Groysman’s plan: phantom or reality?
The Ukrainian Cabinet approved the Action Plan for 2016 and for the medium term. UNIAN tried to figure out whether it is possible to implement it and what can actually become an obstacle.
Prime Minister Volodymyr Groysman on May 25 approved a priority action plan for 2016 and for the medium term. It is qualitatively different from a 10-page program of the Cabinet, adopted by Parliament in April, following the vote for a new prime minister. A 208-page plan looks much more serious and it has and there are more concrete steps in it. Although the experts believe there should be even more of them, at the same time they admit that the plan of Groysman’s Cabinet is very different from that of their predecessors.
By the way, according to experts, the concrete steps envisaged in the plan are nothing else but Ukraine’s obligations to its donors, especially the major one – the International Monetary Fund. They are also related to the provisions of the Ukraine-EU Association Agreement that our country must implement. So all of these steps were earlier discussed with the IMF and announced by former prime minister Arseniy Yatsenyuk.
The experts also noted that the developers of the plan just couldn’t do without some populist statements. But this is a rather traditional feature, and not only for the Ukrainian authorities.
The document starts with the government’s main objectives - "to ensure and improve the quality of life of the citizens through sustainable economic development." That's right - that is precisely the responsibility of the State. But, according to experts, under the present circumstances it is unlikely to perform a task, nor to get any closer to the goal this year. By the way, the Ukrainians who have been overfed with such promises take them really sharply. Further provisions are spelled out more realistically. In fact, it’s a readable plan. Each section begins with what we have at the moment, then there is a historical background providing data on what has already been done to improve the situation, and then the sections are completed with a sequence of steps, down to the specified terms for the adoption of required legislation and a list of responsible officials. According to the prime minister, in July, the ministers will report for the first time, and their work can easily be assessed with the help of this Plan.
So what are the major economic reforms Groysman’s Cabinet is offering the Ukrainians?
Macroeconomics, finance, tax and customs
The first in the Macroeconomic Stabilization section goes budget reform, which involves the introduction of a mid-term state treasury planning, strengthening of fiscal discipline, the efficient use of resources, new timetables for forming the budget, and the establishment of three-year spending limits. This will be the basis of the 2017 budget and the outlooks for 2018 and 2019. Full implementation of the medium-term budget planning is scheduled for the 2Q 2018, that’s according to the memorandum with the IMF.
The main macroeconomic objectives of the Cabinet are the reduction of the budget deficit from the current 3.7% of GDP to 3% in 2017, to 2.5% in 2018, and 2.3% in 2019.
Director of economic programs at Razumkov Center Vasyl Yurchyshyn believes that it is possible to achieve the stated indicators of the state budget deficit, but there must be an understanding that this means further belt-tightening.
"Unfortunately, there is no definite answer, how much this can be offset by other tools. In this issue, it is important to understand what we are going to do with the Pension Fund, privatization, and whether we can get the expected revenues, which can be used to finance spending, in order to support the planned deficit levels. We need to understand what will be the monetary policy of the NBU and how much funds the NBU will be able to transfer from the excess of revenues over expenditures, in order to have the deficit covered. Behind all these steps there must stand a clear and painstaking analytical work to coordinate all disbursements," said Yurchishin.
The government is going to continue the tax reform – it is planning to simplify the administration of the value added tax, the single social contribution, and tax on personal income. Until the end of 2016, it is planned to adopt the relevant laws and regulations necessary. In 2016, the reform of the Fiscal Service is scheduled, providing for significant job cuts (from 58,000 down to 41,000 employees). All reporting will become electronic, as, in fact, all the country's economy will become completely "digital." 10-14 e-services will be introduced, as well as about 3,000 databases to make life easier for the businesses and increase revenues to the budget, making "the minimization of income" almost unreal. There will also be introduced a post-audit, especially in relation to Ukraine’s customs offices. At the same time, tax police should be eliminated in 4Q 2016.
The Plan of the Government states that all tax and financial measures are stepping up the fight against corruption and the money siphoning to offshore jurisdictions. Meanwhile, the "road map" of the Cabinet holds no specifics regarding the volume of taxes, nor it has the list of the future e-services and databases.
Yurchyshyn stressed that all of the Cabinet’s intentions are in fact the obligations to the IMF, but there is a risk that they will not be implemented. "A number of areas of its policy the government will be forced to change, including the simplified taxation system. A number of changes are also required related to foreign economic activities, in particular, transfer pricing, etc. This is what the IMF requires. But the thing is that on May 31, several bills needed for the memorandum to be signed were considered in Parliament, but the vote eventually failed. So I would not say that the government is able to implement everything. And it primarily depends on the Verkhovna Rada. The political crisis is confirmed by Parliament's behavior. Therefore, the likelihood that the Cabinet’s plans will be implemented is very very low," said the expert.
As for the reform of the Fiscal Service and the elimination of tax police, these are just general statements at the moment, according to Yurchyshyn. "Someone is going to change the tax police, someone says that it will not be a police mission, but the information mission. I think that first of all, it is necessary to proceed from the functions that a particular institution should perform. If we define the functions clearly enough, then it will be easier to determine what agencies we actually need... The fact that this structure [tax police] should move from tightly controlling the businesses to supporting them raises no doubt. But it is difficult to say how this will be implemented," said Yurchyshyn.
Privatization, industry, innovation and investment
The government plans to implement large-scale privatization. The Plan states that there are 3,500 state-owned enterprises across Ukraine today, of which 1,700 are not subject to privatization. Approximately 35% of these enterprises have been liquidated as legal entities, while there are under 300 state assets of such kind in the EU member states. Therefore, before the end of the year (in 3Q) the list of state-owned enterprises banned from privatization will be revised toward reduction. In the medium term, the list will be cut as much as possible.
Former head of the State Property Fund Oleksandr Bondar believes that the Cabinet’s plan on privatization plan is actually the plan for the IMF, which is far from the Ukrainian reality. "It is absurd in part of privatization. We have no market at the moment, no people ready to buy the Ukrainian assets. It is not clear what is the basis for this plan. I think the government should not compare the number of enterprises in the West and the numbers that we have here. Instead, the size of the salaries should be compared," said the expert.
According to him, we have enough enterprises - more than a thousand, which are barred from being privatized. They can be sold now, but no one is selling. "We need to learn how to sell something that we have, and only then – take the objects off the black list. Why build the plans which can’t be fulfilled? Billions are being siphoned from Ukraine, and no one has been punished. What investor will buy assets in this country? What kind of mass sales of companies can we talk about if the Individual Deposits Guarantee Fund fails to sell the property of insolvent banks, even in downtown Kyiv and for ridiculously low prices? No one buys them," said Bondar.
The government also plans to reform corporate governance. International audit will be held at the enterprises with state shares, independent review boards will be created and independent directors appointed. In Q3, there must be approved a plan to create state holding companies.
In addition, the government says it will transfer all public procurement into ProZorro electronic system from January 1, 2017. And the government is expected to succeed in doing this. Today ProZorro not only saves money but also helps find the most effective partners. Price offers for certain items vary by two times, so the number of e-competitions has already exceeded 95,000, and the number of customers now reaches 5,000. This success was properly evaluated in the West - in May 2016, Prozorro system received an international award in the field of procurement - World Procurement Awards (WPA) in the category titled Public Sector. It is expected that by the end of 2016, the use Prozorro will have saved Ukraine about UAH 5 billion.
The government plan expects growth of industrial production by the end of 2016 at 2%, and at least 4% in the medium term. The share of industrial production in Ukraine’s GDP should be not less than 20%. To achieve the goal, a program of growth in domestic consumption will be developed as well as the industrial development strategy until 2025 and the key laws in view of the country’s European integration.
Yurchyshyn believes that the forecast growth of industrial production is rather modest and it is necessary to find the tools to ensure stronger growth.
"A 2-3% growth at this very low base we have is nothing for us. The government should look for tools to maintain accelerated growth. It's not easy, it is difficult, but such a low claimed inertia factor for the weak economy – no strong government is required for that,” the expert said.
Meanwhile, the government believes that innovation will be something that will promote industrial growth. It is scheduled to adopt this year the Strategy of the development of high-tech industries until 2025, the creation of the High Tech Office, and the accession of Ukraine to the Innovation Union Scoreboard.
This year, the Cabinet intends to intensify efforts to increase the Ukrainian exports. To this end, the national export strategy will be developed, new sales offices will be created abroad as well as the Board of Export Promotion under the government and the mechanisms of the export risk’s financial support and insurance. The Cabinet aims to sign a number of agreements on free trade zones and have Ukraine enter the international economic alliances. The experts believe that everything should work out well, especially given that the active work in this direction is already underway.
To the growth of investments will contribute the implementation of the government's plan for Ukraine’s entry into the TOP 60 countries in terms of conditions for doing business before 2017, and into the TOP 20 – by 2018. The number of industrial parks has to be increased 30% in the medium term, with five of them to be created before the end of 2016. The Cabinet hopes that all these measures will bring to Ukraine $6.5 billion of foreign direct investment by 2020.
Justice Minister Pavel Petrenko said that the government's plans for 2016 are feasible. "We expect that in the Doing Business-2016 ranking Ukraine will rise from its current 83rd position up to a position between 65 and 69, according to the calculations of the World Bank experts. That is, we have a real chance to have our work over the past year assessed with almost 20 points up in the overall Doing Business rating,” he noted.
The government before year-end intends to create a regulatory and legal framework to address the complex issues of land relations: to introduce the mechanism of the right to a long-term lease of agricultural land, its sale and pledge; and resolve the problem of inheritance. The main thing is to adopt a law On land turnover, which would finally provide for the opening of the land market in Urkaine.
For the first time, the moratorium on a sale of agricultural land was introduced from January 1, 2002, with the entry into force of the Land Code, as a temporary measure. Since then, it has been constantly extended. The latest period of validity ends January 1, 2016. But in November 2015, the parliament speaker (Volodymyr Groysman at the time) once again extended it until January 1, 2017. Petro Poroshenko has signed that law.
Now back to the Cabinet’s Road Map: from January 1, 2017, the government plans to abolish the special regime of VAT taxation regarding farmers (it has been enforced since 2011) and to compensate for the abolition of targeted state support for agriculture businesses. This compensation will start to be allocated as early as this year, with its volume rising from UAH 300 mln to UAH 750 mln. By 2020, the agricultural sector subsidies should increase to 1% of the industry’s production. The first ones to get it will be the farmers of arable land with an area of under 500 hectares.
Also this year, the government intends to develop amendments to the law On the production and turnover of organic agricultural products and raw materials. It is planned to reform the State Customer Service. The first priority is to bring the Ukrainian legislation in the field of sanitary and phytosanitary standards to the European ones. Eight regulations which will ensure proper functioning of organic products and raw materials market will be developed in 2016. All of the above conforms to the EU norms and is agreed with the IMF.
President of the Ukrainian club of agrarian businesses association Taras Vysotsky said that nothing in the document looks unfeasible. "But it is not clear whether all that s planned will be implemented. But if everyone works intensively – the government, the businesses and the society, then nothing is impossible," said the expert.
According to him, it is also possible to open the land market. To have it opened, the moratorium should not be extended until the end of this year and the law on agricultural land should be voted. "According to the Regulations of the Verkhovna Rada, if such a document is submitted to Parliament, there will be enough time remaining until the year-end to consider the bill and adopt it without breaking any rules," said Vysotsky.
He also emphasized that the special VAT regime for farmers has in fact already been canceled. However, he finds direct support that the Cabinet seeks to implement ineffective due to a corruption component. "By law, the special regime will not work until next year. But there is a more important problem: should we have it returned? This is a very debatable question. I think that the first objective conclusions can be made in the end of the year. We have to wait to hold an expert discussion. With regard to direct support to farmers, throughout the 25-year history of independent Ukraine, not once has it been effective, especially because of the corruption component. I cannot predict what will happen this or next year, but history has shown that direct support has never worked. The special regime has, as there were no corruption elements in it. But where the assistance is allocated on the basis of certain indicators, there is always a subjective element – a human factor. That is, there is always some commission, which decides on allocating aid. Therefore, this mechanism does not work. Small producers must be supported, that’s a fact, because they are less competitive. We need to think how to do it the right way. But in general, direct support is ineffective. And there has been no clear decision on this issue yet," said the expert.
In the gas sector, the Cabinet plans to halt the fall in own production of natural gas, increasing it by 2020 to 27 billion cubic meters, which will fully cover domestic demand. The structure of gas imports will also be changed, in particular, by increasing the volume of flows from Slovakia. Before the year-end, the Cabinet intends to introduce IT systems to ensure the gas balance, develop all the necessary documents to complete the reform of the gas market, which implies a division of Naftogaz into core structures. There are also laws to be drafted to create a gas hub in Ukraine, which will resolve the issue of storage of fuel by the European companies in the Ukrainian underground storage facilities. The work on the creation of a gas exchange trading system is also planned to start.
The Cabinet wants to reform the electricity market as well. The goal for 2016 is to stop the decline in electricity production and consumption, as well as significantly increase the export of electricity – to more than 7 million kWh, which is almost twice the volume in 2015. Before the year-end, it is planned to create the legal framework for the transition to the new electricity market model and develop a plan of priority measures for Ukraine’s integration into the European energy system.
According to the president of the Strategy XXI Center Mykhailo Honchar, one can perceive the government plan in various ways. Conceptually, it is the right approach, but we’ve already had plenty of programs drafted in a right way, but they all remained on paper.
"If everything is done the way the speaker of the Verkhovna Rada Groysman did, none of the promises will be fulfilled. Two of the three systemic bills for the reform of energy markets failed to be adopted while Groysman was a Speaker – the laws on the national regulator and the electricity market. And they had to be passed in conjunction with the law on the gas market, which Parliament adopted with great effort in the end of April 2015. And then, this important set of documents was torn to pieces. The paradox now is that Prime Minister Groysman is running into gaps of a Speaker Groysman. That is, when he was a Speaker, he dragged with the adoption of relevant legislation in favor of certain clans and political interests. And now, without a national regulator, there can be no electricity and gas market," said Honchar.
He believes that an indicator will be the way how the bills will pass through Parliament. But then comes the most important thing – we need their implementation. And everything is always limited by the political will. "Sometimes it emerges, and sometimes it disappears – in favor of opportunistic considerations. If everything is done with such political will as it was in the case with the new prosecutor general, it is possible to hope for success," said the expert.
Hinchar also noted that the reform of Naftogaz would not be completed by the end of the year – it will be done later. "If it happens this year, the Government will disorganize the state holding, and we will enter the heating season with the disorganized system, which is extremely dangerous in the face of continued Russian aggression. But this could be done step-by-step," he said.
With regard to the increase of gas production and the refusal of importing gas, the goal may be reached provided the political will and appropriate investment in exploration and production, said Honchar. "Now everything looks like more or less systemic and good intentions. They can be welcomed, but there are doubts that this government will be able to fulfill them," said the expert.
Nuclear energy is also mentioned in the Plan. By the end of the year, the Cabinet wants to finalize the project of construction of a storage facility for spent nuclear fuel and to determine the sources of financing. This issue has remained unresolved since 2009, and in the meantime, Ukraine annually pays Russia $200 million for transportation and disposal of fuel. That is, construction of this storage will allow saving this money, and the experts welcome this decision.
With regard to the coal industry, the government plans by 2020, after the implementation of structural changes in the industry, to increase production volume at the state mines up to 19.6 million tonnes and produce 7 million tonnes of coal in 2016. However, the document provides for no other steps in this direction before the end of this year than the creation of the legal framework to start this transformation. And this is understandable. Coal mining remains in the risk zone, in the occupied territory. We need to think about how we can replace coal. In the end, everything once again boils down to the investment climate. And this is the area of structural reforms.
The Plan also mentions energy efficiency and on energy saving. In this direction, lending will increase of both enterprises and the households, but no exact figures are named. The basic step is the legislative regulation of this sphere, and the term is 2016.
From the transport sector, we consider the most important issue for every Ukrainian – the roads. The government says that today’s level of road financing in Ukraine is the lowest in the world – only 0.9% of GDP. For comparison, in Poland it’s 1.4%, in Russia it’s 1.5%, Belarus spends 2.2%, the developed countries spend an average of 3% of GDP, China gives 3.5%, and Finland spends 3.9%. At the same time, the conditions on the Ukrainian roads do not meet the needs of the economy by 97%.
To address the problem, the Cabinet before the end of the year plans to create a Road Fund, reforming Ukravtodor [Road maintenance body], dealing with its loan debts, as well as to build, reconstruct and repair 1,700 km of roads and repair 3.7 million square meters of pits. In the medium term, there are plans to increase annual volumes of road works by 16 times. 131 km of roads will be pass under the management of local authorities. As to the financing, the Cabinet wants to expand the sources of funding, without any further specifications.
Experts believe that although the situation with roads is difficult, the Ukrainian highways will be restored to a normal state if the government's plans are implemented –not in 2016, of course, but in a few years. And the work is already underway.
As for the trucks, the movement of those weighing over 40 tonnes remains prohibited. The control over trucks will be strengthened. This will also have a positive impact on the state of roads across Ukraine.
Social care and pensions
Regarding social payments, the government has the following plans: legislative unification of the algorithms for issuing target state aid, the introduction of new programs to automatize the process of appointing the assistance and subsidies, the creation of five pilot social service centers in the Transparent Office format.
The government will also take up social protection of working citizens. At present, the minimum wage is only 28% of the average wage. ILO recommendation stands at not less than 50%, the EU has 60%. To heal the situation, the Cabinet plans to draft a new labor law. Besides, it plans to introduce a new system of the methodology for determining the minimum wage and to transfer to local executive bodies the powers in the field of employment and wages. As for the pension system, the Government will continue the reform. Before the year-end, the Cabinet plans to submit to Parliament all the necessary bills, including on the introduction of a funded system, the second level of pension insurance.
As reported earlier, the government of Arseniy Yatsenyuk in May last year submitted to the Verkhovna Rada the bill on pension reform. But things have not changed since. Moreover, the document is a structural beacon of the IMF.
The pension system reform should be carried out immediately, said the general manager of the Pension Reform team at the Reanimation Reform Package social platform Halyna Tretyakova.
"Political will is needed. None of those who have already retired will see a situation worsen, while the young people and those who have a few years left before retirement will be provided with the best conditions. All of Europe has a funded system, the U.S. does, too, but Ukraine doesn’t. 90% of the population will benefit. And those who will lose will be protected by the State. But there will be only 10% of those. With today’s pension system, the State will never cope with the budget deficit. We have to get over with socialism,” said Tretyakova.
The Government Plan provides for a mandatory raise of social standards, but the terms are not specified. It only says this should happen in 2016.
As reported earlier, on May 31, 2016, the MPs rejected a populist bill on raising the minimum subsistence level, the abolition of taxation of pensions and the refusal to limit payments to working pensioners.
The head of the subcommittee on state budget expenditures, Oleksandr Horbunov, said that by law, a living wage and a minimum wage can only be established by a government-proposed bill. "The Ministry of Finance did not support the bill, noting the absence of real sources to cover the additional costs of the state budget. According to calculations of the Finance Ministry, the increase of social standards alone requires about UAH 59 billion in expenditures and all proposed changes require a total of UAH 70 billion," said Horbunov.
Apparently, the increase in the standards of living should be expected after the resumption of economic growth.
The document also plans the introduction of health insurance in 2019, more available medicines and the deregulation of education management.
The most massive sections of the government plan regard decentralization, deregulation, reform of public administration and defense sector. They are clearly itemized. Many of the tasks are already being fulfilled. But these issues are mostly political, so they were not discussed in this article.
Meanwhile, all of the above means a sensible, civilized path of development of the Ukrainian State. Reforms are of an anti-crisis nature, they are painful. But without them, Ukraine will never get rid of its diagnosis of a "post-Soviet state." It’s just that the reforms outlined in the Government Plan are based on on the legislative framework. That is, without Parliament, the problems will not be resolved only with the Cabinet’s intentions. And the Ukrainians are well aware of the way the Rada works. Therefore, keeping promises envisaged in the Cabinet’s Rad Map is rather a matter of conscience of the MPs, not the Cabinet. Judging by the dates for the adoption of bills so important for the country, aimed at reviving the process of reform, we will soon see who really is a patriot of Ukraine.
Nana Chornaya (UNIAN)