions. The flow of funds through the "platforms" formed the movement of shadow "taxes." The system of "platforms" was completely formed after the establishment of the Ministry of Income and Charges, headed by Oleksandr Klymenko. However, Klymenko, while head of the State Tax Administration and his predecessor in the chair, Vitaliy Zakharchenko, laid the basis for the systemic "shadow" taxation of the Ukrainian economy.

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Key players, reformers, and interested parties

At the time of the victory of the Revolution of Dignity, the Ministry of Income and Charges acted not only as an executive and as a service provider for taxpayers but also in a certain way — as an ideologist of change. This selfsufficiency of the fiscal superstructure laid the foundations for the growth of repressive functions and rapid increase in the tax burden on the economy. Of course, all this happened in close cooperation with the Ministry of Finance, which, however, did not really fulfill the functions of the body that shapes policy in the field of public finance, taxes, and fees.

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податкова Tax reform система


The role of the Ministry of Finance was reduced to the development of the next budget plan and control over the implementation of the already approved law on the state budget. The head of the tax superstructure took care of fiscal policy. The Prime Minister, either personally, or via his first deputy, ensured coordination between the two departments. Draft laws were sent to the Verkhovna Rada, and MPs were simply kept out of these drafts as the Ministry of Income and Charges was the real author of the texts that were presented as a legislative initiative of the Cabinet of Ministers. The presence of a controllable majority in the Verkhovna Rada gave an opportunity to steamroll almost any bill without much resistance. The introduction of punitive norms in tax legislation could have been prevented by direct actions — let us remember the Tax Maidan in 2010. The situation changed dramatically after the Revolution of Dignity. The most important thing was the establishment of the State Fiscal Service in place of the Ministry of Income and Charges, which was already subordinated to the Ministry of Finance. The first post-revolutionary Finance Minister, Oleksandr Shlapak, and the head of the State Fiscal Service, Ihor Bilous, were engrossed just in the maintenance of the efficiency of the public finance system. However, Natalia Jaresko, who was the head of the Ministry of Finance in late 2014, proceeded with the introduction of tax reform. Volunteers and various non-governmental organizations set up active assistance to high-ranking officials. For example, the role of entrepreneur’s associations — the Ukrainian League of Industrialists and Entrepreneurs, the Federation of Employers of Ukraine, and the Fortetsya Association — has increased. Also, a large contribution has been made and continued to be made by the Reanimation package of reforms, etc. The American Chamber of Commerce and the European Business Association are quite often enlisted in work on draft laws. Perhaps for the first time, business and taxpayers have gained the opportunity to become co-authors of tax amendments. The recovery of the composition of the Verkhovna Rada during the elections in autumn 2014 also contributed to this. The Government's cooperation with the International Monetary Fund has a significant impact on reform. Unfortunately, the influence is not always positive. On the one hand, the obligations assumed by the Government in the IMF Memorandum contribute to speedier work by pro-Government MPs for the benefit of change. On the other hand, sometimes the Government takes the path of least resistance: it does not hold back the growth of irrational expenditures of the state but suggests increasing the tax burden. The settlement of such disputes formed the progression towards tax reform.

Perhaps for the first time, business and taxpayers have gained the opportunity to become co-authors of tax changes

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2014-2017: new reform

On April 30, 2014, after the Revolution of Dignity, the coming to power of a new Government and the fulfillment of preliminary conditions, the IMF approved the granting to Ukraine a new Standby loan of USD 16.5 billion. By the end of the summer of the same year, Ukraine received tranches; however, the tax reforms stipulated by the IMF Memorandum had not started. After the 2014 parliamentary elections, a new Government provided an opportunity to reload reform efforts. In view of Russian aggression, it was necessary to introduce a war fee charged on salaries. The Government also introduced incentives for companies to move out of the shadow economy: subject to fulfillment of certain regulations, a company could pay the unified social tax with a reduced coefficient of 0.4. This experiment was implemented for a year and has not been renewed, because, from January 1, 2016, a new rate of the unified social tax was introduced. The parameters of tax reform were revised, and they have been included in the next Memorandum. On March 11, 2015, the IMF approved the replacement of the "stuck" Stand-By Program for a new four-year Extended Fund Facility Program. The first tranche of USD 5 billion under the new EFF program was received immediately after its adoption. On July 31, 2015, the IMF’s Board of Directors approved the granting of the second tranche of USD 1.7 billion. Accordingly, the first serious approach to tax reform took place in 2015. In the second half of 2015, there was rather tough dialogue between the Minister of Finance Natalia Jaresko and the relevant committee of the Verkhovna Rada. For example, draft law 3357 — a rather radical tax reform from MPs and an expert on the environment — was prepared and preliminarily recommended for inclusion in the agenda of the session hall. However, the Government, in the guise of the Minister of Finance, refused to accept it in its first reading. The tough positions taken by Jaresko and the chairperson of the Verkhovna Rada Committee on Taxation, Nina Yuzhanina, did not change during three months of debates around the reform. The committee insisted on the taxation of distributed profits, on the reduction of rates of VAT and personal income tax. It was also planned to eliminate the part of the unified social tax (3.6%), which is charged directly from employees, and establish a single rate for part of the unified social tax paid by the employer. As envisioned by the relevant committee, the simplified taxation system had to be limited, but not substantially. Changes were limited mainly to the revision of the annual turnover limits and gradual increase in rates for entrepreneurs of the third group. Yuzhanina also insisted on the introduction of a new, supposedly "softened" system for reporting by entrepreneurs and paying of a 10% tax on net income.

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In her turn, Jaresko supported a conservative option, which provides for an increase of the tax burden. However, along with reduction of the basic rate of the unified social tax to 20% and abolition of the unified social tax paid by employees. Nevertheless, Jaresko was tough in demanding the total elimination of the single tax (simplified system) as such in one or two years. The Government bill initially proposed to significantly increase the rates of the single tax, as well as introduce total control of costs and incomes, by the introduction of cash registers for all groups of businesses within 2016-2019. There was a requirement to ban the application of a single tax to legal entities from January 1, 2016. In the end, there were changes that from January 1, 2016, have made it possible to significantly reduce the burden on the wages fund. The unified social tax was reduced from 36.76-49.7% (the size depends on the level of occupational hazard, paid by the employer) to the unified rate of 22% except for the payment of part of the unified social tax to be paid personally by the worker (3.6% of the payroll). The Government finally managed to introduce a series of anti-corruption measures on VAT, but this matter was under the control of the new Minister of Finance Oleksandr Danyliuk (from April 2016). A system of automatic VAT refunds was introduced under his leadership. Although there were serious complaints about the advancement of VAT refund, in general, the system significantly reduced the chances of irregularities through the formation of fictitious VAT. And in 2017 an electronic VAT invoicing system was introduced, which became fully operational from July 1, 2017.

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Components of tax reforms in 2014-2017 Date 1.01.2014

Tax Corporate profit tax

Excise duty

Excise duty

According to the Law of the Verkhovna Rada of December 28, 2014, No. 71 On Amendments to the Tax Code of Ukraine, an excise tax on the retail sale of excisable goods (beer, alcohol drinks, tobacco products, petroleum products, liquid gas, etc.) and the fee for the development of viticulture, horticulture and hop growing is canceled.

Unified social tax (UST)

On December 28, 2014, the Verkhovna Rada adopted, and on December 31, the President signed the Law No. 77-VIII, aimed at legalizing the wage fund through the application of a coefficient of 0.4 to the UST rate, on condition of leaving the shadow economy and becoming legal.

VAT

According to the Law of Ukraine On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine of July 31, 2014, No. 1621-VІІ, the system of electronic administration of VAT (SEA VAT) was introduced.

Real Property tax

The Law of Ukraine of December 28, 2014, No. 71-VIII On Amendments to the Tax Code of Ukraine and certain laws of Ukraine on the tax reform introduced changes in the taxation of real estate, other than land. That is, the taxation of residential property and other personal property has been introduced.

1.01.2015

Tax reform

Corporation tax was reduced once again. It was 18% after 19% in 2013, 21% in 2012, and 23% in 2011. The first large increase in excise duty rates. Starting from January 1, 2016, the Government systematically raised the rates of excise duty on tobacco and alcohol in view of Ukraine's commitment within the framework of the Association Agreement between Ukraine and the EU.

1.05.2014

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What has been done


Date 1.01.2016

Tax VAT

VAT privileges for agricultural producers were reduced.

UST

The UST rate has been reduced to 22%, but the maximum surcharge base of the UST has been increased to 25 times of the living wage of an able-bodied citizen.

Personal income tax 1.01.2017

What has been done

The personal income tax ceases to be progressive. Instead of a scale of 15/20%, a single rate of 18% is introduced.

VAT

Substitution of VAT allowances for the agrarian business to direct budget compensation.

UST

The increase in the minimum wage from 1,600 to 3,200 UAH — thereby raising the minimum assessment base of the UST — up to 3,200 UAH.

VAT

On 20.12.2016, the Verkhovna Rada of Ukraine adopted the Law No. 1791-VIII, according to which using payment transactions recorders (cash registers) and issuing fiscal receipts from May 8, 2017 is obligatory for all sellers of "technically sophisticated household goods": household appliances, computers, smartphones and other electronics, regardless of their income or type of business.

VAT

According to the Decree of the Cabinet of Ministers of Ukraine of 30.01.2015 No 20 On Amendments to the rules of order of the Unified Register of VAT invoices, the working, operating mode of the VAT invoice registry (blocking VAT invoices) was introduced, which made it impossible to generate a fictitious tax credit. Including — due to so-called "twists."

8.05.2017

1.07.2017

Tax reform

209


Failures and successes

It should be admitted that the quality of the tax system consists of two factors: administrative complexity and the level of tax rates. Unfortunately, the complexity remains high. Research undertaken by the World Bank and the PricewaterhouseCoopers Audit Company show that Ukraine's taxation system continues to be one of the worst in the world. Although the amount of time required for paying taxes decreased in 2017 to 356 hours compared to 491 in 2013. The total tax burden on the economy is most often measured as the ratio of revenues to the consolidated budget, considering pension and other social funds — on the one hand, and GDP — on the other. In 2017, considering the abolition of tax privileges and doubling of the minimum wage, the indicator is expected to be 42.3%. It is significantly higher than in 2016 when the economy felt relieved due to the reduction of the UST rate — last year this figure was 38.1%. That is, we roll back the level of 2015 — 41.5%. In fact, this indicator varied in the range of 39.7–42.8% in the period of 2005–2014. Although it was not always so, as in 2004 it was 34.4%. The conclusion is that under the leadership of Viktor Yushchenko, the country tasted populism; therefore, it cannot go off the rails of unlimited increase of expenditures, and therefore is afraid of a radical reduction in the tax burden. Corporation tax remains.Complicated, incomprehensible, and very risky in terms of generating corruption. There are proposals to replace it with a tax on withdrawn funds, but the Government is so far resisting this, claiming that there is a risk of a possible failure of budget revenues, even though in 2017 the consolidated budget is over-fulfilled in terms of its revenue side. Therefore, in 2017, the key challenges of reform are: - Tax on withdrawn funds instead of income tax; - Lowering the payroll budget burden; - Maintaining a simplified taxation system for small businesses.

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податкова Taxсистема reform

211


rem Hea care Healthcare reform. Background During the years of independence, Ukraine hasn’t been able to create a

healthcare system that can effectively provide the population with quality and affordable medical services, respond to the current challenges related to increasing mortality rates and the spread of AIDS, tuberculosis or hepatitis C, and to carry out effective preventive measures. Today, despite high levels of state expenditure on the medical sector, citizens are forced to pay for expensive treatment on their own. For the disadvantaged section of the population, the payment of medical services is often excessive. As for other problems, medical facilities do not have enough equipment for the examination and treatment of patients, drugs, or qualified personnel. In addition, very low salaries provided by the state for

for th 212

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fo althmedical workers has led to corruption in this area. The results of a survey conducted by TNS-Ukraine in 2016 indicate that the medical sector is the most corrupted sector. This was stated by 61% of respondents. Also, according to a study by the anti-corruption organization Transparency International, in 2016, 33% of respondents made informal payments in a medical institution. During Soviet times, in Ukraine, there was a health model, developed by Academician Semashko, which provided all citizens with the right to free medical care. The basis of this system was the idea of increasing the number of doctors, nurses, and beds. The doctor’s salary depended only on the qualification and doctor's degree, and not on the number of his patients.

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213


Patients, in their turn, could not choose a doctor because they all belonged to a certain district, and therefore could apply only to their district doctor. The biggest problem with the functioning of this model was the inappropriate use of budget funds, reduction in the salaries of doctors and, as a result, the growth of informal payments in hospitals, which became a common practice in the "patient-doctor" relationship. Elements of the Semashko system are still present in many countries of the former USSR, including Ukraine. Given the transition to a market economy, the economic crisis, and the non-compliance of this system with the demands of our times, this has led to a deep crisis in the health system. With the collapse of the Soviet Union, significant changes in the healthcare system did not actually take place until 1996, when the Constitution of Ukraine was adopted, confirming the right of all citizens to free medical care and voluntary health insurance. In the same year, the Law On Insurance was approved, which legalized the field of health insurance and created the basis for the first insurance companies. Also, in 1996 an attempt was made to introduce payment for some medical services. The Cabinet of Ministers approved the resolution On approval of the list of paid services provided in state healthcare institutions and medical schools. However, already in two years — in 1998 the Constitutional Court found such a decision to be unconstitutional, and official payments were canceled. Later, in 2002, there was one more attempt to consider this issue in the Constitutional Court, but the decision on the illegality of payments for medical services remained unchanged. Among the important changes of that time, it is worth mentioning the adoption in 2000 by the Cabinet of Ministers of the decree on the procedure for obtaining charitable (voluntary) contributions and donations to budget institutions, including healthcare facilities. This contributed to the fact that the hospitals received additional financial resources, but did not help to get rid of informal payments.

in 2002, the first Integrated Program "Health of the Nation" for the period of 2002–2011� was approved

214

Healthcare reform


The period of the 2000s was marked by the development of several documents that tried to outline the ways of development and changes in the healthcare system, although it did not proceed further than the general proposals. Thus, in 2002, the first Integrated Program, Health of the Nation, was approved for the period of 2002-2011. The program was aimed at strengthening the health of the population, maintaining working ability, improving the demographic situation and the effectiveness of healthcare. However, the document did not specify the ways to achieve these goals. During the presidency of Viktor Yushchenko in 2007, the Cabinet of Ministers approved a resolution "On Approval of the National Plan for the Development of the Healthcare System for the Period until 2010". This document was like the 2002 Program and mostly contained suggestions. So, matters never come to the real changes. The reforming of the medical sphere started to be discussed again in 2011. Just then the Law On the Procedure for Reforming the Healthcare System in Vinnytsia, Dnipropetrovsk, Donetsk Regions and the City of Kyiv" was adopted, launching pilot reform from January 1, 2012. It provided for the creation of a system of separate medical institutions that provide various types of medical services, the establishment of hospital districts, the financing of medical institutions on a contractual basis, the differentiation of expenditure on healthcare between local budgets, etc. Patients also have the opportunity to choose their own family doctor. It was planned that because of the reform, five types of medical care are to be introduced: emergency care, primary, secondary, tertiary and palliative care. By separating the primary and secondary levels of medical care, it became possible to see the positive and negative aspects of this separation. Many hospitals, particularly in rural areas, were restructured; newly-established centers of primary healthcare ran short of family doctors; doctors had to change their qualification. On the other hand, medical facilities were established in many villages. It also turned out that some approaches to reform are only justified for large cities. For example, assignment of patients to a doctor was done manually — no procedure was prescribed. Similarly, nursing staff was manually redirected from the primary level to the secondary level and vice versa. However, this was a gradual process. In the last year of the reform, the relevant law was suspended. And this was the most important stage — the secondary level of healthcare provisions had to be reformed.

Healthcare reform

215


The current course of the reform

After the Revolution of Dignity, a new attempt to reform was launched, aimed at changing the existing healthcare system. On December 26, 2014, at a meeting of the Healthcare Committee of the Verkhovna Rada of Ukraine, the draft was presented of a national strategy for creating a new health system in Ukraine for 2015–2025. Nevertheless, during 2015–2016, several important steps were taken to improve the situation. The system of medicine procurement was changed with the aim of defeating corruption in this sphere and making the procurement process transparent. Now, this process takes place through independent international organizations such as the United Nations Children's Fund UNICEF, the United Nations Development Program (UNDP) and British Crown Agents. Furthermore, in 2017 the population got the opportunity to track the availability of state-procured medicines in the hospitals of their region via the online service Available Medication. Available health care products can be obtained in medical institutions free of charge. Despite the process of reducing the number of beds that has lasted since independence, Ukraine is still among the leaders in the number of beds per 1,000 people. For example, in 2012, Ukraine ranked third in the world with an indicator of 9 beds per 1,000 people, that is, 90 per 10,000, respectively. It should be noted that this situation is typical for countries of the former Soviet Union. To change the situation when budget funds are used to support hospitals and a certain number of beds, and not on the treatment of the actual number of patients, the Ministry of Healthcare issued an order in early 2016 to reduce the number of beds to 60 (out of the current 87.9) for 10,000 people.

In some districts, there is no pharmacy that would have entered into an agreement of the "Available Medication" program

216

Healthcare reform


Another important step was the launch of the Available Medication program. From April 1, 2017, Ukrainians suffering from cardiovascular diseases, asthma or type II diabetes can, on the prescriptions issued by their doctor, receive the necessary medicines for free or for a small surcharge in the pharmacies of their city. The list of cut-rate prescription drugs included 167 healthcare products. As of June 2017, nearly 6,000 pharmacies throughout Ukraine had already joined this program. A similar pilot project on hypertension drugs has been functioning since 2013. Then doctors did not know which drugs were eligible for reimbursement, to get the medicine at the pharmacy for free. For their part, the local authorities introduced "rules of the plan," indicating how many prescrip— tions should be processed in a certain period. Today, these problems are repeating themselves. As then, the state has debts to some pharmacies as a result of such programs. The worst situation is in small cities. In some districts, there isn’t a single pharmacy that concluded such an agreement. In addition, it has not been legislatively approved that a pharmacy which has concluded such an agreement is obliged to keep an appropriate set of medicines. This also weakens the program.

Healthcare reform

217


The purpose of the reform

First, the reform of the healthcare system involves changing the paradigm: from financing a medical institution to financing the services provided to the patient. In the past the state allocated money for the maintenance of hospitals and a certain number of beds; now these funds will be used for services provided to patients. A number of bills should change the existing system of healthcare financing, including the Draft Law On State Financial Guarantees for the Provision of Medical Services and Medicines (No. 6327), which was adopted by the Verkhovna Rada in the first reading on June 8, 2017. It is worth mentioning another important for medical reform law No 2309a-d, which was adopted in April 2017. Under this law, hospitals received financial and managerial autonomy. It is planned that they will turn into non-profit enterprises that will be able to receive financing from different sources. Article 18 of this law introduces the principle of "money follows the patient," according to which hospitals and private doctors will receive direct payments for the treatment of a patient and his/her medical case. By November, the Ministry of Healthcare should accept all relevant documents, approve the costs of medical services, the number of such services, etc. But no movement has been made in this direction for three months. Meanwhile, contracts need to be not only developed but also concluded. Because of this, there may be serious delays not only with the implementation of the principle of "money follows the patient" until December or January, but also delays in the funding of hospitals. The medical services and medicines provided to patients should be entirely or partially paid for by the state through the state insurance system, which will cover all persons living in Ukraine. The issue here is not about insurance as such, but about another model of budget financing, because the issue is not about a certain contribution, but reallocation of budgets. Its specificity lies in the fact that the population will not have to pay any additional insurance contributions, as the financial provision of obtained medical services will be received from taxes. Thus, everyone who lives in Ukraine is automatically insured as they pay taxes. This bill should be perceived within the system of description of medical care guaranteed to patients.

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Mortality rate in Ukraine (per 1,000 people) 1990 12,1 1992 1994

1991

12,9

13,4 1993 14,7

1995 1996

14,2

15,4 15,2

1997

14,9

1998

14,3 1999

2000

15,3

2001

15,3

2002

15,3

2003

16,00

2004

16,04

2005

16,6

2006

16,2

2007

16,4

2008

16,31

2009

15,3

2010

15,2

2011

14,5 2012

2013

14,6

2014

14,7

2015

14,8

14,5

14,9 Healthcare reform

219


Number of hospital beds (per 1,000 people) 1990

13,01

1991

12,96

1992

12,72

1993

12,47

1994

12,30

1995

11,89

1996 1997 1999

10,84 9,37 1998 8,95 2000

8,82

2001

8,74 2003

8,8

2005

8,7 2006

8,7

2009

8,7 2012

UAH per year the state plans to allocate for one patient. The doctor’s norm will be 2 thousand patients.

220

9,04

Healthcare reform

9


With the transition to a new system, the salary of a doctor will depend directly on the number of patients who visit him/her. On average, the state plans to allocate UAH 210 per year for one patient. The doctor’s norm will be 2,000 patients. For pediatricians, the number will be 800–900 patients. They will receive more per patient — about 270 UAH, taking into consideration the greater amount of work and workload. The same applies to doctors who will treat elderly people. Such information is provided by the Ministry of Healthcare. However, there is no decision that can be referred to confirm these figures. Payment will be received monthly. The patient can still choose a doctor, but now the specialist who has more patients must be paid primarily. However, the corresponding mechanisms are not yet sufficiently spelled out. It could happen that an institution that provides services to more patients will receive more funding. Instead, a doctor who works in this institution and has many patients will not receive bigger pay. A new authority called the National Health Service of Ukraine will administer budgetary funds allocated for financing the services. This structure will procure medical services for the population, sign contracts with primary healthcare providers. Such services are available in almost every country in the world. One of the most controversial subjects within the framework of healthcare reform was the formation of hospital districts with the aim of regulating the existing network of hospitals. The population fears that, because of this process, hospitals in small towns and paramedic-obstetric stations in villages will be closed, and in order to receive medical care it will be necessary to turn to medical establishments located many kilometers away. At the same time, there is always the problem of Ukrainian roads. Many regions refused to provide information on hospital districts. And there is already a great deal of nonsense in the submitted documents. For example, in a newly-created district for an ultrasound examination, it is suggested that the patient go to Kyiv for 8 hours.

A new authority — the National Health Service of Ukraine — will administer budgetary funds allocated for financing the services

Healthcare reform

221


The need for the establishment of hospital districts is the lack of the possibility to obtain high-quality specialized assistance on the ground, but only in regional centers and some cities. The reform should contribute to the creation of one hospital of the second level of intensive care in each hospital district. According to Acting Minister of Healthcare Ulyana Suprun, the Ministry of Healthcare does not plan to close hospitals, but on the contrary, is interested in increasing the number of multi-field hospitals. This is necessary for patients to have better access to these hospitals and so there won’t be any need to go to a regional centre to receive the services they should receive in their particular hospital district.

the essence of Medical reform remains unclear to the population of small towns, villages

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The establishment of hospital districts and the distribution of functions between hospitals takes place at local level, as they have better knowledge of the needs of their population. For these purposes, the members of the hospital district set up an advisory body called the Hospital Council, which develops the district development plan for five years, reorganizes and re-profiles medical facilities, appoints and dismisses heads of medical institutions. The Hospital Council has no authority as a body. It does not have any leverage that would exceed the influence of district authorities. We can deal with the fact that nobody will negotiate on any issue. Hospital districts envisaged enlargement of the regions. However, each district remains the owner of these hospitals and the recipient of funds. The hospital district should include at least one multi-specialty intensive care hospital of the first and/or second level and other healthcare facilities. The intensive care polyclinic of the first level will admit at least 120,000 people, and of the second level at least 200,000 people. Thus, the intensive care hospital will be the most powerful in the region, and the other hospitals will be restructured. The boundaries of the hospital districts will be formed in such a way as to ensure the access of all residents of the district to the secondary (specialized) medical care. The administrative center of the district is a city with a population of more than 40,000 people with an intensive care polyclinic of the second level. Consolidation of areas is very important for medicine. But territorial areas should be created at the level of the particular region. Such a system proved to be good both in financial management and in technical equipment. Unfortunately, on June 8, 2017, the Verkhovna Rada rejected the supportive bill number 6329, which provided for amendments to the Budget Code to ensure the implementation of healthcare reform. The residents of large cities are acquainted with the main premise of medical reform. However, its essence remains unclear to the population of small towns, villages, even when it comes to doctors.

Healthcare reform

223


Statistics

AAccording to the World Bank, Ukraine is among the leaders in mortality rates. In 2015, the country ranked second in the world with an index of 14.9 deaths per 1,000 population. Since 1960, the highest rate for Ukraine was in 2005 — 16.6 per 1,000 people.

Bulgaria

15,3

Ukraine

14,9

Lesotho

14,693

Serbia Swaziland

14,6 14,485

Latvia

14,4

Lithuania

14,1

The CAR Chad Angola

14,088 13,799 13,424

The situation with life expectancy is not much better.

years was the average life expectancy of Ukrainians, which is almost ten years less than in most European countries. *

224

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place ranked Ukraine in the world in the life expectancy rating as of 2015* * World Health Organization data

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225


Poll

In May 2017, the Sociological Group Rating conducted an opinion poll, which showed that only 9% of respondents believe that the quality of public health services has improved over the past two years. According to half of the respondents, the situation has deteriorated. One third of those polled believe that nothing has changed, while 11% were unable to answer the question. The research also showed that the population was increasingly supporting initiatives under medical reform, except for the introduction of compulsory health insurance, the conclusion of contracts between patients and doctors, and the introduction of strict controls over public funds. The initiative to reimburse the cost of drugs for diabetes, asthma and cardiovascular disease received the biggest level of support, namely 88%.

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Healthcare reform


Many bills introduced a system of medical self-government

Interesting Facts

Due to the pressure exerted by activists last year, the Ministry of Healthcare issued a corresponding order, allowing relatives admittance to all resuscitations 24/7. Many bills introduced a system of medical self-government. It involves the provision of individual licenses, the right to practice, like this works in Europe. This can be seen most clearly with the example of dental work. Two bills on this issue have already been prepared. The system of medical self-government takes away many functions from the Ministry of Healthcare, which are not appropriate to it. For example, every 25 years the Ministry of Healthcare required retraining.

Healthcare reform

227


2015

2016

law No. 269-VIII was adopted, which facilitated the procurement of medicines and medical products through international organizations

the Cabinet of Ministers of Ukraine with the adoption of Decree No. 1013-p On Approval of the Concept of Healthcare Financing Reform approved the Concept of Healthcare Reform, and the Ministry of Healthcare, jointly with the interested central and local executive authorities was tasked to develop and submit for consideration within one month a draft plan of measures for the implementation of the Concept. On the same day, the Cabinet of Ministers passed a resolution approving the procedure for the establishment of hospital district

March

April

the Verkhovna Rada adopted the Law On Amending the Tax Code of Ukraine regarding the Tax Remission of Certain Pharmaceuticals and Medical Products (No. 332-VIII)

September

The Cabinet of Ministers authorized the Ministry of Healthcare to create a new Public Health Center by reorganizing (merging) existing institutions in this area. This is the first important step in building a new public health system in Ukraine. The new Center is intended to replace the Soviet model, whose basic principles retained the old Sanitary and Epidemiological Service (SES). De jure it still exists. Its reference to the Public Health Center is currently unknown. In November-December, the process of preparing institutions for reorganization began

228

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November


2017 April

the Government's Available Medication program was launched, which provides for patients to be able to receive medicines from cardiovascular diseases, type II diabetes and bronchial asthma for free or with a small additional charge the Verkhovna Rada of Ukraine adopted the Law On Amending Certain Legislative Acts of Ukraine on Improving Healthcare Legislation" (No. 2309a-d), which provides for the autonomy of medical institutions and their transformation into a kind of non-profit enterprise

June

the Verkhovna Rada adopted in the first reading the bill On State Financial Guarantees for the Provision of Medical Services and Medicines (No. 6327), which will change the system of financing medical services. The law was only passed in the first reading at the second attempt the eHealth Electronic Healthcare System began its pilot operation. The first service of the system — registration of primary care institutions — was launched

податкова Healthcareсистема reform

229


rem Edu tion Education reform. Background

The reform of the Education system belongs to the bulkiest systemic reforms. To change the Education system, there is a requirement to develop the basic concepts and new state standards of education, new curricula as well as new handbooks. Moreover, it is necessary to educate new teachers, ideally changing the whole system of their training. At the same time, there is a need to secure the funds for this by changing the patterns of financial relations between the participants of the education market.

form 230

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fo uca-

m

Despite all the difficulties and significant spending, reform of education is conducted periodically by every developed country, even a developing country which is undergoes serious changes to ideology and the economy. Considering that our country has experienced some tremendous changes in the economic, socio-political, cultural, geopolitical and, eventually, mental spheres, it is no wonder that this reform took place almost instantly, at least on paper. It is necessary to note that reform of education has two inseparably intertwined constituents. The lack of either prevents the reform from happening, and these constituents must be agreed upon only simultaneously. The first constituent is the conceptual one. What is the goal of education? What are we going to be? What kind of person do we want to bring up?

re-

What kind of skills do we want him/her to acquire? What kind of society are we preparing him or her for? What function in society should the person perform? The answer to all of those questions is important when developing the fundamental principles of education. It is necessary to simultaneously develop the second constituent of this reform, namely the many positions that determine the legal and financial relations between main the participants of the education market: pupils, teachers and parents. Those are the forms of study, the level of the autonomy of schools, school subordination, etc. Ideally, the financial and organizational conditions present in state schools should facilitate the fullest embodiment of its basic goal and conceptual principles.

податкова система

231


232

Education reform


the professional community realized that life needed a change

Ukraine met the declaration of independence in 1991 with a fresh, almost hot law On Education which was adopted in July 1991. This law described essentially a Soviet school that was strongly integrated into a multi-stage bureaucratic system of reports and subordination, the school that did not have its own money or the ability to spend it on its own, the school where a teacher was the main actor and a pupil was only a cog in the huge education system. The professional community realized that life needed change; they even knew what kind of change it had to be. In November 1993, the Cabinet of Ministers approved the national program called Education (“ХХІ century Ukraine”) — the outcome of joint work by education researchers and practicing teachers. This was a very progressive, almost revolutionary document that fundamentally revised the basic principles and the goal of education. It was in strong opposition to the Soviet system and it brought the newly-created state closer to the values of a democratic society. If the points contained in this document had been at least implemented by at least 50%, the issue of education reform today would not be as acute as it is. The fact of the matter is that the Soviet system was outdated even at that time, and was based on the so-called class-lesson system, that was combined with the idea of learning a certain amount of information and one-sided communication. A teacher speaks and a child listens or answers the question. This system was reputable during the industrial era when it was required for a big number of students to learn a volume of basic knowledge that was necessary for employment. The abilities to concentrate, to sit still for long periods of time while completing accurate tasks that cultivate memory and attentiveness were some of the system’s key components. Figuratively speaking, this system prepared students for work on a big production line, regardless of the purpose: whether it was a factory, science institute, library or housing maintenance office.

Education reform

233


During the time of independence, a lot of handbooks were rewritten, since the country itself was changing rapidly However, back then it was obvious to the best members of society that life was changing and that the industrial age was coming to an end and being replaced by the post-industrial digital society in which totally different skills are valued the most. Creative thinking, ability to create something new, flexibility and readiness to work in a group are now moving to the forefront. Moreover, the Internet is developing very quickly, handbooks are ceasing to be the only source of information. The function of handbooks is changing. Their function is to teach students how to work with information, to teach critical thinking, analysis, and selection of necessary facts among an endless sea of information. The concept of a national “Education” program back in the distant year of 1993 was taking into account the majority of these new factors. It provided the decentralization of education management (local communities should have taken care of it), the individualization of the educational process, continuity of learning throughout one’s lifetime and a large variety of curricula and programs, and finally — re-orientation of education towards prioritizing one’s personal development. Sadly, this document became just another piece of paper, since no conditions were created for its implementation. Some practical steps were taken only towards relative modernization of the secondary education structure. In 1999 the law On General Secondary Education was approved which, among other things, covered the transition to 12-year long secondary schooling (which advanced Ukraine towards the so-called Bologna System), introduced a twelvepoint grades system and divided the study process into three stages: I — Elementary school (grades 1–4) II — Basic school (classes 5–9) III— Senior school (classes 10–12) The doctrine for development of national education was based on a bill adopted in 2001. The state standard of Basic and Senior school, developed within it, was approved in 2004. Even though the basic principles of the education system and its financing remained in the main Soviet, the system was formally modernized. Moreover, this came to be a great pretense to finally write new congruent handbooks published in line with one standard. In the course of the independence era many handbooks have been rewritten, first and foremost in the humanitarian subjects, and this was weird since the country itself was changing rapidly. During the first decade of independence there were three consecutive options of a school program for the “History of Ukraine”, every three years on average, while the handbooks were changed even more frequently.

234

Education reform


New officially reformed handbooks made their first appearance on 1st September 2004, and then gradually, year by year those handbooks were introduced into larger numbers of classes. Simultaneously, the first experiments on External Independent Assessment (EIA) were held, they were made to replace the usual graduation exams. EIA became the big step forward that allowed them to substantially shake, if not to altogether eliminate, corruption during enrollment to universities, thereby creating social lifts for provincial school graduates, giving them real access to higher education. Since 2008 passing external independent assessment is a mandatory condition for enrolment into a higher education facility. The reform should have been completed by 2013 when the entire system should have gone back to a 12-year school period. But, a man proposed something that God did not dispose of. In 2010, reform actions planned back in 2001 were unexpectedly halted and canceled. And in its place different huge education reform in Ukraine was begun. This was a bright result of the weakness of the system, after all, one of the key problems of Ukrainian education and its reforms was that every reform was considered the personal project of the Minister of Education and could have been stopped or canceled altogether by his or her successor. This is unacceptable for a sector where full reform usually takes place during the term of a few ministers. The initiative of new “extraordinary� reform often connects with the name of the minister of education at that time, Dmytro Tabachnyk (put on the wanted list in July 2015 by the Investigative Department of the Security Service of Ukraine).

Education reform

235


The new program and new handbooks were criticized by teachers under the radar and by parents in mass media

New reform of secondary education started with canceling the incumbent 12 year system and returning to the 11 year one by leading in new changes to legislation dated 6th July 2010. Besides changing the length of secondary school, state standards of education were changed for basic, full and secondary education alike. Supporters of the new reform stressed a number of new positive changes: study of the first foreign language from the first grade, introduction of a second foreign language in the fifth grade, studying of computer science from the second grade, etc. On top of that, new standards, curricula, and abruptly written handbooks were brought in without any approbation. This resulted in unacceptably low print quality handbooks riddled with typos and mistakes. New state standard handbooks were introduced on 1st September 2012 for elementary education and on 1st September 2013 for basic schools. Full implementation of the secondary education standard is planned to take place on 1st September 2018. The new program and new handbooks were criticized by teachers under the radar and by parents in the mass media right after they appeared. The article “Words starting with the letter ‘H’, or the new primer published on the website of ‘Ukrainian Truth’” (Ukr. Ukrayinska Pravda) in November 2012 caused wide social resonance. Several press conferences were organized, particularly with the compilers of the primer; this topic was caught quickly by the mass media, teachers and parents. Discussion about the quality of handbooks and the education system, in general, had turned into public arguments, the focus of which has rapidly shifted from the quality of handbooks to the quality of the education system in general, to its correspondence with the challenges of the present time. During the discussion we learned that everybody, parents, teachers, pupils, are unhappy with the situation. However, it seemed impossible to change something prior to the Revolution of Dignity.

236

Education reform


In fact, without changing the methods of the old Soviet in-class system this lead only to an increase in the academic load of pupils, who began to have 7 or 8 45-minute classes a day. The content of education that was becoming obsolete never changed

податкова система

237


New reform

After Maidan public activists in education, teachers-innovators who demonstrated their abilities over the last two years got to hope for real changes, moreover, Lilia Hrynevych became the new minister of education and she totally shared the opinion that “Tabachnyk’s reforms” were inadmissible. Under the guidance of the Lady Minister a concept of the “New school” was developed at a meeting of the Cabinet of Ministers in December 2016. Conceptually the new concept develops and complements previous ones, creating the conditions for raising human beings that can be competitive within the world of a new post-industrial creative economy. The key skill of this modern human must be not the ability to understand orders and perform monotonous work, but the ability to set and resolve creative tasks, think ‘out of the box’, ability to work in a team, and think in projects. The concept of the “New School” suggests that the goal of the new education is not to provide knowledge, but to provide competence, meaning the combination of knowledge and understanding and skill, that is going to help to make use of the information received during school days in life. The new competencies required by the XXI century, like the “ability to study”, “environmental literacy” or “adventurousness" are added to those described earlier. But, if competencies were described in different Ukrainian education concepts as early as the 1990s, a completely new branch of skills is incorporated in the “New School” program for the very first time. Those are so called “cross-cutting skills” that also need to be taught in schools and are required in real life regardless of a person’s occupation. These include critical thinking, the ability to express one’s opinion, teamwork, creative approach, etc.

The fundamental change to the education system can only be brought only by total reforming of the state schools

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It is definitely impossible to teach those things within the existing class system. Realization of this fact has led to a surge in the number of private schools that practice alternative systems of working with pupils. Free communication and thought exchange, a project approach to mastering the school curriculum, are things that normally differentiate modern institutions from state schools. However, it is extremely hard for those schools to acquire the license for issue of the state certificate. Moreover, those schools are fee-paying schools and the tuition fee there is rather high. It’s no wonder that despite the obvious spike in the number of such schools, less than one per cent of Ukrainian pupils study there. Fundamental change to the education system can only be brought by total reform of state schools. The new bill On Education was prepared in order for this reform to happen. This new edition of this bill was approved by Parliament in October 2016 and sent for reworking. Since then more than 1,600 amendments have been made, and though not all revolutionary changes made it through, the principle things were retained.

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Principal’s authority is increased, schools become more independent Among the important innovations which make the change possible are decentralization and effective management, which will provide schools with real autonomy. According to the new bill, 50% of the funds are being allocated to local communities, who will free to decide how to use these funds. Principals must be appointed in accordance with the results of the competition during which they should present their programs for school development, including the financial one. The principal’s authority is increased and schools will become more independent. Equality between all forms of education and legalization of so-called “alternative” private schools are stipulated in the new bill. This will obviously lead to a rise in the number of private schools; therefore, they will in effect reduce tuition fees. There is one more point regarding education fees; the revolutionary principle for our system that “money follows the child”. The state allocates a certain sum annually for each child’s education in a state school. The funding of the school depends on the number of pupils willing to study in this school, and if a child leaves the school, he or she takes the money to the next school. Even if a child attends a private school, the allocated state funds may make up part of his/her tuition fee. This principle becomes essential for inclusive studying, which is also one of the most important innovations in this new bill. Children with special needs and certain mental issues can now study in regular schools. Moreover, they are very welcome there since the amount of money allocated for the child with special needs greatly surpass the amount allocated for a ‘regular’ child. Secondary schooling will once again last 12 years, which will bring Ukraine closer to the EU standards fixed after the Bologna Declaration, giving the ability to optimize the system. Elementary education will be 4 years long, basic education (high school) — 5 years, sectoral basic (lyceum or professional education facility) — 3 years. The last three years of school will determine the vector for the child’s further education. That is, whether he or she chooses an academic direction orientated towards university education, or settles for a professional education targeted for the needs for the labour market and acquiring a profession.

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years

years

years

will be long the elementary education

will be long the basic education (gymnasium)

will be long the profiled basic (lyceum or the professional education facility)

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Significant attention in this bill is paid to teachers. On the one hand, the reform requires their further education (separate funds are allocated for this purpose) but, on the other hand, the bill’s authors have taken care of the prestige of the teaching occupation, meaning an increase in salary. Moreover, the bill offers a 20% premium for those who pass certification, which will become the instrument of motivation for the self-development of the best teachers, mastering of new methods and approaches. Another important innovation in the new bill is inclusive education, which means including people with special needs into the stud process, providing them with normal socialization. Moreover, the bill contains the concept of an inclusive study environment, which is directly related to providing quality education. Voting in Parliament on the bill On Education is scheduled for 11th July. If it is approved, it will start education reforms in Ukraine scheduled to be fully implemented in 2029. This reform will quite literally help the country and its citizens to not fall behind.

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2016 December

the “New school” concept is approved at a meeting of the Cabinet of Ministers, which was developed by the Ministry of Education

October

the bill On Education is approved in its first reading and sent for refinement to the relevant committee. The bill is still waiting approva

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2017 July

consideration of bill On Education is scheduled at the second reading stage in the Verkhovna Rada


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orm Agr cu t re form Agriculture Reform. Background

During Soviet times, the state was the sole landowner. Consequently, the prerequisites for agrarian reform were laid down by the principles of land ownership. In 1990, the Land Code of the Ukrainian SSR was adopted, establishing the existence of land title in the form of lifetime-inherit ed possession, permanent possession, as well as permanent and temporary use. However, inherited possession is not equal to the right of ownership, since the right to dispose of land was reserved to local councils.

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for

riulturem The first step towards real reform was the adoption by the Verkhovna Rada of the resolution On Land Reform in March 1991. The purpose of the document is redistribution of lands to create conditions for the balanced development of various business patterns in rural areas. This became the impetus for the transition of land to private ownership by citizens, agricultural enterprises and other users under certain conditions. Another important step was the adoption in January and March 1992 of the law On land ownership and the new edition of the Land Code, respectively. These documents introduced three equal forms of land ownership: private, collective and state. In addition, all landowners could legally lease it.

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Due to adoption in the same year of the Law On the peasant (farmer's) economy, privatization of the average land plot, which accounted for one tenant on the respective territory, became possible. The further implementation of reform became possible due to the adoption of presidential decrees on its acceleration (November 1994), on the procedure for land parceling, transfer to agricultural enterprises (August 1995), on land lease (April 1997), etc. Finally, according to these documents, real denationalization was carried out. That is, the lands were disposed of into collective and private ownership for the production of agricultural products. Land parceling was also carried out. Certificates confirming the right to land share (portion) were issued. Thus, 7 million Ukrainians received agricultural land in private ownership. The owners of the certificates could freely dispose of them, including the right to conclude sales contracts (was canceled later). In 2000, the process of replacing land certificates with the Certificate of Title under the Land Transfer Act began. It should be noted that the new draft of the Land Code was ready back in October 1996, and the Cabinet of Ministers sent it to Parliament. Then, as now, the launch of the land market was a prerequisite for prolongation of Ukraine’s international assistance program. However, despite pressure from the World Bank and the IMF, in March 1997, the draft was rejected by Parliament. The Government and the president followed a different path. In 1998–1999, the denationalization (privatization) of land through the system of the above-mentioned decrees began. At this time, it was possible to sell land, but this did not last long, until 2001. The completion of the land market’s formation at that stage of Ukraine’s development was the adoption of a new version of the Land Code (October 2001), which is significantly different from the previous document. Thus, a legal basis for the use of land as a pawn, its sale, and land use restrictions was created. In addition, the list of forms of ownership was changed: private (population and legal entities, including the form of joint ownership of the land plot), communal and state. Moreover, the new version of the document established regulations for the free transfer of land plots to citizens, the conditions for acquisition of the right to land (property rights or rights of use) by the population and legal entities are considered. At the same time, the Land Code made it impossible to concentrate land in private ownership and set a ban on non-residents owning agricultural land. The restrictions were set until the necessary laws for the effective functioning of the land market were developed. That is, the moratorium was planned as a temporary solution, but it just so happened that it has become a constant regulation that is still in place. The central element of agrarian reform in modern conditions is land reform, which has two goals: the creation of a proper land sales market and associated infrastructure, as well as the development of farming.

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Key authorities The Ministry of Agrarian Policy and Food of Ukraine — is the successor of the Ministry of Agrarian Policy created by the presidential decree in June 2000, and in December 2010 it was reorganized in its current form. The State Service of Ukraine for Geodesy, Cartography, and Cadastre (land cadastre support) — was established in September 2014 by reorganizing the State Agency of Land Resources of Ukraine, which existed from 2011.

The main aspect of the reform The cornerstone of land reform is a moratorium on the sale of agricultural land or its alienation through other ways. To regulate land use, the Verkhovna Rada adopted a new Land Code in 2001. At the same time, a ban on alienation of agricultural land and a change in their designated purpose (moratorium) was introduced. This restriction was originally set before January 1, 2005. However, since then, the moratorium has been constantly extended.

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In November 2015, the Verkhovna Rada adopted a law on amendments to the Land Code, which extended the validity of the moratorium until January 1, 2017. In October 2016, the Verkhovna Rada again prolonged the moratorium for one year — until January 1, 2018. President Petro Poroshenko signed the law passed by Parliament, although earlier he supported the cancellation of the moratorium. That is, in fact, the Ukrainian land market has been in a state of legal uncertainty for more than 16 years. The moratorium is valid until the law on the turnover of agricultural land comes into force. As early as in 2015, MPs obliged the Cabinet of Ministers to draft this bill by March 1, 2016, but such a document was not adopted. Land reform in Ukraine is a 16-year history of permanent moratorium prolongations, a history of missed opportunities, primarily — investment. Due to the reform, land should become a commodity and a subject of a pledge, which will enable the receipt of bank loans. Rented land cannot, for obvious reasons, be used as a pledge to receive financing. Agrarians, especially small and medium-sized agricultural enterprises, are complaining that they cannot attract bank financing at the current level of interest rates on loans. However, large agricultural holdings often lack working assets too. At the same time, large agricultural companies have more opportunities for product development and higher profitability than small farms. The average yield in agro holdings is double that of small farms, but the latter mainly providework to most of the rural residents employed at agro-industrial complexes. At the same time, the figures on the development of the agro-industrial complex in Ukraine show positive dynamics. The production of agricultural goods is on the rise (by 6.1% in 2016, including agricultural enterprises by 9.8%); harvesting record grain crops for the last few years (in 2016 — the largest cereal harvest during the period of independence — 66 million tons, which is almost 6 million tons more than the results of 2015), while agricultural exports make up about 40% of its total volume. Despite the availability of rich black earth and a favorable climate, Ukraine has low yields: on one-hectare farmers get crop output that is less (by at least 20–30%) than in Europe. The reason is underdeveloped agro technologies, lack of investment and the pending issue with the land market. Significant grain production is not due to high yields, but due to the large size of the area. In addition, the low efficiency of Ukrainian agro-industrial complex is due to the fact that our products are quite cheap compared to European ones. A major problem for the agricultural sector is the significant domination of export of raw materials in comparison with the specific weight of finished products, which create value added. Thus, Ukraine requires huge investments (hundreds of billions of hryvnias) to make the agro-industrial complex more effective through the introduction of modern agro technologies, expanding the processing capacities and infrastructure, and the first step is liberalization of the land market.

the Ukrainian land market is in a state of legal uncertainty for more than 16 years Agriculture Reform

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Nevertheless, the heightened tensions around the issue suggest that this reform is sensitive in the political and electoral sense, but important in view of the economic impact. The International Monetary Fund calls land reform one of three top priorities


The current situation

In 2015, the Ministry of Agrarian Policy presented a Single Integrated Strategy for the Development of Agriculture and Rural Areas for 2015–2020, in which, according to the Minister, all priority directions of agricultural sector reform were reflected. The National Council of Reforms

supported the strategy, and the European Union has allocated 3 million euro for its implementation. However, the only real achievement so far is the consideration by the relevant committee of the Verkhovna Rada, which took the strategy to the notice. At present, the Strategy for the Development of the Agricultural Sector for the period until 2020, dated October 17, 2013, signed by Mykola Azarov, remains in force. In 2015–2016, the government made several positive steps towards the land market. The requirements for renting state land through auctions were strengthened. The access to the state register of rights to real property and land cadastre was opened. The notaries have been provided with functions for property registration and lease. The electronic provision of extracts from Land Cadastre and land evaluation was established. The government has an obligation on liberalization of the land market to the IMF, as stated in the memorandum dated March 2, 2017, and should be approved by the Verkhovna Rada in the draft law on agricultural land circulation by the end of May 2017.

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Formally, the 2017th is the last year when it is possible to carry out the land reform. The next chance will appear only after the presidential and parliamentary elections, and not one of the Ukrainian politicians want to take a risk. Meanwhile, according to the Ministry of Agrarian Policy, Ukraine has lost approximately USD 43 billion since 2004 due to the lack of a free market of agricultural lands. Consequently, the government must submit a bill to the Verkhovna Rada in the short run (there are already two draft bills on this matter), but people's deputies may not vote for it. Political statements of the party leaders represented in the Verkhovna Rada predict the complex consideration of the draft law submitted by the Cabinet of Ministers. It should be noted that 297 deputies voted for the extension of the moratorium at the end of 2016, which is almost 2/3 of the Parliament. Moreover, some political forces even have planned to collect signatures against the cancellation of the moratorium, although it would be too difficult to implement this plan. That is, the subject of moratorium cancellation is too politicized and is the basis for populism and gathering of political points in the eyes of the electorate.

in one form or another, the Ukrainian agro-market is enlarging. However, the level of consolidation is far from over

However, to settle all land issues, in addition to the Act on the circulation of agricultural land, it is also necessary to make an inventory of land by ownership and economic entities, to clarify the validity of entries in the land cadaster (imposition of borders of adjacent areas, nonconformity of coordinates) and register of rights to real property, etc. Many politicians and experts say that Ukraine is not ready to launch the land market. In the context of the unfinished land reform, the expectation of lands being bought up by foreigners, large agricultural holdings, and speculators, as most small farms have no funds for it and will not have in the nearest future. Meanwhile, in one form or another, the Ukrainian agro-market is enlarging: production is increasing, agro holdings’ land banks of cultivated areas are increasing. However, the level of consolidation is far from over. There are more than 38 thousand farmers in Ukraine (during last five years their number has decreased by approximately 10%), and 72% of them have up to 100 ha in land tenure. According to official statistics, the farmers cultivated only about 10% of all agricultural land (total area of Ukraine’s cropland is more than 40 million hectares), and large and medium-sized agricultural holdings — 15%. The absence of a legal market significantly reduces the land price and makes its owners less competitive compared to large capital. In general, 41 million hectares (more than 96% of agricultural land) of Ukrainian lands fall within a scope of the moratorium.

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At the same time, some parliamentarians, who understand the possible resistance to the cancellation of the moratorium, went a different way. In February 2017, 55 people's deputies sent a petition to the Constitutional Court with the demand to cancel the moratorium on the sale of land, which violates the rights and freedoms of citizens. However, according to the rules of the Constitutional Court, proceedings may be held only six months later. Authorities are seeking various "compromise" alternative for land reform: the possibility of selling the rights for its lease, setting limiting size of land ownership of 200 hectares, and the sale of land only to residents, etc. Realizing that this issue is sensitive for many Ukrainians, the government does not want to carry out radical changes and agrees only to gradual ones, which would not change anything in the agro sphere. If the government is tinkering at the margins of the land reform, which could satisfy the Verkhovna Rada and people, but for large agricultural holdings, whose land bank counts tens and hundreds of thousands of hectares of land, such a reform will create additional difficulties. For example, they will be forced to renew lease agreements with owners of plots up to 200 hectares. Large agribusiness will find ways to continue its activities, but Ukraine's land market will remain non-transparent and investment-unfriendly, and most importantly, such a reform will not have the expected economic effect on the country. The existing moratorium hinders development of the agro industrial complex, since it hampers the transfer of land to more efficient owners and producers; reduces the rental price and owner's income (now rental payment for the agricultural land is one of the lowest in Europe and the CIS); limits the possibilities of fund raising on the security of land. With its withdrawal, providing the establishment of the appropriate regulatory framework, one can expect an increase in the land value, an increase of lease payments, obtaining the opportunity to give land on a gage, the creation of a large mortgage market, increase of investments and revenues to the state budget. However, the success of the land reform depends on the overall investment climate in the country. If the conditions for business remain non-transparent, the secondary land sale will be complicated, so banks will reluctantly grant loans on its pledge. That is, alongside with the liberalization of the land market, it is necessary to provide qualitative improvements of the overall investment climate in Ukraine. It should be noted that the land reform is an element of agrarian reform, which requires parallel implementation of a number of other measures: improve the tax system and create favorable conditions for the development of the industry; deregulation; improve sectoral legislation; harmonize Ukrainian standards of product quality with international ones; improve the efficiency of state land management; create the food security systems; develop the value added chains in agriculture; increase competitiveness of domestic agricultural enterprises, etc.

it is necessary to provide qualitative improvements of the overall investment climate in Ukraine

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International obligations

International Monetary Fund. At present, the main factor of the land reform is Ukraine's obligations to the IMF to receive another loan tranche from the fund. In a memorandum dated March 2, 2017 (this commitment was taken from the previous document), the following actions are indicated: — Liberalization of the land market, including the sale of agricultural lands; — drafting a bill on the circulation of agricultural land (the Verkhovna Rada's approval of this document is expected by the end of May 2017), which will allow the current moratorium to expire at the end of 2017; — Launching a public awareness campaign to explain the benefits of this reform.

The main factor of the land reform is Ukraine's obligations to the IMF

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NGOs

Independent experts and journalists are closely monitoring the implementation of the land reform. Among the organizations that monitor the implementation of the reform, the following can be noted: • Better Regulation Delivery Office — brdo.com.ua • Independent analytical platform VoxUkraine — voxukraine.org • Non-profit organization EasyBusiness — easybusiness.in.ua

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Ordinary Ukrainians have controversial views on the land issue. only one in six Ukrainians approves lifting the moratorium

Interesting Facts

During the permanent prolongation of the moratorium, the politicians acted contrary to their own convictions. In October 2004, this decision was supported by the lefts and nominally rights the newly elected President Viktor Yushchenko. However, at the end of 2006, when the Rada once again extended the moratorium, Yushchenko vetoed this decision, but the parliament was able to override it. President Petro Poroshenko also signed the law on the extension of the moratorium passed by the parliament in late 2016, even though earlier he stood for its abolition. Ordinary Ukrainians have controversial views on the land issue. According to the results of the sociological survey conducted by the Kiev International Institute of Sociology in September 2015, more than half of Ukrainian citizens and one-third of landowners understand the benefits of the possibility of buying and selling agricultural land, although only one in six Ukrainians approve the lifting of the moratorium. The main concerns of landowners are the low prices of land, the pressure regarding land sales and fraudulent acquisition schemes.

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1991 March

the Verkhovna Rada adopted the Resolution "On Land Reform"

1992 January

the law "On forms of land ownership” was approved

March

the Land Code of Ukraine was adopted (it replaced a similar document, which Ukraine inherited from the Ukrainian SSR)

1994 November

the president signed a decree "On urgent measures to accelerate land reform in the sphere of agricultural production"

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1995 August

the president signed a decree "On the procedure for land transferred to the collective ownership of agricultural enterprises and organizations"

1997 April

president signed a decree "On land lease"


2001 2015 October

a new edition of the Land Code of Ukraine was approved

January

Strategy for Sustainable Development “Ukraine–2020” was adopted

November

2011 July

Single and Comprehensive Strategy and Action Plan for Agriculture and Rural Development in Ukraine for 2015–2020 was approved

the law "On the State Land Cadastre" was adopted

2017 March

a memorandum with the IMF was signed, where land reform is one of the obligations of Ukraine

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nergy m Ener Indepen dence m ram Energy Re Energy Independence Program and Energy Reform. Background The policy of "cheap gas" that were in place in 1990–2004, slightly relaxed both the Ukrainian authorities and consumers of blue fuel. Despite the appropriate priority of state policy, enshrined in legislation at various levels, including the 1994 Law of Ukraine On Energy Saving, in practice no measures have been taken to reduce consumption, to introduce energy-efficient technologies and to develop domestic production. The situation remained unchanged even in 2009 after the

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Energ Ref rgy ne Progm and y Reform signing of a leonine contract for the supply of Russian gas to Ukraine, under which the price of “blue fuel” for Ukraine exceeded its price for European consumers. It should be noted that for the last 15 years the price of gas was an element of Russia's geopolitical pressure to promote its own interests in Ukraine. Persistently blaming Ukraine for stealing gas, Russia has carefully formed a negative image of Ukraine in the eyes of Western countries.

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Starting energy reform in 2015, Ukraine has stopped buying gas directly from Russia; accordingly, this pressure tool was leveled. However, cooperation with Russian fuel suppliers can be resumed by Ukraine on an as-needed basis. The real implementation of energy independence measures began only after increased tension between Ukraine and Russia due to the events that took place in Crimea and the Donbas. At the same time, all external conditions were extremely unfavorable: economic decline and loss of opportunities to invest in its own production, the loss of the productive capacity of Chornomornaftogaz (up to 2 billion cubic meters of gas per year), the closure of shale gas projects, etc. On the other hand, the volume of gas consumption decreased significantly due to the loss of Crimea and part of the Donbas, as well as the declining output of large enterprises which were consumers of natural gas. Until recently, Ukraine has not been dependent on other countries, except for coal mining and electricity (not including the import and disposal of nuclear fuel). But here there were many problems too: loss-making state mines required constant billion-hryvnia subsidies which were distributed and spent in a non-transparent manner. It was accompanied by a low level of security, remarkable illicit production and a devastating impact on the environment. Due to the conflict in the Donbas and blockade on coal deliveries from the temporarily occupied territories, it turned out that "mainland" Ukraine became dependent again. This led to the introduction of a state of emergency in the energy sector under a decision adopted by the National Security and Defence Council, which is regularly extended, and energy operators are forced to import thermal coal from Russia as well. The energy sector is equally problematic: cross-subsidization through cheap nuclear energy, high capital intensity amid a lack of investment opportunities, dependence on foreign fuel suppliers, low percentage of alternative energy sources (in 2016 — 1.26%), etc. However, the last figure should increase exponentially now. In 2016, Ukraine ratified the Paris Agreement, committing itself to reduce its greenhouse gas emissions by 40% from 2012 till 2030 to the level seen in 1990. Energy will play a decisive role in this process, and replacement of traditional generation with renewable sources should reach 25% by 2035 (according to the draft of the new Energy Strategy of Ukraine).

The main problem of the energy market was and remains political speculations and populism, applying primarily to gas of domestic production

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A major factor in achieving energy independence is energy efficiency. At present, the average index of energy intensity in Ukraine is 2–3 times higher than the average index in the world, and 5–6 times higher than that in EU countries. Achieving European indicators means energy savings, including gas. Reduction of energy consumption in the residential sector will lead to a decrease in benefits and subsidies, for which the state budget has already allocated UAH 47.1 billion in 2017, and by the end of the year, this figure is likely to increase by at least a third. The main problem of the energy market was and remains political speculation and populism, applying primarily to domestically produced gas. It has always been a guarantee for maintaining low utility tariffs (it is said to be cheap and goes to satisfy the needs of the population). But within the framework of the liberalization of the sector and the introduction of competitive markets, and under IMF arrangements, the difference in gas prices for various categories of consumers has practically been abolished recently. Such a decision has led to the fact

that utility tariffs will no longer be constant but would change according to the dynamics of prices for imported gas. This is payback for ignoring energy reforms over the past decades. After all, non-market gas prices for the population cost the state too much: USD 53.6 billion was spent on subsidized gas in 2005–2015.

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From May 1, 2017, gas prices for the population were as close as possible to market prices (regulated gas prices for the population amounted to 84–96% of the market in April–July 2017), that is, industrial consumers receive it almost for the same money. This will help to avoid long-term corruption and abuses in the future, when cheap domestically produced was sold to industrial consumers at a higher price, and the difference found its way into the pockets of those who were involved in the organization of such schemes. Also, fair pricing will prevent cross-subsidization, contributing to the financial stabilization of state enterprises of the fuel and energy complex, moving this market out of shadowing sector, the availability of funds for capital investments and increase in revenues to the state budget. However, the current situation is difficult and continues to deteriorate. Almost half of the population faces difficulties paying for services. Thus, in March 2017, subsidies were received by 43.6% of households. The total debt of the population of Ukraine for housing and utility services comes to more than UAH 18.8 billion (according to the State Statistics Service in the first quarter of 2017). In the first quarter of the current year, the number of subsidies for housing and utility services increased by 14.6% to UAH 2 billion compared to the same period in 2016. The energy independence of Ukraine is a factor of national security. 264

Energy Independence Program and Energy Reform


According to various estimates, our country is about 50–60% energy-dependent. However, the effective implementation of the planned measures, adoption of the relevant legislation and opening up of the energy market for investments will help to offset the negative effects of such dependence податкова система

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Key authorities The Ministry of Energy and Coal Industry of Ukraine was established in December 2010 through the reorganization of the Ministry of Fuel and Energy of Ukraine and the Ministry of Coal Industry of Ukraine. The State Agency on Energy Efficiency and Energy Saving of Ukraine was created in April 2011 by reorganizing the National Agency of Ukraine for Efficient Use of Energy Resources (established in December 2005) and the State Inspectorate for Energy Saving (established in May 1996). National Commission for State Regulation of Energy and Public Utilities (NKREKP) was established in August 2014 by merging the functions of the National Energy Regulatory Commission (NERC, established in December 1994) and the National Commission for State Regulation of Public Utilities (Natskomposluh, founded in 2011).

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The main task of energy reform is to provide energy security and the energy-efficient consumption of energy resources

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The current situation

The energy independence of Ukraine has many aspects: stimulation of domestic gas production, more effective introduction of alternative energy sources, energy efficiency improvements, etc. So, in April of this year, the Government approved the Medium-Term Plan of Priority Actions until 2020, its section entitled "Energy and Housing and Communal Services" defines the following areas of reform: 1. Implementation of the Third Energy Package of the EU. 2. Development of housing and communal services. 3. Reform of the coal industry. 4. Development of renewable energy. 5. Energy efficiency and energy saving. In any case, the implementation of the principles of energy independence is one of the most significant reforms (62 in total), which is described in the Strategy for Sustainable Development Ukraine 2020. It is chosen as one of the ten priority areas. The main task of energy reform is the provision of energy security and the transition to energyefficient use and consumption of energy resources through practical implementation of innovative technologies. The main goals of state policy in this area are as follows: — Reducing the energy intensity of GDP (by 20% by the end of 2020) through provision of full energy consumption accounting, transition to energy efficient technologies and equipment, including the implementation of development projects for alternative energy sources; — Diversification of ways and sources of energy supply (oil, gas, nuclear fuel, increase in domestic energy production, introduction of transparent rules for the development and use of energy resources); — Liberalization of the electric and thermal power markets, coal and gas, transition to a new model of their functioning; — Reorganization of NJSC Naftogaz according to the Third Energy Package of the EU; — The reform of the pricing and tariff system for energy and fuel (revision of the mechanism for the balance of energy resources, renunciation of cross-subsidization and state subsidies);

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— Reform of the coal industry, privatization of perspective and liquidation of unprofitable mines (Arseniy Yatsenyuk's Government action plan, approved in 2014, provides for the liquidation of 32 loss-making mines, the preservation of 24 mines, the privatization of 37 mines), etc. Also, an important area of energy reform is reorganization of energy markets and the implementation of European energy legislation by the Energy Community Treaty, improving the legislation and regulatory environment to attract private investment into the energy sector. The policy of increasing energy independence is gradually taking the form of strategic documents and concrete actions. Thus, in May 2017, the Cabinet of Ministers presented a draft of the new Energy Strategy of Ukraine until 2035. Priorities: to minimize import dependence by optimizing domestic consumption and energy efficiency, to maximize domestic production of various types of fuel, to establish strategic reserves, to diversify sources and ways of energy supply, etc. Developers suggest stimulating the energy efficiency improvement through monetization of subsidies with a gradual renunciation of subsidies. In general, this strategy repeats other documents on reform of the energy sector. There are plans to create an Energy Efficiency Fund soon (the relevant law has already been adopted), which will enable a systematic approach to the thermo-modernization of multi-apartment houses. The problem is as follows: about 90% of high-rise buildings in Ukraine need to be thermo-modernized, which, according to rough estimates, could cost more than UAH 300 billion, but the actual lending level (insulation of a house or apartment and the replacement of gas boilers with solid fuel boilers) by state-owned banks remains insufficient (more than 120,000loans for insulation amounting to more than USD 2 billion). The fund is aimed at complex measures on improving energy saving and energy efficiency in the housing stock, unlike selective "warm loans," and is expected to save 1.5 billion cubic meters of gas annually. This project will involve not only public funds but also funds of the European Union and the German Government. At the same time, the introduction of energy-saving technologies at state enterprises continues. In 2016 Naftogaz and companies subordinated to it saved 240 million cubic meters of gas, 25.6 million kW of electricity and 105.960 thousand Gcal of thermal energy. The total value of saved fuel and energy resources over the past year amounts to UAH 1.6 billion.

One of the main factors in achieving energy independence is to increase its gas production

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One of the main factors in achieving energy independence is raising the level of gas production. From overall production of 20.1 billion cubic meters in 2016, 14.6 billion cubic meters accrue to the state producer Ukrhazvydobuvannya. According to estimates made by officials, domestic production should grow up to 27–28 billion cubic meters by 2020 (“Ukrhazvydobuvannya” — 20 billion cubic meters) and provide Ukraine with its own gas almost entirely. For this purpose, within the framework of the Ukraine–2020 strategy, six key areas of reform of PJSC Ukrhazvydobuvannya were identified, aimed at increasing the company's economic efficiency: increasing production and stockpiles, improving operational and investment efficiency, etc. The Law On the Electricity Market of Ukraine, which was adopted by the Verkhovna Rada on April 13, 2017, implementing the norms of the Third Energy Package of the EU, including the division of companies according to the areas of distribution and transmission of electricity, was an important element for further development of the Ukrainian energy

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market. The law creates the necessary basis for the transition to a new model of the market: moving away from a single buyer practice and the introduction of a market pricing mechanism, which provides for the elimination of cross-subsidization. This law will liberalize the electricity market for thermal power plants starting from the second half of 2019, and for nuclear power plants and hydroelectric power plants from the second half of 2020. Electricity production companies will decide on the price for most of the electric power produced. Also, it will be possible to switch to direct contracts between electricity producers and suppliers to the final consumer. The law eliminates the current structure of the energy market (State Enterprise Energorynok) and allows for increasing competition and optimizing the mechanism of money flow from consumers to producers. Due to the elimination of cross-subsidies, the price of electricity for the population will become equal to the tariffs for industrial users. This means that it will be increased 1.5–2 times compared to the current level. On the other hand, the industry will overcome the burden of subsidizing the population and will be able to win in terms of the competitiveness of Ukrainian production. An important element of strengthening the institutional capacity and independence of the National Commission, which regulates energy and utility services, was the adoption of a relevant law which came into force at the end of 2016. The document reduced the President's influence on the NKREKP and ensured the rotation of the Commission’s members for the renewal of its composition. It should be noted that it is still a long way off the legislative and regulatory finalizing procedures and reforms in energy and energy independence. It is necessary to implement many elements of European legislation soon, to approve the draft of the updated Energy Strategy of Ukraine until 2035 and the new edition of the Code of Ukraine on mineral resources, to implement the Concept of reforming and developing the coal industry for the period until 2020, to implement in practice the recently adopted laws On Energy Efficiency of Buildings, On Commercial Accounting of Utilities, etc.

an important area of energy reform is the implementation of European energy legislation

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International obligations

International Monetary Fund. At this point, the key motivation for energy reform in Ukraine is its commitments to the IMF for receiving another tranche from the fund. The memorandum of March 2, 2017, indicates the following: 1. Increasing level of social assistance targeting, encouraging households to save and spend within budget limits. From May 1 of this year, the norms of gas and electricity consumption for individual and centralized heating have already been reduced. By the end of July 2017, other parameters of the system of utility subsidies for households will be revised to improve targeting. Revision of social norms will be introduced in off-peak months during the heating season; gas and heating distribution tariff based on capacity will be applied, enabling the transfer of part of the cost to the summer months. Thus, this will give an opportunity to limit expenditures on subsidies for utility costs to UAH 47 billion in 2017. 2. Improvement of the gas sector. Ukraine undertakes the commitment to adjust the prices for domestically produced gas every six months so that its price would be on a par with the price of imported gas. This price revision is carried out in case of changes in the price of imported gas by more than 10%. The interim adjustment mechanism will be in effect until the tariffs are fully liberalized. Moreover, by the end of August this year, a resolution of the Cabinet of Ministers on monetization of assistance within the framework of subsidies for housing and communal services at the level of utility companies will be adopted. Thus, private gas traders will be able to compete with Naftogaz in gas deliveries. Furthermore, the scheme, which allows non-subsidized households to receive a payment delay of 12 months, will be abolished.

NGOs

Independent experts from various organizations closely monitor the implementation of the energy independence program and energy reform, including the following: • DiXi Group Analytical Center — dixigroup.org • Better Regulation Delivery Office — brdo.com.ua • Independent analytical platform VoxUkraine — voxukraine.org • Non-profit organization EasyBusiness — easybusiness.in.ua • Center for Economic Strategy — ces.org.ua • Energy Research Center — eircenter.com • Association on Energy Efficiency and Energy Saving — energy-efficiency.in.ua • Civic Network OPORA — oporaua.org • National Ecological Center of Ukraine — necu.org.ua

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Interesting Facts

On September 7, 2016, the Ministry of Economic Development and Trade changed the statute of the Naftogaz Ukrayiny energy company, taking Ukrtransgas away from its management and transferred the company to its own control. Naftogaz stated that this decision had not been agreed. The EBRD also spoke out against the decision. Within less than two weeks, Prime Minister Volodymyr Groysman revoked the decision of the Ministry of Economic Development and Trade.

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According to Prime Minister Volodymyr Groysman, Ukraine will become energy independent in 3–4 years time. However, the importance of statements by politicians should not be exaggerated. Providing there is economic growth, gas consumption by industrial users will also increase. Therefore, a gradual increase in domestic production may fail to meet rising demand. Moreover, the importance of reduction of gas consumption is somewhat exaggerated in Ukraine. In 2014–2016, gas consumption in Ukraine fell by 16% to 42.6 billion cubic meters, by 21% to 33.7 billion cubic meters, and by 2% to 33.2 billion cubic meters, respectively. The largest reduction was in industry — by 22% to 15 billion cubic meters, by 19.2% to 11.4 billion cubic meters, and by 12% to 9.9 billion cubic meters of gas (for the same period). Consequently, the decline in gas consumption was not due to the introduction of energy efficient technologies, but due to the loss of industrial capacities in Crimea and Donbas, as well as due to the decrease in production caused by the deterioration of the economic situation in 2014–2016. The Law On the Electricity Market of Ukraine approved in the first reading in September 2016 and the adoption of the Law On the National Commission for State Regulation of Energy and Public Utilities was the price for receiving the next tranche of EUR 600 million of macro-financial assistance from the EU.

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2009 2015 September

The EU's Third Energy Package came into force

January

Sustainable Development Strategy Ukraine–2020 was adopted

March

2010

the Gas Sector Reform Action Plan was approved

April

September

Ukraine signed the Protocol on Accession to the Energy Community Treaty (was enacted in February 2011)

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the Law On the Natural Gas Market, which implements the EU’s Third Energy Package, was adopted


2016 July

2017

September

April

the Law on Ratification of the Paris Climate Agreement, which was signed by Ukraine in April 2016, was adopted

March

Ukraine signed a memorandum with the IMF, where energy sector reform is one of Ukraine's obligations

the Law On the National Commission for State Regulation of Energy and Utilities (came into force in November 2016), which implements the EU’s Third Energy Package in the part on the functioning of the national regulator, was adopted

December

the Concept for the development of Ukraine's gas industry was approved the Draft Energy Strategy of Ukraine until 2035 was presented for discussion

the Government approved the Medium-term Action Plan until 2020 the Law On the Electricity Market of Ukraine, which implements the EU’s Third Energy Package, was adopted

May

the Concept of the Coal Industry Reform and Development for the Period until 2020 was approved

June

the laws On the Energy Efficiency Fund, On the Energy Efficiency of Buildings, On Commercial Accounting of Utility Services were adopted

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content

introduction ................................................003 The governance renovation and anti-corruption reform ................ 006 Constitutional reform ....................028 JUDICIAL REFORM ..........................................042

Reform of the national security and defense system ...............................058 Law Enforcement Reform ..................................................................076 Public administration reform.................................................................. 090 Election laws reform ......................... 104 Decentralization and the state management reform .............................118 Reform of the state property management and privatization...................................... 132 Deregulation and entrepreneurship development .................................................. 148 Public Procurement Reform ...................................................................166

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Financial Sector Reform .................................................................. 180 Tax reform ....................................................... 194 Healthcare reform ................................. 212 Education reform .................................... 230 Agriculture reform ..............................244 Energy Independence Program and Energy Reform ............................................260

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Analytical publication The Reforms Guide 2017 The publication was prepared by the Internews Ukraine NGO The chairman of the board — Konstantin Kvurt Executive Director — Natalia Pedchenko Director of Program Activities — Andriy Kulakov The editor in chief — Anna Kyslytska The design and layout of the edition — Julia Chernous


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THE refor guiTHE reforms guide

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