By Nataliya Zhuhay and Caroline Elkin
As in any state ruled by law, local government officials in Ukraine are obligated to work within the framework of existing laws when developing regulations. But in practice, the regulations they create often act as obstacles for entrepreneurs to run their businesses. These flawed regulations can be poorly written, full of holes that corrupt officials can exploit, or do not correspond to existing laws. Until recently, such regulations did not take into account the costs they imposed, for example, on the café owner who wants to open a summertime terrace—or for that matter, any other basic entrepreneurial activity.
In December 2015, Ukraine’s Cabinet of Ministers adopted a resolution requiring all legislators to calculate the cost of implementing regulations for small businesses. This procedure is known as the M-Test. Although the resolution seems to represent a victory for Ukrainian business owners, many challenges remain. First, previously adopted regulations are not subject to the M-Test. Secondly, officials are not required to examine existing regulations for their corruption potential. Thirdly, the State Regulatory Service of Ukraine is unable to change problematic regulations because it can only make recommendations. Thus, only the courts are capable of compelling local governments to withdraw or change regulations. In practice, though, entrepreneurs are reluctant to pursue such matters in court, preferring instead to keep their heads down. As a result, the conditions for doing business on the local level discourage entrepreneurs rather than encourage them.
While individual entrepreneurs alone have little power to change improper or badly designed regulations, a united business community with fact-based evidence for its advocacy platforms can succeed in improving the business climate.
One example is the coalition of small and medium-sized enterprises (SMEs) in Mykolaiv, a city in southern Ukraine. Through training sessions from the Center for International Private Enterprise (CIPE) on M-Test and anti-corruption expertise methodology, as well as coalition building, the group of SMEs assessed the corruption potential and cost for businesses of several local regulations. Moreover, the group conducted a successful advocacy campaign that led to stronger working relationships with the Mykolaiv city government.
Coalition members identified one of the most significant problems for entrepreneurs: the unnecessarily prohibitive process to rent city property for business use, says Olena Gerasymchuk, president of the Federation of the Mykolaiv Association of SMEs. City council representatives decide who can lease property. Although the law requires officials to provide an answer to business owners within 15 days, they often drag out the decision for months. They frequently deny a lease without explanation and shorten rental terms despite the tenants’ requests—even though other city property is leased out for 29 years, Gerasymchuk notes.
Due to the local government’s delays and lack of transparency, the Mykolaiv city budget suffers substantial losses, says Gerasymchuk. In April 2017, the local government finally reviewed lease extension requests submitted in November 2016—a five-month delay that led to the loss of potential new jobs that businesses could have created with these workspaces.
Mykolaiv’s situation is common for other regions of Ukraine as well, according to Nataliya Kobylchak, a lawyer with Ivano-Frankivsk and a CIPE expert. Renting municipal property is an area with significant corruption potential. Procedures to grant a lease are often non-transparent and rely heavily on the discretion of local officials. Decisions on granting leases are first made by committees of representatives whose criteria are not shared with the public; nor is it known whether such criteria exist. In Mykolaiv there is no set procedure or criteria to make leasing decisions, nor time limits or a requirement to justify the decision. Despite being public officials, the committee operates behind closed doors.
To address the situation, the Mykolaiv SME coalition conducted M-Tests to determine the cost of regulations on renting city property, as well as anti-corruption assessments. “The M-Test and anti-corruption analysis and consultations with entrepreneurs have shown the need to design new terms and conditions [for renting municipal property] that accept tried-and-tested propositions from business owners,” observed Gerasymchuk.
The Mykolaiv coalition presented its analysis and recommendations, including a new draft of the regulation designed with CIPE support, to the public at a roundtable, which brought together representatives of the city council’s Executive Committee and business owners.
The city council did not immediately accept the coalition’s draft regulation. However, the coalition’s M-Test results earned the respect of local government officials, enabling the coalition to engage officials in debate. Eventually, the coalition and the city council formed a working group to collaborate on the draft regulation, incorporating the business community’s proposals as well as the local officials’ perspective.
Thanks to the M-Test and anti-corruption expertise, the Mykolaiv coalition developed an advocacy platform that gained traction with local officials. The coalition’s advocacy ultimately resulted in better cooperation between the business community and government through the working group. In addition, the local government cooperated with the coalition to conduct M-Tests on another draft regulation. When the business community uses tools such as M-Tests to demonstrate the evidence for its advocacy platforms, it can achieve greater private sector participation in the democratic process.
Caroline Elkin is a Program Assistant for Europe & Eurasia at CIPE. Nataliya Zhuhay is a Program Officer for CIPE Ukraine.