AGENDA FOR UKRAINE       Free  Market  Road  Show  Kyiv,  2016     Володимир  Федорин   24.05.2016   REPRESSED  ECONOMY   Ukraine  is   162nd  in  the   2016  Index  of   Economic   Freedom   (Heritage   FoundaFon)   2   PERSISTENT  CORRUPTION   Ukraine  is  130th   in  the   CorrupFon   PercepFon   Index   (Transparency   InternaFonal)   3   POVERTY   Ukraine  is  the   2nd  poorest   country  in   Europe  with   GDP  per  capita   $2004  in  2015   (IMF)   4   UKRAINE  AND  ITS  NEIGHBORS   Bulgaria   Poland   Russia   Turkey   Ukraine   30000   25000   20000   15000   10000   5000   0   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014   2015   5   DIVERGENCE  INSTEAD  OF  CONVERGENCE                  Ukraine  and  Its  Neighbors  -­‐  1992   GDP  per  Capita  ($,  based  on  PPP,  Russia’s  is   1)                Ukraine  and  Its  Neighbors  -­‐  2015   GDP  per  Capita  ($,  based  on  PPP,  Russia’s  is   1)   1   0.54   0.57   0.65   1   0.75   0.68   1.04   0.8   0.3   UKRAINE   POLAND   BULGARIA   TURKEY   RUSSIA   UKRAINE   BULGARIA   TURKEY   RUSSIA   POLAND   6   REFORM  SPEED  IS  INSUFFICIENT   Reform’s  Speed  Was  Fast  Enough  (value  of  the  Index  2+)  Only  Thrice  in  33  Periods  of   Appraisal   2.58   2.21   2.05   1.65   1.46   1.26   1.5   1.5   1.12   1   1.1   0.9   0.9   1   1.6   1.4   1.2   0.4   1.4   1.36   1.2   1   1.16   1   0.62   0.4   1.4   0.84   0.6   0.6   0.36   1.1   0.64   0.4   7   …AND  POLITICAL  SYSTEM  IS  SUFFERING   Electoral  Support  of  Center-­‐Right  and  Populist  ParFes  in  Rada   60   50   40   30   20   10   0   Oct-­‐14   Mar-­‐15   May-­‐15   POPULISTS  (TIMOSHENKO'S  BLOCK,  OPPOSITION  BLOCK,  RADICALS)   Jul-­‐15   Sep-­‐15   Mar-­‐16   CENTER  RIGHT  (SAMOPOMICH,  POROSHENKO'S  BLOCK,  NARODNY  FRONT)   8   POLITICAL  CYCLE  OF  SLOW  REFORMS   NEW   GOVERNMENT   WITH   REFORMIST   AGENDA   SNAP  ELECTIONS,   RADICALIZATION   OF  REFORMIST   AND  POPULIST   AGENDA     PIECEMEAL   REFORMS   WITHOUT   GROWTH   DISCONTENT   GROWS  WITH   POPULIST   BACKLASH     9   ХА/НАТ зноыш ВЕ ВОМЕ?! ' LAND  OF  DREAMS   •  The  fastest  growing  economy  in  Europe,  one  of  the  most  dynamic   countries  in  the  world   •  Intensive  development  of  infrastructure   •  New  system  of  health  care,  clinics  and  hospitals  compete  for  customers   •  New  higher  educaFon  system:  money  follows  a  student,  zero  corrupFon   in  universiFes   •  Strong  financial  system  that  allows  ciFzens  to  save  efficiently,  and   entrepreneurs  to  akract  investment   •  Strong  social  system  that  provides  a  decent  standard  of  living  to  those   who  are  not  able  to  take  care  of  themselves   •  Strong  pension  system,  consisFng  of  a  decent  basic  pension  and  an   opportunity  to  save  freely  through  various  financial  instruments   11   PRINCIPLES  OF  THE  NEW  AGENDA     CURRENT  APPROACH   NEW  APPROACH   •  Compromises  due  to  poliFcal   constraints   •  Cajoling  exisFng  consFtuencies   and  groups  of  interests   •  PreservaFon  of  the  ossified   state  apparatus,  low  salaries  in   public  administraFon   •  Draming  reforms  as  if  there  were   no  poliFcal  constraints   •  Appealing  to  broad  popular  base   and  outside  groups  (e.g.  foreign   investors)   •  DrasFc  downsizing  of   bureaucracy,  hiring  new   professionals   12   GOALS  OF  THE  NEW  AGENDA   • DEPOLITIZATION  OF  ECONOMIC  DECISIONS  THROUGH:   •  DOWNSIZING  THE  STATE   •  FOCUSING  ON  CORE  GOVERNMENT  FUNCTIONS  –  DEFENSE  AND  RULE  OF   LAW     •  PRIVATIZATION  OF  ALL  STATE  ASSETS   • CREATING  OPEN  ACCESS  ORDER   •  ELIMINATION  OF  CORRUPTION  IN  CORE  GOVERNMENT  INSTITUTIONS   •  EMPOWERING  CITIZENS   •  CUTTING  RED  TAPE  TOGETHER  WITH  SCORES  OF  GOVERNMENT  AGENCIES   13   TOOLS  FOR  THE  NEW  AGENDA   • DEEP  LIBERALIZATION   •  TAX  AND  CAPITAL  AMNESTY   •  LEGALIZATION  OF  GREY  ZONE  ACTIVITIES   •  CUTTING  SUPERFLUOUS  REGULATION  TOGETHER  WITH  REGULATING   AGENCIES   • IMPORT  OF  INSTITUTIONS   •  RECOGNITION  OF  PHARMACEUTICAL,  CONSTRUCTION  AND  OTHER   STANDARDS  ADOPTED  IN  ADVANCED  ECONOMIES   •  OUTSOURCING  LAST  JUDICIAL  INSTANCE  IN  COMMERCIAL  DISPUTES   •  OPENING  MARKET  FOR  FINANCIAL  COMPANIES  FROM  OECD  COUNTRIES   • NEW  TECNHOLOGIES   14   SCOPE  OF  THE  NEW  AGENDA   LAND  REFORM   Transparent  priva^za^on  NEW  PUBLIC   POLITICAL  REFORM   SERVICE   Tax reform. FIGHT  AGAINST   Lowering taxes on labor to 20%. CORRUPTION     Abolition of corporate MILITARY  REFORM  NATO  STANDARDS   Customs  reform.  UnificaFon  of   tax import  duFes  (0%  -­‐  for  most  goods).              Smart   DecentralizaFon   FREE   State for businesses MOVEMENT   OF  CAPITAL   Public  finance   reform   Reducing   government   spending  to   30%  of  GDP     State for citizens Liberalized   JUDICIARY REFORM Labor   Code   EDUCATION   REFORM   HEALTHCARE   15   REFORM   Judiciary  Reform   PROBLEM   •  Ukraine  is  70th  among   102  countries  in  the   2015  Rule  of  Law  Index   •  Ukrainian  court  system   is  even  less  trusted   than  notoriously   corrupt  law   enforcement  agencies     SOLUTIONS   1 Fast Overhaul of the System 2 Attracting reputable lawyers from abroad BACKGROUND   •  Judicial  system  is   poliFcized  and   controlled  by  the   execuFve  branch   •  Some  judges  are   entangled  in  corrupt   networks     •  Establishing  a  single  court  of  cassaFon,  eliminaFng  high  specialized  courts   •  Introducing  the  unity  of  courts  of  general  jurisdicFon,  having  withdrawn   administraFve  and  economic  courts  from  this  system   •  ConsolidaFng  court  districts  that  may  not  coincide  with  the  system  of   administraFve-­‐territorial  division  of  the  country   •  ConducFng  a  transparent  compeFFve  selecFon  of  judicial  candidates,   giving  preference  to  young  lawyers  with  unblemished  reputaFon •  “Hybrid”  procedure  with  disFnguished  foreign  judges  as  jurors   •  ConsFtuFonal  amendments  allowing  foreigners  to  hold  posiFons  in   Ukrainian  judiciary   •  Outsourcing  appellate  jurisdicFon  for  commercial  disputes   16   Public  Finance  Reform   PROBLEM   •  Ukraine  experiences   systemic  fiscal   problems,  implements   the  9th  IMF  program,   •  The  level  of  state   expenditures  (43%  of   GDP  in  2015)  is  too   high   BACKGROUND   -­‐  State  finances  public   premises,  not  services.   -­‐  Premature  welfare   state  (pension   expenditures  about   15%  of  GDP  in  2014)   -­‐  Budget  is  a  large  source   of  funding  for  the   corrupt  poliFcal  system   SOLUTIONS   1 Downsizing State Intervention ▪  Reforming  so  called  “social  sectors”,  especially  healthcare  and  educaFon.   ▪  Transferring  financial  responsibility  for  primary  and  secondary  educaFon  to   the  municipal  level.     ▪  CreaFng  compeFFve  marketplace  in  healthcare  and  higher  educaFon   ▪  EliminaFng  all  state  subsidies  to  businesses  including  tax  benefits   2 Open Budgeting ▪  Transparency   at   all   stages   of   budget   process   –   from   planning   to   procurement   ▪  Performance-­‐based  budgeFng  instead  of  cost-­‐budgeFng   3 Checks on Fiscal Expansion ▪  Introducing  more  complicated  procedure  for  raising  taxes  (e.g.  through   referendum)   ▪  Introducing  ceilings  for  public  debt  (50%  of  GDP)  and  budget  deficit  (2%  of   GDP)   17   Priva^za^on   PROBLEM   •  Ukraine  is  the  130th  in   the  world  in  terms  of   effecFveness  of  the  state   •  It  lacks  capacity  to  run   3500  companies   •  Losses  of  state   enterprises  in  2014   amounted  to  6%  of  GDP     SOLUTIONS   1 2 •  Reducing the list of companies that can’t be privatized ▪  Opponents  of  privaFzaFon  should  demonstrate  reasons  why  a  company   •  PoliFcians  are  not   •  ▪  CreaFng  Agency  for  PrivaFzaFon     ▪  CreaFng  Agency  for  Managing  State  Companies   ▪  Transferring  all  state  companies  to  the  Agency  for  PrivaFzaFon  from  the   ministries   BACKGROUND   interested  in  transparent   privaFzaFon   Public  opinion  is  against   privaFzaFon  (experience   of  1990-­‐s)   ArFficial  preservaFon  of   monopolies  in  some   sectors   Restructuring of State Property Fund can’t  be  privaFzed   ▪  All  other  companies  should  be  removed  from  the  list  of  state  assets  that   should  not  be  privaFzed   3 Rapid and transparent privatization ▪  Small and medium-sized state companies as well as assets of bankrupt enterprises should be sold via e-auctions in 6-18 months ▪  Big companies should be sold with help from foreign advisers in 3-4 years 18   Land  Reform   PROBLEM   •  Private  owners  of  75%  of   Ukrainian  arable  land   may  not  sell  or  use  it  as   collateral  and  have  to   rent  it  out  cheaply   •  Large  agricultural   companies  are  mostly   short-­‐term  investors   BACKGROUND   SOLUTIONS   1 •  •  ▪  AucFons  to  sell  state  owned  land  tracts  in  order  to  obtain  price   benchmarks     ▪  No  restricFons  on  the  size  of  land  holdings  owned  by  a  person  or  a   company  should  be  imposed   ▪  No  restricFons  on  foreign  ownership  of  arable  land   2 •  PoliFcians  and  large   landlords  block  any  move   forwards     Agrarian  companies  lack   funds  for  buying  land  from   its  owners   Urban  dwellers  tend  to   patronize  their  fellow   ciFzens  in  the  countryside   Lifting Moratorium on Selling Agricultural Land Privatization of all state assets in agriculture ▪  Fast  distribuFon  of  land  plots  that  should  legally  be  transferred  to  the   current  and  reFred  employees  of  state  farms   ▪  AucFoning  of  all  state  assets  in  the  agricultural  sector   3 Financial deepening ▪  LiberalizaFon  of  access  for  financial  companies  and  banks  supervised  by   regulators  from  OECD  countries   ▪  Full  liberalizaFon  of  capital  flows   19   e.AucFon  3.0   PROBLEM   §  Standard  aucFons   restrict  parFcipaFon   §  Due  to  the  centralized   architecture  budget   expenditure  for  support   grows  exponenFally     §  Problem  with  info   accessibility   BACKGROUND   SOLUTIONS   1 §  Emerging,     innovaFve     models   which   offer     the     latest     technological     soluFons     §  Decentralized  blockchain  technology     §  Private   trading   plavorms   parFcipate,   adverFse   and   akract   interested   parFes   2 -­‐  Complicated   procedures  leave  ample   space  for  discreFon   -­‐  As  aucFon  modules  are   run  on  a  central  server   the  chance  of   manipulaFon  and   misuse  rom  the  system   administrator  is  high   Privatization and lease of state property   e.Auction 3.0 ▪  All  informaFon  about  aucFon  is  in  permanent  free  access  online   ▪  Post-­‐moderaFon  provides  control  for  transparency  of  aucFons  and  fairness   of  decisions   ▪  Secure  management  of  processes  due  to  decentralized  database   3 System allows to: §  Control  budget  spending   §  Minimize  the  exisFng  corrupFon,  manipulaFon  and  mismanagement  risks   §  Rebuild  trust  in  government  asset  management   20   ЗЬАХ/А ЦКІЧАУІ М І!