World Bank Document
Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Reducing Market Distortions for a More Prosperous Ukraine Proposals for Market Regulation, Competition Policy, and Public Disclosure Authorized Institutional Reform
ACKNOWLEDGEMENTS This report was authored by: Georgiana Pop (Senior Economist, Markets and Competition Policy Team; Macroeconomics, Trade and Investment), Martha Martinez Licetti (Practice Manager, Markets and Technology; Finance, Competitiveness and Innovation), Soulange Gramegna (Consultant, Markets and Competition Policy Team; Macroeconomics, Trade and Investment) and Seidu Dauda (Analyst, Markets and Competition Policy Team; Macroeconomics, Trade and Investment). Valuable inputs were provided by Mariana Iootty de Paiva (Senior Economist, Markets and Competition Policy Team; Macroeconomics, Trade and Investment) and Tanja Goodwin (Senior Economist, Markets and Competition Policy Team; Macroeconomics, Trade and Investment). The report builds on and summarizes the 昀椀ndings of the 2018 World Bank analysis “Ukraine: A New Vision for Competition Policy to Boost Competitiveness and Growth,” which was prepared under the guidance of Satu Kähkönen (Country Director for Ukraine, Belarus, and Moldova). Sean Lothrop (Consultant) provided editorial support. The team is grateful to Yuriy Terentyev, President of the Antimonopoly Committee of Ukraine, and his team for their valuable contributions and insights.
ACRONYMS AND ABBREVIATIONS AMCU Antimonopoly Committee of Ukraine CMU Council of Ministers of Ukraine FDI Foreign Direct Investment GDP Gross Domestic Product HHI Her昀椀ndahl-Hirschman Index ICT Information and Communications Technologies MEDT Ministry of Economic Development and Trade of Ukraine OECD Organisation for Economic Co-operation and Development PMR Product Market Regulation TFP Total Factor Productivity WBG World Bank Group WDI World Development Indicators i
CONTENTS EXECUTiVE SUMMARY 1 CHAPTER FROM MiCROECONOMiC 1 FUNDAMENTALS TO MACROECONOMiC OUTCOMES 5 CHAPTER SOURCES OF COMPETiTiON AND 2 MARKET CONSTRAiNTS 11 CHAPTER PROPOSALS TO STRENGTHEN 3 MARKET iNSTiTUTiONS, REGULATiON, AND COMPETiTiON 37 REFERENCES 41 ANNEX 43 iii
iV REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE List of Figures FIGURE 1 Total Factor Productivity Growth, Ukraine, 2002–2016 (%) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀7 FIGURE 2 Total Factor Productivity Growth, Ukraine and Comparators, 2010–2016 (%) ⸀ ⸀ ⸀7 FIGURE 3 Contributors to GDP Growth (percentage points) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀7 FIGURE 4 International Trade as a Share of GDP, Ukraine and Comparators, 2006–2017 (%) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 8 FIGURE 5 Net FDI In昀氀ows as a Share of GDP, Ukraine and Comparators, 2006–2017 (%) ⸀ ⸀ ⸀8 FIGURE 6 Contribution to the Growth of Value Addition by Major Sector, 1991–2015 (percentage points) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀9 FIGURE 7 Contribution to the Growth of Value addition and Gross Employment, 1991–2016 (percentage points) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 9 FIGURE 8 Supply-Side GDP Decomposition by Subsector, 2010 and 2015 (%) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 9 FIGURE 9 The Extent of Market Dominance in Ukraine ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 11 FIGURE 10 Market Structures in the Manufacturing Sector, Ukraine and Comparators ⸀ ⸀ 12 FIGURE 11 Number of Markets with at Least One SOE, Ukraine and Comparator Countries ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 13 FIGURE 12 Distribution of Ukraine’s 100 Largest SOEs by Sector ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 13 FIGURE 13 Distribution Ukraine’s 100 Largest SOEs by Subsector ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 14 FIGURE 14 Ukrainian SOEs across Sectors by Commercial Viability and Rationale for Government Intervention ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 15 FIGURE 15 Market Shares of Politically Connected Firms by Subsector, 2015 (%) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 16 FIGURE 16 Multimarket Contacts ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 17 FIGURE 17 Market Concentration in Key Sectors with SOE and Oligarch Participation ⸀ ⸀ ⸀18 FIGURE 18 Does One SOE Hold More Than 50% of the Market? ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 19 FIGURE 19 Does One Politically Connected Firm Hold More Than 50% of the Market? ⸀ ⸀ ⸀19 FIGURE 20 Does One SOE or Politically Connected Firm Hold More than 50% of the Market? ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 19 FIGURE 21 Has a New Producer Entered the Market in the Last Three Years? ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀19 FIGURE 22 New Business Entry Density (average 2006–2016) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 21 FIGURE 23 New Business Entry Density Gap Among Comparator Economies (2006–2016) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 21
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE V FIGURE 24 ICT Development Index 2017 ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 22 FIGURE 25 Port Infrastructure Quality, Ukraine and Comparator Countries (% of respondents reporting “poor” or “very poor” quality) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 23 FIGURE 26 Port Charges, Ukraine and Comparator Countries (% of respondents reporting “high” or “very high” charges) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 23 FIGURE 27 Product Market Regulations, Ukraine and Comparator Countries, 2013 ⸀ ⸀ ⸀ ⸀ 27 FIGURE 28 Restrictiveness of Product Market Regulations Pertaining to State Control, Ukraine and Comparator, 2013 ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 28 FIGURE 29 Regulatory Restrictiveness in the Railway Sector, Ukraine and Comparator Countries (index scores from 0 [least restrictive]to 6 [most restrictive]) ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 31 FIGURE 30 Competitive Neutrality Gap Analysis ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 33 FIGURE 31 An Analysis of Implementation Issues in Ukraine Using the Markets and Competition Policy Assessment Tool ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 34 FIGURE 32 Priority Areas for Strengthening National Competition Policy ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀38 FIGURE A.4 Coe昀케cient of Variation of Prices Across Ukrainian Cities ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 47 List of Tables TABLE 1 Market Structure Information for Individual Food Products ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 25 TABLE 2 Examples of Market Regulation Distortions and Competition Constraints in Enabling Sectors ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 30 TABLE 3 Policy Recommendations ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 39 TABLE A.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD ⸀ ⸀ 43 TABLE A.2 Price Comparison Analysis: Kiev, Ukraine vs ⸀ Comparator Cities in OECD and Selected ECA Countries ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 45 TABLE A.3 Price Comparisons Analysis: Ukraine vs ⸀ OECD and Selected ECA Countries ⸀ ⸀ 46 TABLE B.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD and Selected ECA Countries ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 43 TABLE B.2 Price Comparison Analysis: Dnipropetrovsk, Kharkiv, Kiev, Lviv, Odesa, and Sumy in Ukraine vs ⸀ Comparator Cities in OECD and Selected ECA Countries ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 45 TABLE C.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD ⸀ ⸀ 44 TABLE C.2 Price Comparison Analysis within Ukrainian Provinces ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 46 TABLE D.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD and Selected ECA Countries ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ ⸀ 44
EXECUTIVE SUMMARY The following report is designed to support the Government of Ukraine as it strives to pro- mote robust and sustainable growth through market-based reforms. The report examines Ukraine’s market conditions, regulatory framework, and approach to government intervention in terms of their consistency with vigorous competition and economic e昀케ciency. The report’s 昀椀ndings inform a set of policy solutions to help Ukraine achieve its growth potential and create inclusive eco- nomic opportunities. As it attempts to accelerate its economic recovery in the wake of the recent crisis, Ukraine has substantial scope to increase productivity by enhancing competition and implement- ing market-based reforms. Between 2010 and 2016, Ukraine’s annual total factor productivity (TFP) growth rate averaged just 0.9 percent, and the contribution of TFP to GDP growth was negative. The country’s industrial sector and export structure are resistant to change, and both remain focused on older industries such as steel, machine-building, and chemical production despite their low levels of productivity. Meanwhile, in昀氀ows of foreign direct investment have been very modest, especially in export-oriented manufacturing. Small and medium-sized enterprises play a limited role in Ukraine’s economy, and larger 昀椀rms and business groups dominate most sectors—suggesting that competi- tive, market-driven processes of entrepreneurship, innovation, and productivity growth are not func- tioning properly. Firms’ perceptions of the power wielded by vested interests and the prevalence of cronyism, anticompetitive practices, and discrimination against foreign 昀椀rms further underscore the country’s distorted playing 昀椀eld. Addressing these challenges through pro-competition reforms that increase market con- testability and sharpen incentives to allocate resources e昀케ciently could accelerate eco- nomic growth and promote broad-based development. Recognizing the need to increase productivity through private-sector-led growth, the government has begun implementing a set of market-oriented reforms. However, more must be done to build a modern market economy capable of generating robust, sustainable growth and shared prosperity. Ukraine’s markets are concentrated, as government interventions and regulatory barriers—combined with the dominant role of state-owned enterprises (SOEs) and the power of politically connected 昀椀rms—limit entry and distort competition. The wave of privatizations in the 1990s shifted the ownership of former state monopolies to politically connected private interests, but they did not create fully open or contestable markets, and subsequent 1
2 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE attempts to privatize the remaining SOEs have largely failed. Certain sectors and even speci昀椀c SOEs remain protected from restructuring despite operating alongside private 昀椀rms in markets where competition is clearly viable. SOE market shares exceed 50 percent in at least 15 of 28 sectors and markets. These SOEs consume public resources and crowd out private investment, and their continued existence often lacks a clear rationale. In addition, the share of politically connected private 昀椀rms is unusually high, reaching over 60 percent of sectoral turnover or assets in capital-intensive 1 industries. Together, SOEs and politically connected 昀椀rms are the major players in at least 13 markets, including all of the key productivity-enabling sectors. The Ukrainian economy su昀昀ers from weak competitive pressure, with little room for investment in value addition. An analysis of entry and exit dynamics reveals a persistent lack of contestability in Ukrainian markets. Even markets where competition would typically be viable tend to be dominated by a single SOE or a few large 昀椀rms, often with political connections, which reduces competitive pressure and exacerbates the risk of anticompetitive practices. An econo- 2 metric analysis of 昀椀rm-level data for 2006–2015 昀椀nds statistically signi昀椀cant di昀昀erences in economic outcomes between politically connected 昀椀rms and other 昀椀rms, even when controlling for 昀椀rm sector, size, and age. Not only are politically connected 昀椀rms less productive than their non-connected peers, they also tend to have slower turnover, employment, and TFP growth rates. The estimated di昀昀erences range from –5.7 to –16.2 percentage points for the turnover growth rate, –13.0 to –28.9 percentage points for the employment growth rate, and –4.6 to –10.1 percentage points for the TFP growth rate. Concentrated markets and weak competitive pressures increase the costs of goods and services and diminish their quality. Ukraine ranked 83rd out of 140 countries on the 2017–18 Global Competitiveness Index (GCI), and its overall score (4.11 out of 7) has improved little over the past 昀椀ve years. Among Eastern European countries, only Moldova and Bosnia and Herzegovina scored lower on the GCI. Ukraine fares especially poorly on the sub-indicator for goods-market e昀케ciency (4 out of 7) and ranks well behind close regional comparators such as Romania, Bulgaria, and Poland. Prices for basic food products, which comprise a signi昀椀cant portion of Ukraine’s food consumption basket, are an estimated 20 to 50 percent higher than the levels observed in the OECD and in peer countries in Eastern Europe and Central Asia. Markets for certain food products, such as rice and sugar, are especially distorted by powerful interests, and prices for these goods are far above the levels of comparator countries. In addition, domestic prices for food commodities traded on international markets do not appear sensitive to changes in international prices, and domestic price regulations may have served as a 昀氀oor, preventing downward price adjust- ment due to increased competition from abroad. 1 Firms are considered politically connected if they are able to in昀氀uence the policy process to their advantage at the expense of the public interest. 2 The World Bank Group and the UK Good Governance Fund (2018). Crony capitalism in Ukraine: impact on economic out- comes (English). Washington, D.C.: World Bank Group.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 3 in Ukraine, the government’s economic interventions have a major in昀氀uence on market outcomes. The propensity of SOEs and politically connected 昀椀rms in concentrated markets to lobby for regulatory protections and other policy-based advantages underscores the importance of mainstreaming the principle of competitive neutrality in government interventions. Even rel- atively minor distortions or barriers imposed in speci昀椀c sectors can substantially impact market dynamics, especially in markets that are not naturally conducive to contestation. To address these challenges, this report proposes measures to improve Ukraine’s regulatory framework, institutional arrangements, and enforcement mechanisms within the context of a national competition policy. Although Ukraine’s economywide and sectoral product-market regulations are relatively progressive in principle, their application must be strength- ened to ensure a level playing 昀椀eld supported by competitively neutral public policies. At present, multiple sectoral regulators and market institutions are not fully independent and cannot e昀昀ectively execute their mandates. In addition, a high degree of vertical integration in network industries and key productivity-enabling sectors (e.g., electricity and gas) can increase risks of market foreclosure, and in these cases the unbundling of monopolies or dominant players could yield substantial e昀케- ciency gains that enhance the competitiveness of downstream sectors. Therefore, a holistic competi- tion policy must go beyond antitrust enforcement to: (i) ensure a competitively neutral environment that minimizes the policy-based advantages of SOEs and politically connected 昀椀rms; (ii) improve the predictability, consistency, and transparency of the regulatory framework, both in principle and in application; and (iii) support the development of robust, independent market institutions.
CHAPTER FROM MICROECONOMIC FUNDAMENTALS TO MACROECONOMIC OUTCOMES 1 Ukraine Has Substantial Scope to Boost Productivity through increased Competition and Market-Oriented Reform Ukraine is emerging from a period of slow growth in the wake of the economic crisis that marked the start of the still-unresolved con昀氀ict in the eastern part of the country. The econ- omy has begun to stabilize, with real GDP growing by 2.3 percent in 2016 and 2.5 percent in 2017. 3 However, this follows a cumulative 16 percent contraction in 2014 and 2015. The Ukrainian govern- ment is aware that market-based reforms will be vital to accelerate growth, and the authorities have already taken important steps to increase competition. Nevertheless, much more could be done to reduce the distortive impact of the regulatory framework, especially in network industries and services, and the evenhanded enforcement of competition policy by independent market regulators will be necessary to increase investment and improve outcomes for consumers and businesses. In this context, the following report analyzes market competition in Ukraine, evaluates the e昀케ciency of its regulatory framework, and assesses the extent to which government interventions are conducive to competition. The report’s 昀椀ndings are designed to inform policy solutions that will help unleash the country’s growth potential and create inclusive economic opportunities. Strengthening competition policy will be critical to overcome Ukraine’s decades-long lack of productivity growth and leverage the capacity of an e昀케cient private sector to sustain progress on social development by expanding access to a昀昀ordable, high-quality goods and services. Competition policy encompasses the laws, regulations, processes, and institutions neces- sary to ensure a level competitive playing 昀椀eld and address distortions that could reduce economic 4 welfare. A sound competition policy framework promotes economic growth and shared prosperity both by facilitating productivity growth within 昀椀rms and by enabling the e昀케cient reallocation of 5 resources to more-productive 昀椀rms and sectors. Productivity gains reduce prices and improve the quality of goods and services, bene昀椀tting consumers—including lower-income households. E昀昀ec- tive competition policies must consider the speci昀椀c features of di昀昀erent markets, and well-designed 3 World Bank Group (2018). Macro Poverty Outlook for Europe and Central Asia. Spring Meetings 2018. 4 See Motta, M. (2004). Competition policy: theory and practice. Cambridge University Press. 5 See Syverson, C. (2011). What Determines Productivity? Journal of Economic literature. 5
6 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE government interventions are especially important in sectors that are naturally vulnerable to market failures or anticompetitive practices. As it recovers from the recent crisis, Ukraine can accelerate its economic development by adopting pro-competition reforms that sharpen e昀케ciency incentives. In past decades, the economy has experienced a volatile growth pattern, which expansions driven by favorable terms of trade and large capital in昀氀ows in a context of weak underlying productivity growth, persistent structural bottlenecks, and serious governance challenges. The country’s industrial sector and export structure are resistant to change, and both remain focused on older industries such as steel, machine-building, and chemical production despite their low levels of productivity. Meanwhile, in昀氀ows of foreign direct investment (FDI) have been very modest, especially in export-oriented manufacturing.6 Small and medium-sized enterprises play a limited role in Ukraine’s economy, and larger firms and business groups dominate most sectors—suggesting that competitive, market-driven processes of entrepreneurship, innovation, and productivity growth are not func- 7 tioning properly. Firms’ perceptions of the power wielded by vested interests and the prevalence of cronyism, anticompetitive practices, and discrimination against foreign 昀椀rms further underscore 8 the country’s distorted playing 昀椀eld. Ukraine Su昀昀ers from Persistently Low Productivity, Limited investment, and Shrinking industrial and Service Sectors Weak productivity growth is among the most salient, enduring, and critical obstacles to economic development in Ukraine. During 2000–08, the annual TFP growth rate averaged 6.6 percent, and rising TFP was responsible for over 80 percent of GDP growth. However, the robust TFP growth observed during this period was due in part to rebounding capacity utilization following the sharp post-transition contraction of the 1990s. During the 2008–09 global 昀椀nancial crisis, deteriorating external conditions caused TFP to plummet, and between 2010 and 2016 the annual TFP growth rate averaged just 0.9 percent (Figure 1), well below the rates of most comparable countries in Eastern Europe 9 and Central Asia (Figure 2). Low TFP growth rates have detracted from overall GDP growth in recent years (Figure 3). While signs of a recovery in TFP growth have emerged since 2016, restoring productivity growth to pre-crisis levels and sustaining those levels over time pose considerable challenges. 6 FDI represented 1 % of GDP in January-July 2017. World Bank. 2017. Macro Poverty Outlook for Europe and Central Asia and World Development Indicators. 7 World Bank (2014). Opportunities and Challenges for Private Sector Development. 8 Economist Intelligence Unit (2018). 9 Poland, Turkey, Lithuania, Romania, Moldova, Kazakhstan, Bulgaria, Estonia, Latvia, Croatia, Czech Republic, Georgia.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 7 FIGURE 1 Total Factor Productivity Growth, FIGURE 2 Total Factor Productivity Growth, Ukraine, 2002–2016 (%) Ukraine and Comparators, 2010–2016 (%) 15.0 5.0 9.4 11.0 4.0 10.0 7.1 7.1 3.0 5.3 5.7 2.0 5.0 2.1 3.8 3.4 1.8 0.7 0.3 1.0 0.0 0.0 –2.3 –1.0 –5.0 –4.8 –2.0 –10.0 –3.0 Croatia Poland Turkey Latvia Ukraine Estonia Georgia Bulgaria –15.0 –13.8 Hungary Romania Lithuania Moldova Kazakhstan –20.0 Czech Republic 2002 2004 2006 2008 2010 2012 2014 2016 Growth 2016 Average growth 2010–2015 Source: The Conference Board Total Economy Database™ (adjusted version), Source: The Conference Board Total Economy Database™ (adjusted version), November 2017 November 2017 FIGURE 3 Contributors to GDP Growth (percentage points) 15.0 10.0 5.0 0.0 –5.0 –10.0 Growth rate (percentage points) –15.0 –20.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Factor Productivity (gA) Labor ((1-α) * gL) Human Capital per Labor ((1-α) * gh) Capital Stock (α * gK) Real GDP (gY) Source: World Bank sta昀昀 Note: Growth rates are weighted according to the income share of capital (%) = 40%
8 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE Although Ukraine is open to trade, the country could attract much more FDi, especially in 10 higher-value, export-oriented markets. While Ukraine performs relatively well on measures of 11 trade openness (Figure 4), it attracts less FDI than do many comparable countries (Figure 5). Before the crisis, annual net FDI in昀氀ows averaged 5 percent of Ukraine’s GDP, but in 2017 they reached just 2.1 percent, below the levels of the Czech Republic (4.3 percent), Croatia (3.8 percent), Latvia 12 (3.8 percent), Bulgaria (2.9 percent), and Romania (2.3 percent). The slow pace of the reform process, unaddressed macroeconomic vulnerabilities, and uncertainty surrounding the 2019 elections are among the key factors weakening investor con昀椀dence.13 FIGURE 4 International Trade as a Share of GDP, FIGURE 5 Net FDI In昀氀ows as a Share of GDP, Ukraine and Comparators, 2006–2017 (%) Ukraine and Comparators, 2006–2017 (%) 450 60 400 ) 50 350 GDP40 300 f o % 250 ( s 30 200 Ukraine in ow t Trade (% of GDP)150 ne 20 , Ukraine DI 100 F 10 50 0 06 7 8 9 10 11 12 6 7 8 9 10 11 12 log GDP per capita (PPP 2011) log GDP per capita (PPP 2011) Source: WDI Dataset Source: WDI Dataset 10 These include high-value metal and agriculture products. 11 According to MIT’s Atlas Media for 2016, Ukraine’s top exports are seed oils (US$3.44 billion, 9.8 percent of total exports), wheat (US$2.37 billion, 6.7 percent), corn (US$2.26 billion, 6.4 percent), semi-昀椀nished iron (US$2.1 billion, 6.0 percent) and iron ore (US$1.92 billion, 5.5 percent) per the 1992 Harmonized System. The country’s top imports are re昀椀ned petroleum (US$3.3 billion, 8.7 percent of total imports), packaged medicaments (US$1.37 billion, 3.6 percent), cars (US$1.24 billion, 3.3 percent), coal briquettes (US$1.11 billion, 2.9 percent) and petroleum gas (US$964 million, 2.5 percent). For further information, see: https://atlas.media.mit.edu/en/pro昀椀le/country/ukr/ 12 Peer countries include Poland, Turkey, Lithuania, Romania, Moldova, Kazakhstan, Bulgaria, Estonia, Latvia, Croatia, Czech Republic, and Georgia. 13 World Bank Group (2018) “Macro Poverty Outlook for Europe and Central Asia.” Spring Meetings 2018.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 9 Since 2009, Ukraine’s most important economic sectors have been stagnating or shrinking. Services account for 60 percent of Ukraine’s GDP, followed by industry (30 percent) and agricul- ture (10 percent). The growth of value addition has been either low or negative in the post-crisis period (Figure 6), and the industrial sector has had the largest negative impact on the growth of total value addition (Figure 7). The service sector has also detracted from total value addition, though its contribution to gross employment has been positive due to an expanding public-sector workforce, as the share of public services in GDP rose signi昀椀cantly between 2010 and 2015 (Figure 8). Agricul- ture, meanwhile, has increased as a share of GDP and is the only major sector that made a positive contribution to value addition between 1991 and 2016. FIGURE 6 Contribution to the Growth of Value FIGURE 7 Contribution to the Growth of Value Addition by Major Sector, 1991–2015 Addition and Gross Employment, 1991–2016 (percentage points) (percentage points) 15.0 10.0 0.1 Agriculture 5.0 –0.4 0.0 –1.3 –5.0 Industry –0.6 –10.0 Percentage Points–15.0 –0.6 –20.0 Services etc. 0.3 –25.0 1 3 5 7 9 1 3 5 7 9 1 3 5 –1.5 –1.0 –0.5 0.0 0.5 9 9 9 9 9 0 0 0 0 0 1 1 1 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 2 2 2 2 2 2 2 2 Percentage points Agriculture Industry Value Added Contribution to Value Added Growth, 1991–2016 Services etc. Residual Growth Contribution to Gross Employment Growth, 1991–2016 Source: World Bank sta昀昀 Source: World Bank sta昀昀 FIGURE 8 Supply-Side GDP Decomposition by Subsector, 2010 and 2015 (%) 100% 21.6% 24.1% 80% Administrative, public and other services Transport and logistics 60% FIRE ( nance, insurance, real estate) 11.9% 11.2% Retail trade, catering and hotels 40% Construction Manufacturing 33.3% 28.7% Mining and quarrying 20% Agriculture, forestry and shing 0% 2010 2015 Source: Ukrstat.
10 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE Recognizing the need to increase productivity and facilitate private-sector-led growth, the government has launched important reforms in recent years. These e昀昀orts have focused on three areas: (i) privatization, with the government and the State Property Fund working on a 14 privatization plan; (ii) energy, with recent reforms attempting to open the electricity market to 15 competition; and (iii) digital technology, with the approval of a roadmap to increase productivity by introducing new information and communications technologies (ICT) and leveraging public-private partnerships to invest in broadband internet infrastructure.16 Further reforms will be necessary to build a robust and competitive market economy. Certain sectors and even speci昀椀c SOEs remain protected from restructuring despite operating in markets that can sustain private 昀椀rms. For example, Energoatom, which holds a market share of over 90 percent in the electricity-generation subsector, is just one of many SOEs protected from 17 privatization by a 1999 law. Moreover, many key pro-competition reforms have only been partially implemented. For example, the state-owned oil and gas company Naftogaz is currently unbundling its transmission functions, yet otherwise it remains fully vertically integrated. While the government has undertaken important reforms under very di昀케cult circumstances, Ukraine’s regulatory frame- work continues to restrict competition. Further improvements in competition policy could boost economic growth by promoting allocative e昀케ciency and encouraging private investment. 14 The new Law on the Privatization of State and Communal Property became e昀昀ective in March 2018. The government has indicated that the 21 largest SOEs are scheduled to be privatized during 2018, including SOEs in the energy, chemicals, engi- neering, and agricultural sectors. 15 These measures include the unbundling of electricity transmission and distribution, with the goal of establishing a liber- alized wholesale market by July 2019 and liberalized household electricity prices by December 2018. See: The Law on the Electricity Market (13.04.2017 #2019-VIII) available at http://zakon3.rada.gov.ua/laws/show/2019-19 16 Ministry of Economic Development and Trade, cited by Ukraine Digital News at http://www.uadn.net/2018/01/24/ ukrainian-government-approves-digital-economy-strategy-for-ukraine/ 17 The Law on the List of Objects of State Property Not Subject to Privatization
CHAPTER SOURCES OF COMPETITION AND MARKET CONSTRAINTS 2 SOEs and Politically Connected Firms Dominate Key Sectors, Weakening Market Contestability and Undermining E昀케ciency incentives Surveys and 昀椀rm-level data both indicate high levels of market dominance in Ukraine. According to surveys conducted for the World Economic Forum’s Global Competitiveness Report, only Moldova, Croatia, and Hungary were perceived to experience more severe market dominance than Ukraine (Figure 9). Firm-level data18 corroborate these perceptions and highlight the increasingly oligop- olistic structure of Ukraine’s manufacturing markets. The FIGURE 9 The Extent of Market Dominance 19 in Ukraine share of oligopolies in the manufacturing sector rose from 25 percent in 2008 to 44 percent in 2013, and a rel- 7 atively large share of 昀椀rms in the sector report operating 6 in an oligopoly or duopoly (Figure 10).20 5 in addition, the large market shares commanded 4 by SOEs and politically connected 昀椀rms appear to 3 undermine contestability and weaken e昀케ciency 2 incentives. High levels of market concentration are not necessarily a cause for concern, as successful 昀椀rms 1 can garner large market shares through innovation, 0 a y ia ia v tia via g key process optimization, or other e昀케ciency-enhancing oa aine t onia r r hstanLa eor ur oland oldoC HungarUk omaniaG BulgarT Est epublicP measures. However, market dominance may also occur M azak LithuaniaR K ech R when 昀椀rms are shielded from competition by barriers to z C entry or when they enjoy large regulatory advan-tages Source: World Economic Forum 2017/18 over their competitors. Competitive neutrality— the Note: Values range from 1 (highly concentrated) to 7 (highly contested) 18 World Bank and European Bank for Reconstruction and Development Enterprise Surveys (2008, 2011, and 2013). 19 The manufacturing sector includes food, textiles, garments, leather, wood, paper, publishing, printed and recorded media, re昀椀ned petroleum products, chemicals, plastics and rubber, non-metallic mineral products, basic metals, fabricated metal products, machinery and equipment, electronics, precision instruments, transportation machines, furniture, and recycling. 20 A description of the Enterprise Survey methodology is available at http://www.enterprisesurveys.org/methodology. 11
12 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE FIGURE 10 Market Structures in the Manufacturing Sector, Ukraine and Comparators 100% 90% 80% 70% 60% 50% 40% 44% 30% 25% 20% 10% 0% Estonia Latvia Ukraine Poland GeorgiaCroatia BulgariaTurkeyUkraine Moldova Lithuania HungaryRomania Kazakhstan Czech Republic 2013 2011 2008 Monopoly Duopoly Oligopoly 6 or more Source: World Bank/EBRD Enterprise Surveys for 2008, 2011, and 2013 (manufacturing sectors only) principle that government interventions should not favor certain 昀椀rms over others—is vital to ensure that the presence of SOEs and politically connected 昀椀rms does not undermine market e昀케ciency. Due in part to its history as a command economy, Ukraine has an unusually large number 21 of SOEs. A total of 3,591 SOEs are registered in Ukraine, though only half are currently operational. These SOEs are not restricted to network industries with natural-monopoly segments (e.g., electricity, gas, water supply, and railways), and they operate in a wide range of manufacturing, agricultural, and 昀椀nancial services markets. Moreover, SOEs have repeatedly been used as instruments in corruption 22 schemes. Among comparator countries, Ukraine has an exceptionally large number of markets with 23 at least one SOE (Figure 11). Ukrainian SOEs employ about 1 million people, or roughly 5 percent of 24 the national workforce. 21 Government of Ukraine (2017). See: http://www.spfu.gov.ua/ua/content/spf-stateproperty-Subiekti-gospodaruvannya.html 22 Prime Minister Volodymyr Groysman, cited by Reuters. See: https://www.reuters.com/article/uk-ukraine-privatisation/ ukraine-passes-privatisation-law-needed-for-imf-aid-idUKKBN1F71OD. 23 World Bank and OECD (2018). The product-market regulation (PMR) indicator assesses the extent to which public policies promote or inhibit in several areas of product markets. The PMR methodology encompasses 12 subsectors and policy areas, including electricity, gas, telecommunications, postal services, transportation, water supply, retail distribution, professional services, other subsectors, administrative requirements for business startups, the treatment of foreign parties, and others, such as governance of public-controlled enterprises and antitrust exemptions. The information for Ukraine was collected in 2017, re昀氀ecting the status of the regulations as September 2017, and was used to calculate PMR scores in 2018. 24 World Bank (2016). Systematic Country Diagnostic, p. 76
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 13 FIGURE 11 The Number of Markets with at Least One SOE, Ukraine and Comparator Countries 30 Ukraine*, 28 25 Ukraine, 19 20 OECD Average,13.7 15 10 5 0 as k es ia y y y ia a e y e y viaalta ea t azilicaeru aliay ael ica taly a key tia oniat ador andata agua P ium age eec landtinaeniafrancI w aine oa ndiagypt yprusLaMlandselandJapanKorChadmanelandBrChile ustrtugaler itaniaIsr v oliviarSpainedenunisiarurChinarIolandEaine* anama r emalaw anada agua enegalvinlandKenealand er RussiaBF w T r P ingdomCEst alvIenmartR CerIc arepublic JamaicaAelgorSustrF epublicepublicGrgen S NorTUkcuador C omaniaP D ed SBulgarGicarPUruguaosta RBP A olombiaaurNamibiaHungarLithuaniarSlo E ndonesiaenezuelaRUk Hondur El S Gua N C C M witzA outh A hilippines I V ed K Nether ak R S S P Unit v New Zech R OECD A z Unit Slo C ominican R D Source: Markets and Competition OECD-WBG PMR indicators (2018 for Ukraine; or most recent year) Note: *Includes additional sectors beyond those reported in the Market and Competition World Bank/OECD PMR data. Ukrainian SOEs are present in almost 30 economic FIGURE 12 Distribution of Ukraine’s 100 Largest sectors, and they hold signi昀椀cant market shares in SOEs by Sector more than half of the markets in which they operate. A Other plurality of Ukraine’s 100 largest SOEs operate in the service 23% sector (Figure 12). SOEs play an especially signi昀椀cant role in transportation (Figure 13), as well as other productivity-en- Services abling sectors such as electricity and banking. SOEs are also 41% present in extractive industries such as oil, gas, and coal Agriculture mining, manufacturing industries such as chemicals and 10% machinery, and commercial activities such as real estate. SOEs hold market shares greater than 50 percent in at least 25 15 of 28 subsectors and markets in which they operate. The law explicitly prohibits privatization of some of these. Industry 26% In addition to Energoatom, the list of SOEs protected from Source: MEDT (2015). privatization includes NJSC Naftogaz Ukrainy (the monop- Note: “Other” includes media companies, other public services, and real estate. oly gas importer), PJSC Ukrtranshaz (the monopoly gas transporter), PJSC Ukrzaliznytsia (a railroad-infrastructure operator and passenger and freight transporter); PJSC Ukrainske Dunayske Paroplavstvo (a freight and passenger 25 According to Markets and Competition OECD-WBG (2018) and MEDT (2015), at least one SOE operates in 28 subsectors and markets. However, this assessment is not necessarily exhaustive, and SOEs may also be active in additional subsectors and markets.
14 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE FIGURE 13 Distribution Ukraine’s 100 Largest SOEs transportation service provider), Dnipro and Kharkiv by Subsector Metropolitan (a passenger transportation company), the Banking Pivdennyi Machine-Building Plant (a manufacturer of 6% fabricated metal products, machinery and equipment), Transportation Chemicals Antonov (the national aircraft manufacturer), Antonov 22% 6% Coal Mining Airlines, Kiev Boryspil Airport, all of the country’s seaports, 7% all regional road-infrastructure operators, all companies 26 involved in water collection, treatment, and supply, the Electricity Hotel Dnipro in Kiev, and the State Design-Research Insti- Real Estate 13% tute of Transport Construction(“Kyyivdiprotrans”). 11% Many Ukrainian SOEs lack a clear economic or Food & public-policy rationale to justify their existence, Other Agriculture 12% 10% and there is little indication that their benefits Oil & Machine outweigh their costs. SOE losses strain the govern- Gas Building 3% 10% ment’s limited fiscal resources, and the market domi- Source: MEDT (2015). nance of SOEs risks crowding out private investment. Note: “Other” includes media companies, other public services, and real estate. While some Ukrainian SOEs operate in sectors with national security implications, natural-monopoly char- acteristics, or other features that could potentially jus- tify a role for the state, most SOEs are involved in sectors and markets where there is no obvious basis for government participation. Although a detailed analysis could reveal market failures that warrant SOE involvement, the international experience indicates that many sectors in which Ukraine’s SOEs operate—including alcohol production, commercial banking, hotels, agriculture, and machine building—tend to function efficiently without SOEs, and SOE involvement in these sectors is rarely justified by strategic considerations or development policy objectives (Figure 14). The country’s large and persistent SOE footprint in a context of weak economic perfor- mance suggests that barriers to entry and market distortions are limiting the role of private 昀椀rms in sectors where competition would be viable. National statistics indicate that almost half of Ukraine’s largest SOEs are unpro昀椀table, yet loss-making SOEs continue to operate—consuming productive resources that would otherwise be employed by more e昀케cient private 昀椀rms. Of Ukraine’s 27 28 100 largest SOEs, only 57 were pro昀椀table in 2014, and their average net pro昀椀t margins were low. 26 Article 14 of the Law on Drinking Water, Water Supply and Drainage (available at http://zakon4.rada.gov.ua/laws/show/ 2918-14) provides for the privatization of SOEs that supply drinking water. 27 Their combined assets totaled UAH 982.5 billion (roughly US$44.7 billion) in the 昀椀rst half of 2015. Their revenue averaged UAH 241.7 billion (about US$10 billion) between 2012 and 2014. Earnings before interest, tax, depreciation, and amortiza- tion (EBITDA) over the same period 昀氀uctuated between UAH 3 and 30 billion (US$250 million to US$2.5 billion). See also: http://www.me.gov.ua/News/Detail?lang=en-GB&id=5fe878f1-885c-4690-ab84-6c612b0504e2&title=MinistryOfEconomic DevelopmentAndTradeOfUkrainePublishedTheFirstReviewOfThe100-LargestStateEnterprises 28 MEDT (2015). Ukraine’s Top 100 State-Owned Enterprises.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 15 FIGURE 14 Ukrainian SOEs across Sectors by Commercial Viability and Rationale for Government Intervention Transport of oil and oil products by major pipelines (Naftogaz, SE represented by PJSC Ukrtransnafta) Transport of natural gas by major pipelines (Naftogaz, SE represented by PJSC Ukrtransgas) Rationale for government Electricity import (Ukrinterenergo) intervention to limit entry Transmission of electricity (National Energy Company Ukrenergo) Railways (State Administration Ukrzalinitsya) YES Air tra c control (SE Ukraerorukh) Private sector Airports (Kiev Boryspil Airport, Lviv International Airport) Private sector excluded/limited Seaports excluded for due to market failure Aerospace manufacturing (Antonov, Pivdennyi Machine Building) strategic/public Legal monopolies Specialized services of transport terminal and warehouses for Exclusivities ammonia (PJSC Odessa preport Plant) policy reasons Statutory restrictions Postal services (SE Ukrposhta) on the sale of state Local telephones (PJSC Ukrtelecom) controlled shares Water distribution (national or subnational governments) Commercial Health care viability NO YES Ethyl alcohol production (Ukrspyrt) Electricity generation (Energoatam, PJSC Centrenegro) Oil extraction and manufacture of re ned petroleum products (PJSC Non Ukrnafta) commercially SOEs compete Banking (Pryvatbank, oschadbank, Ukreximbank, Ukrgazbank) viable for private with private Construction (PJSCHC Kyivmiskud) sector unless operators Hotels (Hotel Dnipro) state intervention Air transport Water transport NO Poultry (PJSC MHP) Agriculture (State Food, Grain Corp. of Ukraine +9 others) Manufacture of chemicals (PJSC Sumykhimprom +5 others) Manufacture of aluminum foil (SE Factory aluminum foil) Coal mining (SE coal of Ukraine, SE Selydivvuhillya +5 others) TV and radio broadcasting (Broadcasting, radio communications & Source: Author’s elaboration TV concern) Note: Sectors that typically attract private investment are in blue. According to data from Ukraine’s Ministry of Economic Development and Trade (MEDT), the country’s operational SOEs contributed about 20 percent to its GDP in 2015. In the same year, the 46 largest 29 SOEs accounted for 94 percent of SOE assets and 92 percent of SOE losses. Concentrated markets with large SOE footprints are at high risk of producing poor out- comes, especially in the absence of a fully implemented competitive-neutrality framework. While the presence of SOEs is not necessarily incompatible with competitive market outcomes, a competitive-neutrality framework is vital, particularly in markets that are naturally concentrated. To ensure their economic e昀케ciency, SOEs must be exposed to competitive pressures from private 昀椀rms on a level playing 昀椀eld, or they must be subject to economic regulations that establish e昀昀ective per- formance incentives. Like SOEs, private 昀椀rms that enjoy regulatory protection tend to create markets that are not fully contestable or competitive. Explicit or tacit collusion between 昀椀rms can also weaken competitive pressure and distort incentives. 29 World Bank (2016). Systematic Country Diagnostic, p. 76.
16 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE in Ukraine, high levels of market concentration and a heavy SOE footprint are compounded by an unusually large share of politically connected private 昀椀rms. Firms are considered polit- ically connected when they are able to in昀氀uence the policy process to their advantage at the expense of the public interest. Recent research has found that between 0.5 and 2 percent of all 昀椀rms in Ukraine are politically connected, yet these 昀椀rms account for over 20 percent of total turnover.30 Politically connected 昀椀rms tend to operate in capital-intensive industries such as mining, energy, and transportation, where they account for over 40 percent of total turnover and over 50 percent of total assets (Figure 15). FIGURE 15 Market Shares of Politically Connected Firms by Subsector, 2015 (%) 70% 60% 50% 40% 30% 20% 10% 0% g y g d ly d e s d s n d d k s ing n p ion n te n n io n ies ity ion tinstr r a ad o an r t e ying p ct r n a i a n r r s a t a e iat g n cu u ishin r a u le il r g e ca l wor h F a ctu g r su a u a icat d ctivit u ctivitie , u fa , e str ta r n e tin a tio d cia a e d fo q t n lese n a E o r n u ty r sta u m e a n o e sto r r ss cial s s u nd a iciwa Co h r , m e , e d vice d t m inistrso n r a M tr W n r te sin , icult g lec a o co l int u m ce a se r E sp sta b d n lth r g inin ls n cia l e a e A te a n a c a fe h M r li e Ot Ho T ina Re b d He F u P Agriculture Industry Services Sector’s number of rms Sector’s turnover Sector’s assets Source: The World Bank Group and the UK Good Governance Fund, 2018. Many politically connected 昀椀rms are owned by the country’s oligarchs who wield enormous political and economic power. The Ukrainian oligarchs emerged during the country’s transition and privatization process in the mid-1990s, when the leaders of newly formed business groups rapidly accumulated economic assets and began investing in politics to defend their market positions.31 The Ukrainian air-transportation market is currently dominated by the oligarch-owned Ukrainian 30 The World Bank Group and the UK Good Governance Fund (2018). Crony capitalism in Ukraine: impact on economic out- comes (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/125111521811080792/ Crony-capitalism-in-Ukraine-impact-on-economic-outcomes. This analysis uses two approaches to identify politically con- nected 昀椀rms. The 昀椀rst approach is based on publicly available information on the ownership and control of businesses by individuals who have been entrusted with prominent public functions, including senior politicians and party o昀케cials, senior government, judicial or military o昀케cials, and senior executives of SOEs. A 昀椀rm is considered connected if it has at least one such person among its owners, shareholders, or managers. The second approach includes companies that possess political connections through an oligarch or a business group. 31 Wojciech Kononczuk´ , Denis Cenus¸a and Kornely Kakachia (2017). Oligarchs in Ukraine, Moldova and Georgia as key obstacles to reform. Available at: http://www.3dcftas.eu/system/tdf/Oligarchs_14%20June_FINAL_0.pdf?昀椀le=1&type=node&id=358%20
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 17 International Airlines (UIA), which carries over 80 percent of domestic passengers and is the only airline on most domestic routes, though it also serves many international destinations. Two of the three largest players in the mining and steel markets are Metinvest and Interpipe Group, both of which are owned by oligarchs. The third, ArcelorMittal, is a former SOE that was successfully privatized in 2005 after an initial privatization attempt in 2004 was marred by a corruption scandal. Another oligarch controls a group of companies known as Ostchem, which supplies over 80 percent of the domestic market for several varieties of mineral fertilizer. Yet another oligarch owns Myronivsky Hliboproduct (MHP), the market leader in poultry production and sales. Business groups owned by Ukraine’s oli- garchs tend to operate across multiple markets and economic sectors, leading to signi昀椀cant multi- market contact among politically connected 昀椀rms and SOEs (Figure 16). FIGURE 16 Multimarket Contacts SOE Transportation Coal Real Estate Airlines and storage Steel Titanium Grain Ports Airports & Shipping Chemicals Meat Energy aerospace lines Iron ore Media Poultry Milk Fixed generation manufacturers Banking broadband Fertilizers Engineering Eggs Insurance Shipbuilding Sports Confectioneries Pharmaceuticals Oligarch Oligarch Oligarch Oligarch Oligarch Oligarch Other 1 2 3 4 5 6 Source: Author’s elaboration based on publicly available information. Note: The markets covered by this 昀椀gure include the main product markets with SOE and/or oligarch presence. Together, SOEs and politically connected 昀椀rms are the main players in all productivity- enabling sectors of the Ukrainian economy. SOEs operate alongside politically connected 昀椀rms in least 13 markets, including banking, transportation, mining and quarrying, energy, and agri business. The relationship between SOEs and politically connected 昀椀rms varies widely from market to market. For example, the energy-generation subsector includes at least one SOE and at least one 昀椀rm owned by each of the country’s four most powerful oligarchs. All of the country’s four biggest banks are now SOEs, after the largest, PrivatBank, was expropriated from an oligarch in 2016 due to alleged risky lending practices. In the oil and gas subsector, the government owns 51 percent of the joint stock company Ukrnaftaone, one of Naftogaz’s main production and re昀椀ning subsidiaries, while an oligarch is a minority
18 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE shareholder. That same oligarch controls an oil-transportation company and owns the country’s largest network of gas stations. These multi-market contacts facilitate explicit or tacit collusion. Most markets in Ukraine are highly concentrated, with the same 昀椀rm or 昀椀rms persistently com- manding large and stable market shares. Markets with a large SOE footprint that have not been subject to privatization have tended to retain their structure over time. This is particularly true in the electricity and gas production and import subsectors. Other markets, including air transportation and fertilizer production, remain concentrated even though they lack strong network e昀昀ects or other charac- teristics of natural monopolies. The enduring concentration of these normally contestable markets likely re昀氀ects uneven competitive playing 昀椀elds due to the preferential tax treatment of incumbents and/or unnecessarily high administrative barriers to entry, including restrictions on foreign investors (Figure 17). FIGURE 17 Market Concentration in Key Sectors with SOE and Oligarch Participation Market share of largest player (%) 100% Energy imports Dry eggsGas imports 80% Fertilizers Airlines Tomatoes Oil Energy extraction 60% Generation Airports Iron ore Mobile 40% Coal telecom Shell eggs Poultry 20% Pork Ports Milk Meat Grain Concentration Low Medium High index (HHI) (
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 19 FIGURE 18 Does One SOE Hold More Than 50% FIGURE 19 Does One Politically Connected Firm of the Market? Hold More Than 50% of the Market? No No Yes Retail Banking Insurance Construction Fixed broadband Hotels Transportation and storage Electricity generation Grain Energy generation Electricity import Meat Shipbuilding Gas generation Milk Shipping lines Gas import Chemicals Media Railways Aluminum Sports Airports Titanium Pharmaceuticals Water cargo transport Chemicals Real Estate Oil extraction Fixed broadband Coal Health care Ports Steel Aerospace manufacturing Airlines Yes Titanium Ethyl alcohol production Shipping lines Engineering Confectioneries Retail Banking Transportation and storage Mineral fertilizers Shell eggs Coal Real Estate Chemicals Meat Airlines Poultry Iron ore Grain Dry eggs Note: This 昀椀gure shows markets with SOE presence and potential private-sector Note: This 昀椀gure shows markets with oligarch presence for which information on investment for which information on market shares is available. market shares is available. FIGURE 20 Does One SOE or Politically Connected FIGURE 21 Has a New Producer Entered Firm Hold More than 50% of the Market? the Market in the Last Three Years? No No Yes Fixed broadband Electricity generation Ports Electricity import Electricity generation Shipbuilding Gas production Electricity import Shipping lines Gas import Gas production Transportation and storage Railways* Gas import Insurance Airports Oil extraction Pharmaceuticals Yes Health care Railways Steel Chemicals Airports Titanium Construction Oil extraction Airlines Aluminium Hotels Aerospace manufacturing Water cargo transport Media Real Estate Ethyl alcohol production* Aerospace manufacturing Sports Meat Retail banking Health care Real Estate Grain Mineral fertilizers Ethyl alcohol production Construction Confectionaries Sports Retail banking Hotels Engineering Insurance Engineering Confectioneries Pharmaceuticals Shipbuilding Mineral fertilizers Shell eggs Airlines Coal Chemicals Meat Water cargo transport Poultry Coal Poultry Transportation and storage Milk Iron ore Grain Media Titanium Dry eggs Milk Aluminum Steel Ports Fixed broadband Source: Author’s elaboration Source: Author’s elaboration Note: Information on market entry is based on investment announcements and news reports. Market entry is not possible in sectors declared legal monopolies (*). Natural monopolies are excluded from this 昀椀gure.
20 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE New producers have been observed entering just 14 of the 34 markets in which SOEs or politically connected 昀椀rms operate (excluding those classi昀椀ed as legal or natural monop- 32 olies ), and in many cases these 昀椀rms were only able to enter the market after obtaining an explicit government endorsement. Several of the new entrants were large international 昀椀rms with considerable investment resources and the capacity reduce infrastructure gaps and improve service quality (Figure 21). However, even major international players have struggled to enter the Ukrainian market. For example, Ryanair failed to enter the air transportation market in 2017, but it later succeeded in obtaining approval from the Ukrainian government and has announced that it will 33 launch operations in October 2018. Similarly, P&O Maritime—which is owned by DP World Group, the world’s largest port operator—started operations in Ukraine in January 2018 and will provide 34 towing services in the Odessa region. Even in markets that are not dominated by SOEs, entry remains limited. Between 2006 and 2016, the average entry density in Ukraine’s formal private sector was low, both by global standards and by the standards of comparable countries (Figure 22 and Figure 23). Low entry density weak- ens competitive pressure in domestic markets, contributing to low productivity growth. Multiple factors could explain Ukraine’s low entry density, including a lack of investor con昀椀dence due to the country’s di昀케cult macroeconomic and political situation in recent years, but regulatory barriers to entry and policies that protect certain incumbent 昀椀rms almost certainly play a major role in pre- venting open competition. 32 The Law on Natural Monopolies of 20.04.2000 (#1682-III) identi昀椀es the following markets as natural monopolies: transpor- tation of oil and oil products by pipelines, transportation of natural gas and LPG by pipelines, other transportation pipelines, large-volume natural gas storage, electricity transmission and distribution, of electricity (transmission of electric energy by local electricity grids); use of railway tracks, dispatch services, stations and other infrastructure items, providing tra昀케c to general rail transport; air-tra昀케c control, centralized water supply and drainage systems, thermal energy transportation infrastructure, riverine and maritime port services, certain airports, and household waste-disposal services. 33 See Ryanair’s corporate website: https://corporate.ryanair.com/news/ryanair-cancels-planned-ukraine-services-as-kiev-air- port-fails-to-honour-commitments/ and https://corporate.ryanair.com/news/ryanair-brings-low-fares-to-ukraine/ 34 See SD Capital Press O昀케ce: http://sd.capital/2018/01/04/the-worlds-largest-port-operator-dp-world-group-enters-the- ukrainian-market/
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 21 FIGURE 22 New Business Entry Density FIGURE 23 New Business Entry Density Gap (average 2006–2016) Among Comparator Economies (2006–2016) 30 16 14 25 12 10 e 8 t 20 a 6 y r 4 15 2 y densit 0 y a tr 10 ia tia ia via v En oa onia g t key aine r eor hstanLa oland ur r BulgarC epublicEstG Hungar oldo P omaniaT Uk 5 Ukraine azak LithuaniaM R ech R K z 0 C 6 7 8 9 10 11 12 Observed Predicted log GDP per capita PPP (constant 2011 $) Source: World Bank Enterprise Surveys and WDI database Source: World Bank Enterprise Surveys and WDI database Note: Bars show the observed density rate (average 2006–16). Dots show the bench- Note: New business entry density is de昀椀ned as the number of newly registered mark predicted by a (linear) regression with (the log of) average GDP per capita formal private limited-liability 昀椀rms per 1,000 working-age people (ages 15–64). 2006–16 adjusted for (2011) purchasing-power parity as the explanatory variable. in sum, Ukraine’s markets are highly concentrated and frequently dominated by SOEs and politically connected 昀椀rms, with very limited entry observed in recent years. Market concen- tration is aggravated by a lack of contestability in markets where competition is viable. Many large players are SOEs, which are not subject to the same general pro昀椀t-maximizing incentives as private 昀椀rms, while others enjoy strong political connections that enable them to lobby for regulatory protec- tion. Moreover, multi-market contacts facilitate explicit or tacit collusion among market players. The following section examines barriers to entry, regulatory capture and protectionism, and the uneven enforcement of regulations in greater detail. High Prices and Low Service Quality indicate Ample Space to improve Market Dynamics and Generate E昀케ciency Gains The combination of a heavy SOE footprint, numerous politically connected 昀椀rms, high levels of market concentration, pervasive cross-ownership, and low rates of market entry have undermined competitive pressure and left little room for investment in value addition. Many Ukrainian markets, even those in which competition would typi cally be viable, are structured around a single dominant SOE or a small group of powerful 昀椀rms, some of which enjoy regulatory protections and advantages. Intense market concentration coupled with widespread cross-ownership weakens e昀케ciency incentives and greatly exacerbates the risk of anticompetitive behavior. An econometric analysis of 昀椀rm-level data from 2006 to 2015 reveals
22 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE statistically signi昀椀cant di昀昀erences in economic outcomes between politically connected and non-connected 昀椀rms, even when controlling for 昀椀rm size, age, and sector. Not only are politically connected 昀椀rms less productive than non-connected 昀椀rms, they also tend to have slower turnover, employment, and total factor productivity (TFP) growth rates. Estimated di昀昀erences range from –5.7 to –16.2 percentage points for the turnover growth rate, –13.0 to –28.9 percentage points for 35 the employment growth rate, and –4.6 to –10.1 percentage points for the TFP growth rate. An anemic competition environment in upstream sectors increases input costs and weakens service quality, undermining e昀케ciency across the economy. SOEs and politically connected 昀椀rms are especially prevalent in productivity-enabling services (e.g., utilities, transpor- tation, and logistics) and sectors that supply industrial inputs (e.g., cement, steel, fertilizers, and oil products), and competitive distortions in these markets negatively a昀昀ect overall domestic produc- tion and export competitiveness. Ukraine ranked 83rd out of 140 countries on the 2017–2018 Global Competitiveness Index (GCI), and its overall score (4.11 out of 7) has improved little over the past 昀椀ve years. Among Eastern European countries, only Moldova and Bosnia and Herzegovina scored lower on the GCI. Ukraine’s iCT sector is the weakest among comparator countries—a serious liability for an economy in which services account for 60 percent of GDP. Ukraine scores poorly on the ICT Development Index, lagging regional comparators such as Moldova and Romania (Figure 24). Ukraine’s internet bandwidth per internet user is especially low at just 45 percent of the European average. FIGURE 24 ICT Development Index 2017 10 8 6 4 2 0 ia a ia y g key v tia via aine oa t onia r eor ur hstan oland r La Uk G T oldo omania Bulgar P Hungar epublic C Est M R azak Lithuania K ech R z C Source: International Telecommunication Union (2018) 35 World Bank Group and UK Good Governance Fund (2018). Crony Capitalism in Ukraine: Impact on Economic Outcomes.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 23 High costs and low service quality are especially FIGURE 25 Port Infrastructure Quality, Ukraine prevalent in Ukraine’s port sub sector. In 2016, the and Comparator Countries (% of respondents Ministry of Infrastructure reported that average port reporting “poor” or “very poor” quality) charges in Ukraine were 2.5 times higher than those in Bulgaria other regional ports. In 2015, cargo transshipment tar- i昀昀s in Odessa and Mykolaiv were US$15 and US$13 per Czech Republic ton, respectively, about 2–3 times the European average Ukraine of US$5–7 per ton.36 In surveys conducted for the World Kazakhstan Bank’s 2016 Logistics Performance Index, respondents Lithuania in Ukraine were more likely than those in most compar- Turkey ator countries to report that port infrastructure quality 0% 20% 40% 60% 80% 100% was either poor or very poor (Figure 25) and that port Source: WBG 2016. Logistics Performance Index charges were high or very high (Figure 26). Although tar- Note: In Estonia, Georgia, Moldova, Poland, Latvia, Romania, and Hungary, i昀昀s reportedly decreased by 30 percent in 2016–17, there 0% of respondents found quality of port infrastructure to be low/very low is still ample room for improvement. The poor condition of Ukrainian railways increases FIGURE 26 Port Charges, Ukraine and Comparator Countries (% of respondents reporting “high” transportation costs. The current rail network (exclud- or “very high” charges) ing Russian-controlled Crimea and Donbas) covers more than 41,500 kilometers. However, the poor condition of Ukraine the country’s railways does not allow for high-speed Kazakhstan travel. In 2016, Ukrzalyznytsia, a state-owned railway Turkey that provides 50 percent of passenger and 82 percent of Estonia cargo transportation services, reportedly ful昀椀lled only 30 Romania percent of demand for cargo cars and locomotives, forc- ing potential exporters to wait and pay for idle time.37 Czech Republic Bulgaria Domestic prices for basic food products that Latvia comprise a significant portion of Ukraine’s 38 Lithuania food consumption basket appear to be 20–50 percent higher than prices for comparable goods in 0% 20% 40% 60% 80% 100% 39 Source: WBG 2016. Logistics Performance Index OECD countries and regional peers. Until 2016, the government regulated the prices of food products Note: In Georgia, Moldova, Poland, and Hungary, 0% of respondents found port charges to be high/very high 36 KyivPost (2017). Ukraine’s infrastructure needs $30 billion, more transparency. Available at: https://www.kyivpost.com/ business/ukraines-infrastructure-needs-30-billion-transparency.html 37 Ibid. 38 The following basic food products are included in the price analysis: apples, bananas, beef, butter, chicken, eggs, fresh 昀椀sh, lettuce, local cheese, pasteurized milk, mushrooms, onions, oranges, peanut or corn oil, pork, potatoes, tomatoes, white bread, white 昀氀our, white rice, and white sugar. 39 Using 2010-2017 data from Numbeo and the Economist Intelligence Unit (EIU) (see Annex).
24 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 40 considered “socially important,” yet a cross-country empirical analysis indicates that basic food products in Ukraine cost as much as 50 percent more than they do in OECD countries.41 The di昀昀erences in the average prices for key food products in Ukraine vis-à-vis its comparators may indicate a lack of competition in certain food-product markets. While prices for chicken and eggs are broadly similar to those of comparator countries, which may re昀氀ect relatively robust competition from EU producers in the Ukrainian poultry market, Ukrainian households appear to pay signi昀椀cantly more for milk, onions, oranges, tomatoes, wheat bread, and white rice than do households in comparable OECD countries and regional peers (Table 1). Industrial associations, such as the Dairy Alliance and the Food and Vegetables Association, operate in many of these markets, and higher prices may indicate the 42 presence of price or market-sharing agreements, with negative implications for consumers. in addition, a comparison of food prices in key cities reveals that residents of Kiev, Ukraine’s capital, pay about 40 percent more, on average, for basic food items than do residents of similar cities in the OECD and regional comparator countries. The results of the city-level analysis remain robust when using alternative datasets that include other major Ukrainian cities like Dnipropetrovsk, Kharkiv, Lviv, Odessa, and Sumy. A domestic price comparison shows that food prices were about 13 percent higher in Kiev than in other Ukrainian provinces between March 2014 and December 2017, even after controlling for demand drivers (e.g., population and disposable income) and cost drivers (e.g., labor and transportation costs).43 Oligarchs dominate several of Ukraine’s major food-product markets. These include chicken, eggs, rice, and sugar. While chicken and egg prices are broadly in line with those of comparable coun- 44 tries, the average Ukrainian prices for rice and sugar appear to be signi昀椀cantly higher. 40 Food products classi昀椀ed as socially important include 昀氀our, bread, pasta, cereals, sugar, beef, pork, poultry, sausage products, milk, cheese, sour cream, butter, sun昀氀ower oil, and buckwheat meal. See http://artlife.rv.ua/?area=ukrainian-news/31139 41 The Numbeo database includes data for 35 OECD countries (Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Latvia, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Swit- zerland, Turkey, the United Kingdom, and the United States) and 7 additional regional comparators (Bulgaria, Croatia, Georgia, Kazakhstan, Lithuania, Moldova, and Romania). The EIU database includes data for 32 OECD countries (Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Swit- zerland, Turkey, the United Kingdom, and the United States) and 3 additional regional comparators (Bulgaria, Kazakhstan, and Romania). The analysis considers di昀昀erences in demand and cost factors impacting prices such as income per capita, import costs, and tari昀昀 rates, and all speci昀椀cations are included in Table A.1 in the Annex. The results are generally robust to the inclusion of additional regional peers (see Table B.1 in the Annex). While the analysis uses purchasing-power parity conversion rate, the results remain robust when the market exchange rate is used (see Tables C.1 and D.1 in the Annex). 42 An in-depth competition assessment could analyze market dynamics and gauge the risk of anticompetitive outcomes. 43 The analysis uses food-price data from the World Food Program for 23 basic food products: beef, beetroots, buckwheat meal, butter, cabbage, carrots, chicken, curds, eggs, pasteurized milk, mixed sausage, onions, pasta, pork, potatoes, rye bread, salted pork fat (salo), sour cream, sun昀氀ower oil, white bread, white 昀氀our, white rice, and white sugar. For the full speci昀椀cations, see Tables A.2, B.2, and C.2 in the Annex. Price dispersion across Ukrainian provinces is generally low for the food products analyzed, but some products such as salo, cabbage, and potatoes exhibit greater price dispersion (see Figure A.4 in the Annex). 44 For all speci昀椀cations, see Table A.3 in the Annex.
e ed . [3]ts tanc — mpor11% 2.6% 5.9%3.1%0.9% 0.1%3.4% 2.0% 0.1%2.0%2.0% ger Guidelines mpor et; eggs (558), an er I of I k e [2] ws: (i) unconcentratontal M tancts ed marolloiz 2.7% 3.6% 0.0% 0.0%0.6% 0.4% — 0.7%0.0%3.4% 27% 10.3% mpor I of Expor ely concentrate classi昀椀ed as f age d em els arommission 2010. Hor MFNer 0% 5% v v of Aaloruties)12.7%12% 10%10% 10% 11% 10% 10% 15% 50% ari昀昀 A V D rade C T ( T - - - ederal y tion sso eed eed ndustr y Br y Br y Alliance eeders en (1,631), indicating a moderat I ssocia raine raine raine A ssociationssociation of egetables ssociationoducers of oultr oultr ruit and egetables ig Brruit and r P ers Union of UkPers Union of Uk—DairFVA—APF V A — — — National Aciation of Sugar PUkts: chick tment of Justice and F tion oducepar a et. Based on the HHI, the concentration le tical rx x — x x — x — — — — — k .S. D er eg wing pr V t ed maree U n ollo I e or the fe 2500. S har [1] v gest er y eggs et S y 38% — — — — — la 23.2%23% 22% 80% 28% arkof LarP ets: HHI abo M 31% shell eggs /87% dr k ed mar irmsial ial ial irschman index (HHI) f er v ies er 昀椀ndahl-He sugar (603), indicating an unconcentratr/ y/uk er 270 industroducerser 200 industroducers; oer 3 er 50 industroducers Number of Fv v v 100 bak v O pr O pr 1,000 households—O— — — — > — — O pr et; and whit k ts ⸀ or o昀椀le/countr ⸀ t ⸀ ta) s a ed mar ⸀ v v oduc ie ities Da r ities K C IU ed the estimation of a Her ompar(E igherigher igherigherigher igherigherigher w een 1500 and 2500; (iii) highly concentrat C — — N/AH H H H H — H H H w y alloely concentrat ood P ⸀ ainian C , s .media.mit.edu/en/pr r , y v sk VIV itiesta) vailabilitets: HHI bet v , L k o v or C ie t aine/Uk, K a ed mar ndividual Fropetriv or I nipr ompar(Numbeo Da mation. Data a D hark C igher igher igher igher igher or es f es in UkKOdessa, and Sum— — H — — H N/A H H N/AH N/A mation, see https://atlas ric ely concentrator tur er oil (1,747), indicating a moderat vailable infwther inf truc el of Paine ta) v r OECD or fur e ⸀ Da et S L Uk vs(Numbeo igherigherigher igher igher igher igher et; sun昀氀o ark — — H H H H N/A H H N/AH N/A k M w 1500; (ii) moderat t ead ice MCU and publicly aed maredia. 2016. F 1 en oes k e bre 昀氀oure re sugar ce: A tlas M. oduc ilk r ets: HHI belo ABLE r ggs ocal cheese omat our k bid P Chick E L M Onions OrangesPo T WhitWhitWhitWhit S MIT A I T [1]unconcentratmar[2][3]
26 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE in addition, domestic prices for certain internationally traded food commodities do not appear sensitive to global price changes, suggesting that domestic distortions may limit the pass-through e昀昀ect of imports.45 An analysis of various food commodities reveals that domestic prices for rice and sugar do not respond to international price changes. The insigni昀椀cant impact of international prices on domestic prices may re昀氀ect price regulations, which applied to 46 these two food products and many others during the period under analysis. Rather than acting as a ceiling to keep staple food prices a昀昀ordable, Ukrainian price regulations may actually have served 47 as a 昀氀oor, preventing downward price adjustments due to import competition. In August 2016, the government launched a pilot project eliminating state price regulation on most of the food products, and in July 2017 these price regulations were permanently lifted. Reforming Ukraine’s Regulatory Policies and Market interventions Can Reduce Distortions and improve Outcomes for Firms and Consumers Many Ukrainian markets lack adequate competitive pressure to ensure e昀케ciency, and government interventions play a major role in shaping market outcomes. Given the pro- pensity of SOEs and politically connected 昀椀rms in concentrated markets to lobby for regulatory protections or undue advantages, the design and implementation of government interventions have a major impact on economic e昀케ciency. In this context, aligning economic policies with competitive- neutrality principles will be vital to restart productivity growth. Competitive neutrality is espe- cially critical in upstream sectors and markets that are not naturally conducive to contestability, as even minor distortions or regulatory barriers in these areas can negatively impact economy-wide productivity and competitiveness. Excessive state control over the economy and the prevalence of barriers to entry in net- work industries are major obstacles to competition. Ukraine’s aggregate Product Market Regu- 48 lation (PMR) indicator is broadly comparable to the OECD average (Figure 27). However, regulations 45 A pass-through analysis was conducted to determine whether domestic prices of rice, sugar, sun昀氀ower oil and wheat 昀氀our respond signi昀椀cantly to di昀昀erences between international and Ukrainian prices and, if so, to determine the speed of adjust- ment and whether upward and downward price adjustments are symmetrical. International prices were obtained from the World Bank’s Commodity Price Database, and Ukrainian national average prices were obtained from the World Food Program. 46 Price data are from March 2014 to December 2017. 47 National Investment Council. 2017. https://mfa.gov.ua/media昀椀les/sites/uae/昀椀les/NIC_Middle_Year_Report_2017.pdf 48 The OECD-WBG PMR data are part of the WBG’s Markets and Competition Policy Database. Each area addressed within the PMR methodology sheds light on speci昀椀c restrictions of the regulatory framework, both economy-wide and in key sectors of the economy. These areas include: electricity; gas; telecommunications; post; transport; water; retail distribution; professional services; other sectors; administrative requirements for business startups; treatment of foreign parties; and other issues such as SOE governance or antitrust exclusions and exemptions.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 27 FIGURE 27 Product Market Regulations, Ukraine and Comparator Countries, 2018 (index scores from 0 [least restrictive] to 6 [most restrictive]) 6 5 4 Barriers to Investment, 0.41 3 State Control, 0.87 Barriers to Entry, 0.26 2 1 0 y ia o y y as via eru tia ica ica key azil ageonia age aine t enia xicP adoraguaoa fr gypt ndiatina er er Chile r La oland v e r emala aguaur Br E China I oliviaunisia v Est epublicepublicvUk P omania M alv C t anamaepublicJamaicaT cuadorgenB T Hungar Bulgar R Slo olombia icar P osta Rar Urugua E r Lithuania C El SN Guaouth A C P hilippines Hondur A ak R S P op 5 A v ech R T z OECD A SloC ominican R D Source: Markets and Competition OECD-WBG PMR indicators. 2018 PMR scores for Ukraine. Notes: The top 5 performers are the Netherlands, the United Kingdom, the United States, Austria, and Denmark. that allow for state control over certain aspects of the economy or that establish barriers to compe- tition in network industries are high by international standards and may impose binding constraints on competition. As described above, Ukraine has a much larger SOE footprint than do most comparator countries. Ukraine’s PMR score for state control (2.62) is well above both the OECD average (1.72) vand the scores of neighboring countries such as Hungary (2.05) and the Slovak Republic (2.17) (Figure 28). SOE governance is the largest contributor to the restrictiveness associated with public ownership, and Ukraine’s PMR score in this area (4.5) signi昀椀cantly exceeds the OECD average (3.57).49 49 Higher scores indicate more restrictive policies and regulations.
28 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE FIGURE 28 Restrictiveness of Product Market Regulations Pertaining to State Control, Ukraine and Comparators, 2018 (index scores from 0 [least restrictive]to 6 [most restrictive]) 4.0 3.0 57% 2.0 33% 33% 1.0 0.0 o y y ia y eru via aziltia as ica ica key ageoniaageP ador xict agua enia oa aine fr tinagypt ndia er er e La Chile emala aguav Br r r oland oliviaurChinaE unisiaI v Estv alvepublicM anama t epublicepublic C Uk omania JamaicaP cuadorB T gen T Hungar icarP olombiaarSlo R BulgarUruguaosta RE r El S N LithuaniaGuaC P hilippinesHondur C outh A A ak R P S op 5 A ech R v T OECD A z C Slo ominican R D Source: Markets and Competition OECD-WBG PMR indicators; 2018 PMR scores for Ukraine. Note: The top 5 performers are the Netherlands, the United Kingdom, the United States, Austria, and Denmark. Restrictive regulatory frameworks in network industries—where many Ukrainian SOEs operate—limit the entry of private firm in segments where competition is viable. Ukrainian law defines certain segments of the electricity, gas, and transportation sectors as nat- ural monopolies, while the postal services, railways, alcohol production, and water distribution 50 markets are all legal monopolies. While natural monopolies can, in principle, be efficient, legal monopolies may restrict entry in markets where competition would be both viable and beneficial. The entry of new 昀椀rms is explicitly capped in several services markets. Bilateral agreements impose quantitative limits on the entry of foreign 昀椀rms in the road passenger transportation sub- sector, and the participation of foreign investors in the 昀椀xed-line telecom sector is limited. These caps ultimately reduce competitive pressure both in markets subject to regulatory restrictions and in substitute markets. 50 Ordinary letters weighing up to 50 grams and simple postcards are carried by Ukrposhta, which is designated as the national postal services provider under Art. 15 of the Law on Postal Services of 04.10.2001 #2759-III (http://zakon2.rada.gov.ua/laws/ show/2759-14). Passenger and freight railroad transport services are provided by Ukrzaliznytsia, which is designated as the national basic railroad service provider under Art. 4 and 9 of the Law on Railroad Transport (http://zakon2.rada.gov.ua/laws/ show/273/96-%D0%B2%D1%80) .Ethyl alcohol is produced by SOEs in line with Art. 2 of the Law on State Regulation of the Production and Sale of Ethyl, Cognac, and Fruit Alcohol, Alcoholic Beverages, and Tobacco Products (http://zakon3.rada.gov. ua/laws/show/481/95-%D0%B2%D1%80)
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 29 Market concentration and regulatory protections can facilitate anticompetitive behavior. For example, a lack of clarity regarding the regulation of 昀椀rms with signi昀椀cant market power and the use of termination rates can encourage abuse of dominance in the 昀椀xed-line telecom market. Likewise, the absence of regulations or guidelines aimed at preventing collusion by trade associations could facilitate price 昀椀xing or market sharing. The current con昀椀guration of Ukrainian market institutions and their regulatory frameworks is inconsistent with ensuring competitive and e昀케cient markets. Even in markets were an inde- pendent regulator exists, SOE dominance and regulatory constraints can still inhibit competition. For example, without extensive SOE unbundling and regulatory liberalization of the wholesale electricity market, private investment in the generation and transmission segments will be inadequate and may even accentuate weaknesses in competitive neutrality and facilitate anticompetitive practices. Con- versely, regulatory reform may be insu昀케cient to foster competition in the absence of an independent sectoral regulator. The liberalization of certain transport subsectors (railways, ports) and telecom assets (spectrum allocation) may not facilitate market opening or accelerate growth without e昀昀ective sectoral regulators. In addition, inadequately enforced regulations in the mobile telecom and airport subsectors may undermine service provision and encourage anticompetitive behavior. Similarly, a lack of regula- tory clarity and transparency in the road transportation and 昀椀xed-line telecom subsectors may distort network investments, increase administrative costs, weaken incentives to comply with regulations, and potentially advantage larger or better-connected market players. Table 2, below, maps the impact of regulatory distortions and constraints on competition across sectors, and Box 1 identi昀椀es the potential gains from reducing regulatory restrictiveness in network industries and services. Beyond the aspects captured by the PMR, in practice: (i) the regulatory framework is implemented in a discriminatory manner in the network and enabling sectors, (ii) there is a lack of competitive neutrality, including in markets dominated by SOEs, and (iii) enforcement of the overall competition policy and law is not fully tackling anti competitive behavior. Unclear regulations and uneven or discriminatory enforcement increase administra- tive costs, weaken compliance incentives, and tend to bene昀椀t large 昀椀rms and incum- bents. Ukraine scores 5.8 out of 10 on the Bertelsmann Stiftung Transformation Index for market organization, lagging behind the average for comparator countries. The index measures the perception that clear rules are in place to guide stable, market-based competition. Moreover, numerous instances of discrimination have occurred regardless of the regulatory framework. For example, Ukraine International Airlines has historically received preferential rates for passenger transfers, aircraft service, and parking space at the country’s largest airport, the state-run Kiev Boryspil, as well as preferred parking space for aircraft and prime real estate in the airport termi- nals. In some market segments, such as airline baggage-handling services, the regulatory frame- work is limited, and enforcement is wholly inadequate.
ed s s ix Ye Ye omsF elec s T obile42%No Ye13 M ts s irpor60%Ye No A 80%No s irlines Ye t A > ts s or Ye No ansporP r T s y a s 1 90%Ye No ailw > R oad No s R Ye 56,000 > ors s t ec Ye istribution D s s Ye Ye asansmission G r ts in Enabling ST ain t 90%s s Ye Ye mpor > onstrI tion s s a Ye Ye ener 50–90% G ompetition C 25 trum allocation. No istribution D ding spec tions and C egar or isty s No1 100%Ye tricitansmission , notably r r tion DT Elect es s tur egula 90%Ye N/A mpor > ts I et R et struc ark tion s s ying 昀椀eld or lacks independence a Ye Ye e conduc ener 60% e pla egulat G y - entionsy n y gest v eig e y enc e esenceer e anticompetitivential orangements and marktivor tur m ms t entr t the competitiver has ery y frameecs elaboration Examples of Me of laror pric ory ef or ’ ticipation in t or or elecommunication R 2 gest 昀椀r-secestre ban on entro prorstural or* egulatuthorT et strucet sharer (%)e pareernment intiminat egulategulatk or ine昀昀y ky v hat r hat facilitathat distgest pla it ce: A ar ivato T elativTollusionT eatment of f or e: * the ABLE MarkMplaStatthe larregal or natural egulategulations P Number of 昀椀rGa) Lmonopolies*Rb) CAbusec) Laraccess tconditionsDiscrtroperatInstitutional arrNo strucunbundling of SOENo rNo independent rNo rwrLack of rclarLack of transparour T S Not
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 31 BOX 1 Potential Gains from Reducing Regulatory Restrictiveness in Network Industries and Services n A less-restrictive regulatory framework could signi昀椀cantly enhance competition in Ukraine, especially in network industries and services. Simulations show that a decrease in regulatory restrictiveness in network-based input sec- tors (e.g., electricity, gas, and water supply), as well as postal and telecommunications services, retail and wholesale trade, transportation, and other business services, would signi昀椀cantly accelerate the growth of value addition, generating up to 0.015 percentage points of additional annual GDP growth, all else being equal. As Ukraine’s annual GDP growth rate has averaged 2 percent over the past two years, this increase would be signi昀椀cant. Moreover, this estimate is a lower-bound 昀椀gure, as it re昀氀ects the country’s current regulatory framework; regulatory reforms and improvements in enforcement could further strengthen competition in these industries, magnifying their contri- bution to growth. FIGURE 29 Regulatory Restrictiveness in the Railway Sector, Ukraine and Comparator Countries (index scores from 0 [least restrictive]to 6 [most restrictive]) 6 Ukraine, 6.00 5 4 OECD Average, 3.52 3 2 1 0 u e c d y c e e a a r e s y y r t a r ia i ia ia r i ia iaia zill ia ia o e la o p i g l n l g r i n icat n ca a e ica e n n a b viaa m d i a i ina y is a b tviaa b a a i h ti a d n u k r P r a an o l g r en xicolr a n a i R r h f n u u a u g v m e o B C n I oa a r p m u adg e m st L o n e l n m r v e a C A u E u v p h P p v u lo B e a l p t ug T c o t E u e lo M g a C a Uk i st r h T A i A B S o P J l a t E R Re H r S i o U 5 L k RD C A l h u C u h a E P G o p c v C S o e E T Cz loO S Source: Markets and Competition OECD-WBG PMR indicators. Note: The top 5 performers in the railway sector are the United Kingdom, Peru, Romania, the Czech Republic, and Canada; information for Nicaragua, the Dominican Republic, Paraguay, and Honduras is not available. Discriminatory treatment tends to be especially problematic when institutional arrange- ments create con昀氀icts of interest between regulatory policies and commercial objectives. For example, the railway SOE, Ukrzaliznytsia, handles freight traffic (and the associated infra- structure assets), and it holds a legal monopoly on international and domestic passenger trans- portation. This market structure, combined with the lack of an independent sectoral regulator, makes proper regulatory enforcement almost impossible. In the water transportation subsector,
32 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE the government simultaneously acts as an operator and a regulator, causing conflicts of interest. The lack of both an independent regulator and a regulatory framework that includes third-party access regulations creates inconsistency between the state’s regulatory and operational roles and incentivizes the creation of barriers to entry. The regulatory framework or implementation weaknesses related to the existing pol- icies applicable to SOEs and private sector point to the lack of competitive neutral- ity. The regulatory framework for SOEs grants them advantages over private 昀椀rms. Moreover, corporate governance rules di昀昀er depending on whether SOEs are fully public 昀椀rms or joint-stock 51 companies, and while Ukrainian legislation de昀椀nes commercial and non-commercial SOE activ- ities, unbundling is not yet e昀昀ective.52 SOEs are also legally protected from competition in other- wise competitive sectors that are not listed as legal or natural monopolies. The discretionary enforcement of regulations further distorts the competitive playing 昀椀eld. Governmental respon- sibilities for SOE oversight are dispersed across institutions with overlapping mandates, and SOE performance is not transparently reported, preventing an objective assessment of their e昀昀ective- ness and market impact. As of November 2015, only 40 percent of operational SOEs had published 53 reports online. Moreover, SOEs have traditionally enjoyed preferential access to 昀椀nance through state-owned banks or government guarantees, and public guarantees to SOEs were equivalent to 18 percent of GDP in 2014. Direct subsidies to SOEs represented around 2.5 percent of GDP in 2014 and 1.3 percent in 201554 with direct subsidies to the coal and energy sector alone accounting for about 1 percent of GDP.55 inadequate competitive neutrality extends to competition among private 昀椀rms, as polit- ically connected business groups use various channels to obtain preferential treatment from the government. Such treatment may include favoritism in the public procurement process, preferential access to privatized state assets, trade regulations that restrict imports, favorable tax treatment, subsidized loans from state-owned banks, concessional development 昀椀nancing via public 56 debt guarantees, and state aid in the form of direct transfers from the budget. Figure 30, below, presents a competitive neutrality gap analysis for Ukraine. 51 While joint-stock companies are subject to the same corporate rules as private 昀椀rms, fully public SOEs are not. See Art. 73 of the Commercial Code. 52 An unbundling process is underway in the gas and electricity sectors. An SOE was formerly responsible for electricity generation, importation, supply, transmission, and distribution. However, under Art. 32 of the Law on the Electricity Market of 13.04.2017 #2019-VIII (http://zakon3.rada.gov.ua/laws/show/2019-19), which took e昀昀ect on December 12, 2017, electric- ity transmission is now separated from generation, distribution, and supply. According to Art. 47, which will take e昀昀ect on December 12, 2018, electricity distribution is to be separated from generation, transmission, and supply. 53 MEDT. 2015. Reform of State-Owned Enterprises. Presentation in November 2015. 54 IMF. 2016. Ukraine. Technical Assistance Report – Reforming Management and Oversight of State Assets. 55 IMF. 2015. IMF Country Report No. 16/31, Ukraine, Reforming Management and Oversight of State Assets, p. 27. 56 World Bank Group and UK Good Governance Fund. 2018. Crony Capitalism in Ukraine: Impact on Economic Outcomes. p. 6.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 33 FIGURE 30 Competitive Neutrality Gap Analysis Competitive neutrality Subsidiarity analysis: the role of the State in the economy Firm-level principles: Separation of SOE commercial and non-commercial activities 1 Streamlining the operational 2 Identifying the costs of 3 Achieving a commercial 4 Accounting for public form of government business any given function rate of return service obligations No provisions in Ukrainian legislation Draft methodology for separating No requirement to show: a positive Lack of transparency and objective requiring business separation (legal commercial and non-commercial NPV in investments; market criteria in the compensation of PSOs Ukraine developments underway in electricity activities of SOEs to be adopted consistent rate of returns in sales delivered by SOEs and gas) SOEs do not disclose their No private sector benchmark of performance SOE transactions Legislation requires business Accountancy for separating SOEs commercial operations and Compensation paid to SOEs for the separation of SOEs commercial and non-commercial investments are required to have provision of PSOs is based on Benchmark activities of SOEs positive NPV, market consistent transparent accountability and SOEs objectively assessed based on rate of returns and to being objective criteria. Cross-subsidization transparent performance reports measured based on private sector is avoided. performance Principles embedded in cross-cutting regulatory frameworks and sectoral policies 5 Regulatory neutrality 6 7 Tax neutrality 8 Debt neutrality and Public procurement outright subsidies Preferential access to trade protection Preferential access to public SOEs receive tax exemptions, subsidies and debt guarantees (tax exemptions and state assets for politically procurement for politically and subsidies are also available to private sector) Ukraine connected rms connected rms Preferential access to subsidies, tax exemptions, state guarantees and others, for Legal monopolies established by law; Design facilitates bid rigging politically connected rms. sectors exempted from the practices privatization law Companies compete on a level playing Market based competition in public Tax exemptions, subsidies and debt guarantees granted following competitive eld, with no trade protection and procurement neutrality principles Benchmark market based competition for rights to Bids/auctions designed to reduce invest in state assets the risks of bid rigging Sectors where competition is feasible are open to private investment Control of state support measures to SOEs and private sector operators Level playing eld in the market between SOEs and privately owned operators Source: Author’s elaboration While product market regulations are relatively progressive, serious implementation gaps and pervasive de昀椀ciencies in competitive neutrality underscore the considerable scope for improvement. Inadequate institutional and regulatory arrangements in input and network sectors increase the cost to compete, and weaknesses in competitive neutrality bene昀椀t some players over others, distorting the allocation of resources (Figure 31). Even sectors that were technically liberalized continue to perform poorly. For example, the lack of operational indepen- dence by the telecommunications regulator and the presence of an SOE in charge of spectrum assignment has e昀昀ectively precluded an e昀케cient allocation of the mobile telecommunications spectrum, which may help explain why Ukraine’s international internet bandwidth per internet user is less than half the European average (Box 2). Further improvements in the enforcement of competition policy will be necessary to ensure the e昀昀ectiveness of the legal framework. Strengthening enforcement is particularly important for the Anti-Monopoly Committee of Ukraine (AMCU). Within its competition-advocacy mandate, the AMCU
34 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE FIGURE 31 An Analysis of Implementation Issues in Ukraine Using the Markets and Compe- tition Policy Assessment Tool Market features Economies of scale vs Multi-market contact Vertical integration SOEs and PCFs market size Government regulations Pro-competition interventions aim at: Opening markets to entry, reducing rm dominance Eliminating rules that could be conducive to collusion or increase the cost to compete Leveling the playing eld for players in the market Enforcing e ective antitrust policy Public implementation Requires an adequate institutional set up Commercial, regulatory and political objectives must be separate and independent Firms react to market features and government interventions, leading to market outcomes Market outcomes Anticompetitive Concentration and Investment Productivity behavior market entry Source: Author’s elaboration Note: The grey arrow represents the in昀氀uence of SOEs and politically connected 昀椀rms over regulatory design and enforcement, which directly—and negatively—impacts market outcomes. is expected to work with sectoral regulators and line ministries to identify and address competition con- straints in key sectors of the economy. However, the AMCU’s enforcement capacity is inadequate to police cartel behavior and discourage harmful abuses of dominance. The AMCU’s independence vis-à-vis the state and the private sector remains inadequate, and its existing institutional guarantees and 昀椀nancial and human resources are inadequate to ful昀椀ll its mandate. In addition, the unclear prioritization of com- petition principles across all stages of the public procurement process and the limited enforcement of rules against bid rigging compromise public expenditure e昀케ciency and distort the competitive playing 昀椀eld. To minimize competitive distortions associated with state aid, both to private 昀椀rms and SOEs, the authorities should begin by carefully review-ing the state aid granted to large SOEs—especially those with poorly de昀椀ned public-service obligations—and to politically connected 昀椀rms, with a view toward minimizing preferential treatment and strengthening the overall state-aid control framework.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 35 BOX 2 The Impact of Market Concentration, Con昀氀icts of Interest, Weaknesses in the Regulatory Framework, and the Lack of an Independent Regulator on the Telecommunications Sector n Due in part to limited competition in the telecommunications sector, Ukraine lags comparator countries such as Romania, Poland, and Kazakhstan on key measures of ICT development, especially internet penetration. Ukraine’s 昀椀xed and mobile telecommunications markets remain relatively concentrated: three operators provide 昀椀xed-line services, Ukrtelecom, Kyivstar and Datagroup. Ukrtelecom owns 昀椀xed-line infrastructure. Ukrtelecom dominates 昀椀xed-line services, with a market 57 share of 80 percent in 2017. The mobile telecommunications subsector features a larger number of players but remains relatively concentrated. The largest providers are Kyivstar, Vodafone, Lifecell, and Intertelecom. Ukrtelecom is also present on the mobile telecom market through its Trimob brand.58 Ukraine’s internet bandwidth per user is equivalent to 45 percent of Europe’s bandwidth. The Ukrainian telecommunications framework is expected to be aligned with the relevant EU legisla- tion, which should help address some of the distortions that currently impact both mobile and 昀椀xed-line services. Fixed-line telecommunication services The licensing and authorization regime for the 昀椀xed-line services market is unclear.59 The blurred distinction between licenses and authorizations increases the cost of competing in the market, as navigating the regime is burdensome for businesses. This ambiguity also allows the National Commission for the Regulation of Communications and Informa- tization (NKRZI) to limit the number of players in the market.60 Moreover, only 昀椀rms registered in Ukraine are eligible to be telecommunications operators, which likely creates a barrier to entry for foreign 昀椀rms.61 The framework for regu- lating operators with signi昀椀cant market power is also poorly de昀椀ned, which may result in either the under-regulation of operators with signi昀椀cant market power or the over-regulation of operators without market power, discouraging 62 innovation and investment and potentially reinforcing the dominance of the incumbent. Generally, telecommunica- tions operators are not subject to rules requiring functional or accounting separation, and the resulting prevalence of (continues on next page) 57 Fixed-line internet service providers included Ukrtelecom (with a market share of 23 percent ), Kyivstar (11.5 percent), Volia (8 percent), Datagroup (4.6 percent), Farlep (2 percent) and Lanet (1 percent) in 2017 (NKRZI, 2019). 58 In 2017, in the mobile telecommunications market, Kyivstar had a market share of 48 percent, Vodafone: 34.4 percent, Lifecell: 14.1 percent, Intertelecom: 3 percent, Trimob: 0.64 percent and Telesystems: 0.18 percent (NKRZI, 2019). 59 Under Article 42(7)(7) of the Telecommunications Law (http://zakon.rada.gov.ua/cgi-bin/laws/main.cgi?page=1&nreg= 1280-15), the following sectoral activities are subject to licensing: (i) providing 昀椀xed-line services and operating telecom- munication networks; (ii) providing wireless access to the telecommunications network and operating telecommunications channels; (iii) providing mobile telephone services and operating telecommunication networks and channels; and (iv) main- taining and operating telecommunications networks, radio broadcasting, and broadcast television networks. While general authorization regime has yet to be developed, Article 42(2) of the Telecommunications Law creates an authorization and reg- istration regime, under which “Business entities wishing to carry out activities in the 昀椀eld of telecommunications shall, not less than a month before the beginning of their submission, submit to the national commission that carries out state regulation in the 昀椀eld of communication and informatization, the application for inclusion in the register of operators, telecommunication providers in the form approved by the national commission that carries out state regulation in the 昀椀eld of communication and informatization.” Only 昀椀rms that have been added to the registry may o昀昀er telecom services, subject to compliance with the applicable rules for the speci昀椀c type of telecom service provided. 60 Law on Telecommunications, Article 47. 61 Law on Telecommunications, Article 27(2). 62 For example, the scope of interconnection obligations for network operators and telecommunications providers under Article 39(1)(12) is unclear.
36 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE vertical and horizontal integration facilitates the abuse of market power, reinforces dominance, and increases the risk of anticompetitive behavior. Finally, the lack of clarity regarding the cost-based measure for national and international termination rates may hinder e昀昀orts to regulate markets where operators have signi昀椀cant market power. Mobile telecommunications The lack of pro-competition regulation in the mobile telecommunications subsector appears to be slowing the devel- opment of mobile services in Ukraine. The NKRZI contributes to developing the National Table of Radio Frequencies 63 Allocation, but the 昀椀nal regulatory decisions are taken by the Council of Ministers of Ukraine (CMU). Similarly, the NKRZI is authorized to grant licenses for the use of the radio spectrum, but determining the fees for issuing, renewing, extending, or duplicating these licenses is the responsibility of the CMU.64 The NKRZI’s limited independence over spec- trum matters risks reinforcing dominance or restricting entry through the discretionary application of rules. The Law on Radio Frequencies divides the authority for spectrum licensing and spectrum assignment, and it allocates the latter to an SOE, the Ukrainian State Center for Radio Frequencies, which appears to carry out both commercial and regulatory 65 functions. This con昀氀ict of interest may compromise the state’s competitive neutrality by encouraging discrimination between operators and protecting vested interests. The transfer, trading, or leasing of radio-spectrum licenses is not allowed, and the lack of a secondary market constitutes a barrier to entry and expansion, which could reinforce market dominance. The absence of a framework for unlicensed portions of the spectrum also hinders innovation and restricts market access among businesses and industries that rely on those portions of the spectrum, such as those that use technologies associated with the so-called “internet of things.” In addition, there is no framework that takes into account 66 competition considerations for sharing infrastructure or assets (including the radio spectrum), which risks facilitating anticompetitive agreements among market players. Infrastructure-sharing agreements can promote e昀케ciency and foster market competition, as they lower barriers to entry and expansion. A system for assessing how active and passive infrastructure sharing a昀昀ects competition must account for the following factors: (i) the degree of cooperation or auton- omy between the parties to the agreement, which is also a function of the passive or active nature of the infrastructure; (ii) the parties’ market power; (iii) the agreement’s duration; and (iv) the broadness, density, and other characteristics of the infrastructure or assets covered by the agreement. 63 Article 14(2)(3) and (4) of the Radio Frequency Law (Law No. 2244-VIII of December 7, 2017) 64 Article 14(2)(5) of the Radio Frequency Law. 65 Article 16(3)(1) of the Radio Frequency Law. For a description of the activities of the Ukrainian State Center of Radio Frequencies, see http://www.ucrf.gov.ua/en/about-the-centre/main-activity/ 66 A draft law #5051 that is currently reviewed by the Verkhovna Rada of Ukraine proposes rules on radio spectrum sharing. See also the Law “On access to construction, transport and power engineering facilities for the development of telecommuni- cation networks”: https://zakon.rada.gov.ua/laws/show/1834-19.
PROPOSALS TO STRENGTHEN CHAPTER MARKET INSTITUTIONS, REGULATION, 3 AND COMPETITION One of the most important goals of a successful competition policy is ensuring that government policies and regulations do not unnecessarily restrict entry, facilitate collusion, increase the cost of competing, or distort the level playing 昀椀eld by providing an undue advantage to speci昀椀c 昀椀rms. In 2016, Ukraine’s renewed commitment to enhance market competition resulted in the AMCU planning the adoption of a new National Competition Policy. As discussed above, weaknesses in the competition framework adversely a昀昀ect market outcomes in Ukraine. Many manufacturing subsectors are dominated by SOEs and politically con- nected 昀椀rms, and barriers to entry contribute to the formation of oligopolistic market structures. Constraints on competition are especially binding in network industries and productivity-enabling sectors, increasing production costs economy-wide. High levels of vertical integration, especially in public utilities such as electricity and gas, can increase the risk of market foreclosure if not prop- erly addressed through unbundling and e昀昀ective regulatory enforcement. While the country’s economic regulations are relatively progressive in principle, their uneven application prevents market institutions from ensuring a level playing 昀椀eld and maintaining competitive neutrality. Moreover, several key sectoral regulators and market institutions are not fully independent and cannot e昀昀ectively support competition. Addressing these challenges will require improvements in the country’s regulatory framework, institutional arrangements, and enforcement mechanisms. A holistic competi- tion policy must go beyond antitrust enforcement to: (i) ensure a competitively neutral administrative environment that minimizes the policy-based advantages of SOEs and politically connected 昀椀rms; (ii) improve the predictability, consistency, and transparency of the regulatory framework, both in principle and in application; and (iii) support the development of robust, independent market insti- tutions. Speci昀椀c recommendations for strengthening Ukraine’s competition policies and institutional arrangements are presented in Figure 32 and Table 3, below. 37
38 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE FIGURE 32 Priority Areas for Strengthening National Competition Policy IMPLEMENTATION AND LEGAL AND REGULATORY ENFORCEMENT Adopt rules requiring business separation Mandate the disclosure of SOE performance in vertically integrated SOE, and mandate information, including the costs associated with that SOEs earn rates of return comparable commercial and non-commercial activities to private-sector operators E ective Develop and revise regulatory frameworks regulatory Unbundle vertically integrated SOEs (e.g., in for the use of unlicensed spectrum, frameworks that the gas and electricity sectors) telecom licensing and authorization, and ensure Enforce rules against cartel behavior and sharing mobile-telecom infrastructure predictability, penalties for violating the Competition Law transparency, and Revise regulations that protect competitive Develop a registry of state-aid recipients incumbents, including SOEs (e.g., in the neutrality transportation sector) Upgrade competition rules to Review tax exemptions and other forms of explicitly prohibit cartels and state aid and align them with regulations increase legal certainty and National predictability competition Prioritize pro- Develop policy A market competition public comprehensive environment that procurement rules for state Stronger market minimizes undue processes aid institutions and more advantages e ective institutional among SOEs and collaboration politically connected rms Ensure the independence of sectoral regulators to avoid con icts of interest between policy objectives and SOE incentives (e.g., in the transportation and telecom sectors) Strengthen the AMCU’s institutional guarantees and provide it with the necessary resources to ful ll its mandate INSTITUTIONAL Source: Author’s elaboration
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 39 TABLE 3 Policy Recommendations Short term Medium term Responsible institutions Legal / Regulatory Recommendations Adopt rules requiring business sepa- MEDT/ SPF/AMCU ration in vertically integrated SOE, and mandate that SOEs earn rates of return comparable to private-sector operators Develop and revise regulatory frame- CMU/Ministry of Infrastructure / NCSRCI/ works for the use of unlicensed AMCU spectrum, telecom licensing and authorization, and sharing mobile- telecom infrastructure Revise regulations that protect CMU/Ministry of Infrastructure/AMCU/ incumbents, including SOEs (e.g., in the other government agencies transportation sector) Upgrade competition rules to explicitly AMCU/CMU prohibit cartels and increase legal certainty and predictability Develop comprehensive rules for state aid AMCU/CMU Implementation / Enforcement Recommendations Mandate the disclosure of SOE MEDT/SPF/line ministries performance information, including AMCU the costs associated with commercial and non-commercial activities Unbundle vertically integrated SOEs CMU (e.g., in the gas and electricity sectors) Ministry of Infrastructure Enforce rules against cartel behavior and AMCU penalties for violating the Competition Law Develop a registry of state-aid recipients Review tax exemptions and other AMCU/MEDT/ Ministry of Finance /other forms of state aid and align them with line ministries regulations Prioritize pro-competition public AMCU/MEDT procurement processes Institutional Recommendations Ensure the independence of sectoral CMU/Ministry of Infrastructure/other regulators to avoid con昀氀icts of interest government agencies between policy objectives and SOE incentives (e.g., in the transportation and telecom sectors) Strengthen the AMCU’s institutional CMU/AMCU guarantees and provide it with the necessary resources to ful昀椀ll its mandate
REFERENCES Government of Ukraine (2017) Uni昀椀ed Registry of the State Property Objects. Available at: http://www.spfu.gov.ua/ ua/content/spf-stateproperty-Subiekti-gospodaruvannya.html International Monetary Fund (2016) Ukraine. Technical Assistance Report – Reforming management and Oversight of State Assets. KyivPost (2017) Ukraine’s infrastructure needs $30 billion, more transparency. Available at: https://www.kyivpost. com/business/ukraines-infrastructure-needs-30-billion-transparency.html Martínez Licetti, Martha; Iootty, Mariana; Goodwin, Tanja; Signoret, José. 2018. Strengthening Argentina’s Integra- tion into the Global Economy: Policy Proposals for Trade, Investment, and Competition. International Development in Focus. Washington, DC: World Bank. Ministry of Economic Development and Trade (2015) Ukraine’s Top 100 State-Owned Enterprises. Ministry of Economic Development and Trade (2015) Reform of State-owned enterprises. Presentation in Novem- ber 2015. Motta, M. (2004) Competition policy: theory and practice. Cambridge University Press. SD Capital Press O昀케ce (2018) The world’s largest port operator enters the Ukrainian market. Available at: http:// sd.capital/2018/01/04/the-worlds-largest-port-operator-dp-world-group-enters-the-ukrainian-market/ Syverson, C. (2011) What Determines Productivity? Journal of Economic literature. Reuters (2018) Ukraine passes privatization law needed for IMF’s aid, written by Natalia Zinets. Available at: https://www.reuters.com/article/uk-ukraine-privatisation/ukraine-passes-privatisation-law-needed-for- imf-aid-idUKKBN1F71OD Ryanair Corporate (2017) Ryanair Cancels Planned Ukraine Services As Kiev Airport Fails To Honour Commitments. Available at: https://corporate.ryanair.com/news/ryanair-cancels-planned-ukraine-services-as-kiev-airport- fails-to-honour-commitments/ Ryanair Corporate (2018) Ryanair brings low fares to Ukraine. Available at: https://corporate.ryanair.com/news/ ryanair-brings-low-fares-to-ukraine/ Ukraine Digital News, based in Ministry of Economic Development and Trade of Ukraine (2018) Ukrainian government approves digital economy strategy for Ukraine. Available at: http://www.uadn.net/2018/01/24/ ukrainian-government-approves-digital-economy-strategy-for-ukraine/ Wojciech Kononczuk´ , Denis Cenus¸a and Kornely Kakachia (2017) Oligarchs in Ukraine, Moldova and Georgia as key obstacles to reform. Available at: http://www.3dcftas.eu/system/tdf/Oligarchs_14%20June_FINAL_0. pdf?昀椀le=1&type=node&id=358%20 World Bank Group (2014) Opportunities and Challenges for Private Sector Development. World Bank Group (2016) Systematic Country Diagnostic World Bank Group (2017) Macro Poverty Outlook for Europe and Central Asia and World Development Indicators. World Bank Group (2018) Macro Poverty Outlook for Europe and Central Asia. Spring Meetings 2018. World Bank Group (2018) Ukraine: A New Vision for Competition Policy to Boost Competitiveness and Growth. World Bank Group & UK’s Good Governance Fund (2018) Crony capitalism in Ukraine: impact on economic out- comes (English). Washington, D.C.: World Bank Group. 41
ANNEX TABLE A.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD (1) (2) (3) Ukraine 0.523*** 0.477*** 0.534*** (0.070) (0.101) (0.113) Log of GDP per capita PPP (2011 international $) 0.100** 0.095** 0.180** (0.046) (0.044) (0.066) Log of cost of import 0.044 0.077 (0.108) (0.067) Tari昀昀 rate, applied 0.066** (0.030) No. of observations 3,142 3,142 3,142 R-squared 0.887 0.888 0.896 Notes: Results are from an OLS regression using 2010–2017 data from the Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %. TABLE B.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD and Selected ECA Countries (1) (2) (3) Ukraine 0.370*** 0.312*** 0.328*** (0.043) (0.047) (0.066) Log of GDP per capita PPP (2011 international $) 0.005 0.023 0.058 (0.031) (0.030) (0.045) Log of cost of import 0.100 0.105** (0.067) (0.048) Tari昀昀 rate, applied 0.047 (0.034) No. of observations 3,706 3,706 3,706 R-squared 0.883 0.885 0.889 Notes: Results are from an OLS regression using 2010–2017 data from the Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %. 43
44 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE TABLE C.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD (1) (2) (3) Ukraine 0.404** 0.482** 0.529*** (0.161) (0.177) (0.162) *** *** *** Log of GDP per capita PPP (2011 international $) 0.795 0.803 0.874 (0.110) (0.110) (0.124) Log of cost of import –0.074 –0.047 (0.112) (0.082) ** Tari昀昀 rate, applied 0.055 (0.027) No. of observations 3,142 3,142 3,142 R-squared 0.874 0.875 0.880 Notes: Results are from an OLS regression using 2010–2017 data from Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %. TABLE D.1 Price Comparison Analysis: Ukraine vs ⸀ Comparator Countries in the OECD and Selected ECA Countries (1) (2) (3) * * Ukraine 0.202 0.228 0.243 (0.124) (0.130) (0.137) *** *** *** Log of GDP per capita PPP (2011 international $) 0.655 0.647 0.677 (0.087) (0.090) (0.094) Log of cost of import –0.046 –0.042 (0.082) (0.081) ** Tari昀昀 rate, applied 0.040 (0.030) No. of observations 3,706 3,706 3,706 R-squared 0.868 0.868 0.871 Notes: Results are from an OLS regression using 2010–2017 data from Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 45 TABLE A.2 Price Comparison Analysis: Kiev, Ukraine vs. Comparator Ci琀椀es in OECD and Selected ECA Countries (1) (2) (3) ** ** *** Ukraine 0.281 0.295 0.414 (0.126) (0.111) (0.112) Log of GDP per capita PPP (2011 international $) –0.104 –0.105 –0.031 (0.077) (0.080) (0.075) Log of cost of import –0.020 –0.026 (0.100) (0.081) *** Tari昀昀 rate, applied 0.046 (0.014) No. of observations 14,385 14,385 14,385 R-squared 0.855 0.855 0.861 Notes: Results are from an OLS regression using 2010–2017 data from the Economist Intelligence Unit (EIU). All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %. TABLE B.2 Price Comparison Analysis: Dnipropetrovsk, Kharkiv, Kiev, Lviv, Odesa, and Sumy in Ukraine vs ⸀ Comparator Cities in OECD and Selected ECA Countries (1) (2) (3) *** ** *** Ukraine 0.435 0.409 0.419 (0.143) (0.152) (0.151) *** *** *** Log of GDP per capita PPP (2011 international $) 0.785 0.787 0.806 (0.084) (0.082) (0.083) Log of cost of import 0.039 0.037 (0.094) (0.094) Tari昀昀 rate, applied 0.028 (0.039) No. of observations 16,051 16,051 16,051 R-squared 0.823 0.823 0.824 Notes: Results are from an OLS regression using 2010–2017 data from Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %.
46 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE TABLE C.2 Price Comparison Analysis within Ukrainian Provinces (1) (2) (3) (4) *** *** *** *** Kiev dummy 0.093 0.127 0.114 0.131 (0.006) (0.027) (0.027) (0.031) Log of disposable income per capita –0.032 –0.036 –0.059 (0.026) (0.027) (0.044) Log of population 0.026 0.024 (0.017) (0.034) Log of labor cost 0.004 (0.022) *** Log of price of fuel (diesel) –0.408 (0.012) No. of observations 25,657 25,657 25,657 25,657 R-squared 0.938 0.938 0.938 0.939 Notes: Results are from an OLS regression using 2014–2017 monthly data from the World Food Program. The dependent variable is the logarithm of retail prices (LCU/kg). All regressions include product, month and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %. TABLE A.3 Price Comparisons Analysis: Ukraine vs ⸀ OECD and Selected ECA Countries (1) (2) (3) (4) *** *** *** *** Ukraine 0.380 0.380 0.324 0.341 (0.026) (0.044) (0.046) (0.064) *** *** *** *** Oligarchs products 0.531 0.531 0.531 0.531 (0.025) (0.025) (0.025) (0.025) ** ** ** *** Oligarchs products*Ukraine –0.067 –0.067 –0.068 –0.070 (0.026) (0.026) (0.026) (0.025) Log of GDP per capita PPP (2011 international $) –0.000 0.017 0.051 (0.032) (0.031) (0.047) Log of cost of import 0.096 0.101** (0.068) (0.049) Tari昀昀 rate, applied 0.046 (0.034) No. of observations 3,706 3,706 3,706 3,706 R-squared 0.090 0.090 0.092 0.096 Notes: Results are from an OLS regression using 2010–2017 data from the Numbeo. All regressions include product and year 昀椀xed e昀昀ects. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate signi昀椀cance at 1 %, 5 %, and 10 %.
REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE 47 FIGURE A.4 Coe昀케cient of Variation of Prices Across Ukrainian Cities Salo Potatoes Rye bread Beetroots Carrots Cabbage Mixed sausage Wheat bread Onions Beef Milk Curd Pasta Wheat our Butter Sour cream Pork Rice Buckwheat grits Sun ower oil Eggs Chicken Sugar 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Percent Notes: Price dispersion is measured by the coe昀케cient of variation.
48 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE BOX 3 Price Comparison Analysis: Are Prices of Basic Food Products Higher in Ukraine? n The analysis assessing whether food prices are signi昀椀cantly higher in Ukraine than in comparator countries uses two data sources: (a) “Numbeo” – an online global database of user contributed data on cost of living with information on consumer prices, and (b) Economist Intelligence Unit (EIU) – a survey-based database of consumer prices for over 160 items. The sample was restricted to products available in Ukraine and where yearly data were available in either the Numbeo or the EIU database. The sample covers yearly information on prices of 14 and 20 products, respectively, in the Numbeo and EIU databases from 2010 to 2017. Both databases apply di昀昀erent methodologies in gathering price data across countries, thus strengthening the comparability of price information used in this analysis. The baseline empirical speci昀椀cation for the price comparison analysis follows the equation: ln(Price ) = β Ukraine + β ln(Z ) + η + δ + ε it 1 2 it i t ijt where for each food product i in country j in year t; Price is the price (US$/kg), X is a vector of cost and demand shifters such as GDP per capita PPP (2011 international $), cost of imports, and tari昀昀 rates, Ukraine is a dummy variable for observa- tions in Ukraine, η are product 昀椀xed e昀昀ects, δ are year 昀椀xed e昀昀ects, and e is the error term. The Ukraine dummy variable captures the di昀昀erence in average food prices in Ukraine relative to the average prices across the comparator countries after adjusting for the di昀昀erences in per capita GDP PPP, import costs, customs duties, product types and time e昀昀ects. The variable capturing costs to import (taken from the Trading Across Border dataset) accounts for domestic transport costs. Other sources of transport costs (oversees shipping) depend on the origin and destination of each product, for which data is not consistently available. The food products were selected based on their relative importance to the average Ukrainian consumer and availability in the databases67. The analysis uses di昀昀erent sets of comparator jurisdictions to account for potential distortions in markets of other countries68. 67 The analysis used the following 14 products from the Numbeo database: Apples (1kg), Banana (1kg), Beef Round (1kg or Equivalent Back Leg Red Meat), Chicken Breasts (Boneless, Skinless, (1kg), Eggs (regular, 12), Lettuce (1 head), Loaf of Fresh White Bread (500g), Local Cheese (1kg), Milk (regular, 1 liter), Onion (1kg), Oranges (1kg), Potato (1kg), Rice (white, 1kg) and Tomato (1kg), while the following 20 products from the EIU database we analyzed: Apples (1 kg), Bananas (1 kg), Beef (昀椀let mignon, ground or minced, roast, steak, stewing, 1 kg), Butter (500 g), Chicken (fresh, frozen, 1 kg), Eggs (12), Flour (white, 1 kg), Fresh 昀椀sh (1 kg), Lettuce (1 head), Milk (pasteurized, 1 liter), Mushrooms (1 kg), Onions (1 kg), Oranges (1 kg), Peanut or corn oil (1 liter), Pork: (chops, loin, 1 kg), Potatoes (2 kg), Sugar (white, 1 kg), Tomatoes (1 kg), White bread (1 kg) and White rice (1 kg). 68 The comparator countries with available data in the Numbeo database include 35 OECD countries – Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Latvia, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States – and 7 additional selected regional – Bulgaria, Croatia, Georgia, Kazakhstan, Lithuania, Moldova, and Romania. The comparator countries with available data in the EIU database include 32 OECD countries – Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States and 3 additional selected regional – Bulgaria, Kazakhstan, and Romania.
