What signals the Cabinet sent to the ukrainian business

The Cabinet’s Action Plan evidences no strong presence of the government in the country’s economic life

Last Friday, 236 members of the Verkhovna Rada of Ukraine voted in favor of the Cabinet’s Action Plan. While presenting the document to MPs, Prime Minister Oleksiy Goncharuk emphasized that the government set itself a goal of achieving a 40% economic growth in 5 years. In his opinion, this is possible if the growth reaches 5% next year and the GDP annually increases by 7%.

Pursuant to the Constitution of Ukraine, within the year following the approval of the Cabinet’s Action Plan, the parliament may not initiate resignation of the Cabinet. So, what guidelines does the government lay in the document to make it not only a plan of action, but also an ‘act of grace’ for the whole year? And how do these guidelines suit the interests of Ukraine’s business and industry, as well as hastily adopted initiatives of the new Ukrainian government?

Tax burden

Action 6.2 of the Cabinet’s Action Plan implies a reduction of a burden on taxpayers. It has to be noted that this objective already contradicts the intention of lawmakers to increase the taxes on iron ore mining and gas production and raise the excise duty on tobacco products.

Moreover, Ukraine’s Ministry of Finance is going to ‘deoffshorize’ the economy through the implementation of the BEPS plan as part of Action 6.2, so as to counter tax base erosion and profit shifting.

In brief, the document does not clearly specify the option chosen by the Ministry of Finance: either to reduce taxes or, conversely, to increase them, sheltering behind the BEPS plan.

Loans and salaries

Action 6.4 implies that businesses and citizens should gain access to much cheaper financial resources. However, direct support (in the form of partial guarantee of loans) is expected only for small and medium-sized businesses. The Cabinet of Ministers is not going to simplify access to loans for the industrial sector, e.g. to fund innovation projects on reducing СО₂ emissions and increasing energy efficiency.

Action 7.3 implies that Ukrainian workers should be legally employed and spend less time looking for new legal job. To create jobs, the Ministry of Economic Development, Trade and Agriculture should facilitate the development of small and medium-sized businesses through cheap loans, their partial guarantee, and risk insurance.

However, the industry, as the largest systemic employer, was not mentioned in the document. Therefore, the agenda does not provide for any form of incentives for the industrial sector that would create legal and officially paid jobs.

Export promotion

Action 7.6 of the Cabinet’s Action Plan implies that Ukrainian manufacturers should get a more favorable business environment through removing barriers to exports of domestic commodities. The Cabinet draws the Ministry of Economy’s attention to the need to cut import duties on the 100 main product lines on the 20 key export markets of Ukraine.

It is planned to reach agreements on trade liberalization, including through the signing of free trade zone agreements. The government also intends to seek abolition of anti-dumping and compensatory duties on Ukrainian products.

To date, these intentions ended in nothing. Ukraine ranks last in the world in terms of successful resolution of commercial disputes: 83% of anti-dumping investigations against Ukraine end in the imposition of duties.

Anti-monopoly measures

Action 7.7 of the Cabinet’s Action Plan implies strengthening of the Antimonopoly Committee and creation of tools for compulsory unbundling of monopolies. This means that the players of the five largest markets will be checked for monopoly abuse and, if necessary, an unbundling processes will be launched.

The government intends to use the Herfindahl-Hirschman index as an efficiency criterion, and expects to halve this figure in the five largest sectors. There is a risk of unjustified application of anti-trust legislation to mechanically lower the index. This may hit sectors where high concentration of production is justified and does not cause economic damage. Steelmaking is one of these sectors.

Transport reform

Action 8.1 obliges the Ministry of Infrastructure to provide individuals and shippers with access to a high-quality, safe railway. To this end, it was proposed to:

• launch private trains;
• split Ukrzaliznytsia into three entities;
• renovate railway infrastructure and rolling stock.

The government is going to make a lot for the development of river transport as well. Yet, this will aggravate the situation with rail transportations, as Ukrzaliznytsia’s cargo turnover has been declining over the recent years.

Access to energy

Action 9.2 implies a 50% increase in the share of energy exchange trading until 2025. However, the example of electricity exchange trading shows that this mechanism is inefficient in Ukraine. Steelmaking companies have already faced the impossibility to buy the needed amount of electricity due to a deficient supply. As a result, they have to buy an electricity shortfall in the balancing market at the maximum price, which makes their expenses grow.

The Cabinet’s Action Plan does not provide for a solution to this problem. An electricity shortfall is obviously caused by restrictions imposed on Energoatom and Ukrhydroenergo in terms of electricity sales in the open market.

Clean environment measures

Action 9.4 implies the introduction of planned environmental inspections at eco-unfriendly companies. First of all, these inspections will be conducted at companies obliged to reduce emissions. It would be nice if these environmental inspections are conducted on an unbiased basis, with no signs of eco-raids.

Furthermore, the government has declared the introduction of the polluter pays principle. It is however unclear how its implementation will differ from the current practice according to which companies must pay the environmental tax. At the same time, the government in no way helps carry out environmental modernization. The environmental tax is used only as a means of punishing industrial businesses, and the government in fact proposed to apply this approach.

Action 9.5 implies the creation of a “system of effective environmental taxes encouraging prevention of waste generation and making their dumping as unprofitable as possible.” The government proposed to significantly increase the environmental tax on waste dumping.

Metallurgical slags fall into this category of waste. By raising taxes, the government will actually shift the problem of the use of slag onto steelmaking companies. Though the solution to this problem lies beyond these companies. To increase slag disposal rates, it is necessary to create a system of public ‘green’ procurement, in which slag would be used in road construction. Ukraine has the potential to increase at least fivefold the use of slag in road construction.

Is the Action Plan actually a plan?

All the aforesaid suggests that the Cabinet’s Action Plan could be rather called a vision, not a comprehensive, strategic action plan. The Actions set in it are not well developed. And time limits and methods of implementation are very important. It would have been advisable to hold a serious dialogue with the business and expert community prior to the document adoption. And the readiness of the parties to hear each other is very important.

For the sake of justice, I would like to note that the vote in the Parliament was preceded by an attempt to launch a dialogue with the public. Representatives of the business sector came to the presentation of the Cabinet Action Plan in Parkovy Business Center, Kyiv, to ask specific questions. In response, the Prime Minister and the Minister of Economy rehearsed the theses of the Action Plan in a ‘we will hear everyone’ style. No definite answers were given to the questions regarding pressure on particular companies. After all, raider attacks on companies occur more and more often.

The statement ‘we will develop in all directions’ was however the most surprising. Unfortunately, following the presentation, it was still unclear what economic and industrial agenda the government would focus on.