Unlocking Ukraine’s private-sector potential

5th February 2014

MGI World Unlocking Ukraine’s private-sector potential

Ukraine’s private sector has the tools to drive the country forward, but is being held back from doing so by a difficult political and regulatory environment. As the country remains gripped by protests against the regime, a new study says major reforms are required in the former Soviet-bloc nation, where GDP per capita is just one-tenth of the European Union average.

The World Bank lays bare a series of obstacles facing small and medium-sized enterprises (SMEs) in the country, most notably “endemic” corruption and an ineffective regulatory environment. There is also limited access to finance, not enough competition and weak public sector governance, according to the report.

“To unleash the full potential of the private sector, particularly of SMEs, comprehensive structural reforms and political commitment to implement them are urgently needed,” explained Qimiao Fan, World Bank country director for Belarus, Moldova and Ukraine.

The report calls for wholesale changes to the business landscape in Ukraine, including a major reduction in ineffectual permits, licences, business regulations and inspections.

Officials must improve corporate transparency and credit information systems, and seek to bring competition legislation in line with international standards.

Above all, it is the high level of corruption that threatens Ukraine’s viability and continues to hamper private sector growth. The country is not alone - a recent European Commission report revealed high levels of corrupt practices across the 28 member states of the EU - but it is a far bigger challenge in Ukraine.

The World Bank calls for the country to crack down on state corruption, which it describes as “the ultimate cause of its poor investment climate and stagnant economic performance”. Greater scrutiny of the legislative process is required, while there ought to be a regulatory impact assessment procedure for new legislation.

These reforms need not be complicated or costly. ”With sustained, strong political commitment and leadership, many of the proposed short- and medium-term policy recommendations could be implemented quickly at a low cost, but will have a large positive impact on the country’s business environment, growth and jobs,” Mr Fan added.

Yet there is some cause for optimism. Reforms over the last 20 years may have been slow, but they are happening.

Dmitriy Sushko, managing partner of MGI member firm PSP Audit, broadly agrees with the obstacles for SMEs in Ukraine stated in the World Bank report, noting “corruption, ever-changing legislation, expensive borrowing costs [and] tax pressure” as some of the main barriers to growth.

But he adds: “However, as to regulatory environment, we'd note a particular progress such as stabilisation of simplified tax system, which enables to reduce tax pressure.

Sushko also admits that competition is scarce, though this “depends on industry”. But for him the key lies in the regulatory landscape. A stronger private sector would be better all round, stimulating growth and further reforms.

“In Ukraine the weakness of private sector directly depends on the current government policy, as successful SMEs contribute to increased levels of household incomes,” he explains.

“Such society is more demanding for transparent government; it becomes subject for negotiation and open dialogue which is beyond the interests of the current government."

The virtuous circle of economic growth and political reforms may seem some way off. Progress will be hard won and slow, as the protesters in Kiev will attest, but the means are in place. Someone just needs to pull the levers.

As Marcin Piatkowski, senior economist at the World Bank and one of the report’s authors, optimistically states in the opening to the report, “the private sector has all it takes to realise Ukraine’s substantial growth potential”. Finding the way to unlock this latent power is the key.

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