Policy Documentation Center

#29,  9 August 1999
A Publication of the International Centre for Policy Studies
ICPS newsletter
Regulatory Reform in Ukraine:
Successes and Disappointments
of the First Year Last Week
Alternative method of forming local
budgets. A seminar on "Forming Local
Budgets in Ukraine: Will the Year 2000
Be Crucial?" was held as a part of the
ICPSs Centre of Policy Excellence
(budget policy) project on August 7. Mr.
Wayne Thirsk, advisor on fiscal policy at
Barents Group, noted in his
presentation that local governments in
Ukraine, and other FSU countries as
well, have limited set of instruments for
forming own budget revenues.
Conversely, local authorities depend on
transfers and shares of national tax
revenues such as personal income tax
and corporate income tax. Unable to
change either the tax rate or the tax
base, local governments are seriously
limited in forming independent
revenues, and lack of independence also
narrows maneuverability regarding
expenditures. Moreover, the central
government determines the amounts of
local expenditures based on norms
founded on the extant capacities of the
state sector. Last but not least, total
financing of budget institutions on
paper exceeds overall the financial
capacity of the state.
Given the present insufficient
independence in forming local
revenues, norms of local expenditures
must reflect the current drops in
revenues. One of the methods provides
for introducing such responsibility from
bottom to top and fixing realistic
expenditure rates for each functional
category of expenditures, and then
summing up to get a total expenditure
rate per capita. In developing the 2000
budget, the Ministry of Finance used
this very method, in keeping with its
practice of using local expenditure data
received from the sectoral
Discussion of the fundamentally new draft Conception for the State Regulatory
Policy, developed by the government institutions in cooperation with
nongovernment organisations, has begun. The sixth issue of the monthly ICPS
Policy Studies journal will be published this week, containing the draft
Conception and a detailed analysis of current state policy in the field of
regulatory reform; possible alternatives or improvements are considered by
Andrii Palianytsia, director of ICPSs Regulatory Reform program . The main
conclusions of the published work are presented below
Current criteria for consistent state
regulatory reform in Ukraine have two
priorities: to revise current regulations
and to forestall ineffective drafts of
new regulations.
The existing procedure for revising
regulatory acts in Ukraine has been quite
effective for the first stage of regulatory
reform. First of all, an administrative and
procedural foundation has been laid to
analyse regulatory acts.  An established
general procedure for all steps from
prioritising to monitoring the
implementation of adopted decisions has
proven its effectiveness. Second,
systematic reviews of complaints and
proposals submitted by businesspeople, as
well as consultations, have encouraged
intensive dialogue between the private
sector and the state through the State
Committee for Enterpreneurship (SCE).
Nevertheless, the effectiveness of
regulatory reform and lack of a more
systematic approach have been noted on
more than one occasion. It is obvious that
this factor has both advantages and
serious disadvantages. We are actually
faced with a dilemma between the need
From the Foreword by Vira Nanivska, Director of the International
Centre for Policy Studies
During the first year since regulatory reform was launched in Ukraine, the objective has
been to reduce the burden of administrative intervention in business. To this end,
measures were developed to eliminate existing normative acts and prevent new ones.
Although this work was done thoroughly and productively, it was a self-defeating activity
for the long term. In reality, deregulation reinforced the old system of state control
instead of creating a new market-regulatory system. The possibility of correcting the
administrative system within the old framework was a mere illusion.
Maintaining an entirely reactive type of regulatory reform in the future is not effective,
either. It is necessary to create a fundamentally new, market-oriented system of state
regulation, different from that under totalitarism. The first steps towards this system
must entail an analysis of the qualitative difference between administrative control and
market regulation by the state; and the determination of the characteristics, structure,
and mechanisms of the desired market regulatory system.
At the next stage of regulatory reform, a new market-oriented role of the government
should be defined with respect to economic activities of the population. Only based on this
new role will it be possible to formulate new normative acts and address related problems.
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the International Centre for Policy
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Phone (380-44) 463-6337
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The International Centre for Policy Studies is
an independent non-profit research
organisation with the objective of improving
the development process of Ukrainian policy.
This is achieved by increasing the know-how
of key government officials for policy
choices, formulation, and debate, and the
awareness of the public-at-large of the
benefits of policy.
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Address: 8/5 Voloska Street, Kyiv
04070, Ukraine
Phone (380-44) 462-4937/38/58.
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administrations in the process of
budget development.
The method of expenditure
determination from bottom to top has
some disadvantages. Firstly, the
question of size of local budget shares
in the consolidated budget is ignored.
If the calculated overall expenditure
rate per capita does not correspond to
revenue formation capacity, the
procedure should be repeated to
achieve a better correspondence.
Secondly, the entire process can lack
transparency because only the Ministry
of Finance knows the base used for
calculating sectoral expenditures per
capita. Third, the procedure practically
leaves out the possibility ensuring
social services from other sources,
particularly the social and cultural
services of state-owned enterprises.
Mr. Thirsk proposed an alternative
method allowing a more rational
solution of this problem. This method
provides for determining aggregate
expenditures per capita for all local
budgets from top to bottom. According
to the proposed method, political and
theoretical efforts should be aimed at
considering the three major elements
of local budget formation. Firstly, what
should the proportion of local budgets
be in the consolidated budget?
Secondly, how should aggregate
resources of local budgets be allocated
between different levels and sublevels
of local authorities? And finally, how
should expenditures be financed under
conditions of limited independence to
generate local revenues?
for flexibility, achievement of prompt
results, and effective feedback with
businesspeople, on the one hand, and a
more systematic long-term approach, on
the other. One of the ways to solve this
dilemma is to separate out the systematic
regulatory reform.
This component of regulatory reform is
innovative and targeted to provide
systematic and irreversible reform. The
main function of this component lies in
the complex re-regulation of whole
sectors of the Ukrainian economy, with
the aim of increasing level of compliance
by business entities, and effectiveness of
state policy. One of the objectives of the
government is to develop principles of
state regulation for each sector. These
principles will act as a foundation for
reviewing current legislation as to its
appropriateness and effectiveness.
While the revision of existing regulations
can be considered a long-term but
temporary objective, which has a final
goal, co-ordinating draft regulations is a
continuing government activity aiming to
develop effective administrative
procedures for filtering out ineffective
regulations. Certainly, this should be one
of the governments main objectives in a
market economy. Therefore, this aspect of
regulatory reform is of the utmost
importance since it is closely connected
with administrative reform in Ukraine.
Regulatory reform can be successful only if
all ministries and agencies are consistent
in carrying it out. In terms of reconciling
draft regulations, this means that those
who develop regulations must provide the
rationale, while the SCE must either agree
or provide arguments for its rejection. But
the current situation is the opposite, with
the burden on the SCE to prove why given
regulations are not needed.
According to Mr. Andrii Palianytsia, in
order to work out a more comprehensive
approach to reforming regulatory policy in
Ukraine it is necessary, first of all, to
clearly define the goal of such policy and
the basic prerequisites for achieving this
goal. The first prerequisite is active
dialogue between the state and market
participants. The second prerequisite is
the effective government action.
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office, tel. (380-44) 463-6337
Main aspects of the Conception for the State Regulatory Policy
State regulatory policy is the consistent and deliberate activity of government bodies,
directed toward optimising state regulation of the economy and the social sector,
increasing the feasibility, clarity, and transparency of state regulatory acts as well as
decreasing the cost of fulfilling them, both for citizens and entrepreneurs as well as for
the state. State regulatory policy is a part of the national policy of Ukraine aimed at
providing conditions for sustainable economic growth and improving mechanisms of
public administration.
State regulatory policy should ensure:
·  the transparency, consistency, and predictability of decisions of executive bodies and
local self-government concerning regulatory acts;
·  that new regulatory acts are introduced only after conducting comprehensive analysis
of their potential effectiveness in achieving the established goals, and their possible
impact on the economic climate in Ukraine;
·  that periodical monitoring is carried out of the effectiveness and consequences of
implementing existing regulatory acts and related measures;
·  effective dialogue between executive and local self-government bodies and economic
entities;
·  the co-ordination of the activities of all central and local executive and self-
government bodies;
·  that executive bodies report on the implementation of state regulatory policy;
·  the liability of public officials for non-execution of laws and infringement of
established procedures.
Effective state regulation should be based on the principles of necessity, effectiveness,
equitability, consistency, transparency, and simplicity with regard to regulatory acts.
Gradual improvement of state regulation will allow using limited government resources to
decrease regulation costs for citizens and the state, which will increase the
competitiveness of products and improve the investment climate in Ukraine. State
regulation of the Ukrainian economy will become maximally transparent and predictable.
Improved state regulatory procedures will help to decrease the shadow sector of
the economy.


ICPS Newsletter. No. 29 (August 9) Regulatory reform in Ukraine: successes and disappointments of the first year

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