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Pension reform fail to have consequences for Ukraine-Bank cooperation, - World Bank Director

Author : Elina Beketova

Respondent : Satu Kahkonen

16:06, 14 July 2017
Pension reform fail to have consequences for Ukraine-Bank cooperation, - World Bank Director

Author : Elina Beketova

Respondent : Satu Kahkonen

The series of interviews 112 International Insight introduces the viewpoint of influential Western experts, who are the source of a new, fresh point of view, different from the one of the Ukrainian experts, who usually comment on the current situation

16:06, 14 July 2017

112 Agency

Satu Kahkonen, the  World Bank Country Director for Belarus, Moldova, and Ukraine, sat with 112 Ukraine TV channel in the frames of 112 International Insight to talk about why it is so important for Ukraine to introduce the pension and medical reform, which consequences it may cause in terms of Kyiv’s cooperation with international investors.

The series of interviews 112 International Insight introduces the viewpoint of influential Western experts, who are the source of a new, fresh point of view, different from the one of the Ukrainian experts, who usually comment on the current situation.

ELINA BEKETOVA: Hello, Mrs. Kahkonen, thanks for joining "112 Ukraine". The World Bank approved a plan for cooperation with Kyiv for the next five years, which aims to support Ukrainian reforms. Can you tell more about it? And we also know that there is a Strategy towards Ukraine. Are that different documents or the same one?

SATU KAHKONEN: Let me first tell you about Country Partnership Framework that was discussed by our body in June. In every country the World Bank operates, we prepare every 4-5 years the Engagement Strategy. And we call this document the Country Partnership Framework. And this framework is specifying our goals for our engagement, the focus areas, and the results we want to achieve. So, in the past several months, we prepared our strategy for engagement in Ukraine, and then it was discussed in June. Our aim here, in Ukraine, after 2 years of deep crisis, will be to support lasting economic recovery that supports every people, everybody in Ukraine. And we are focusing on four areas. And we selected the areas for our focus based on their contribution to economic growth and progress. So, we are trying to focus on areas that matter and that do make a difference for Ukraine and the people of Ukraine. So, we are not operating in every sector, in every area, but we are selective. And those four areas we will focus is functioning of markets, fiscal and financial sector sustainability, because without sustainability the markets won’t function. And then service delivery – in particular health and social protection delivery. And finally the fight with corruption and citizen engagement, and good governance. And in this four areas we are going to promote reforms. We are going to do analytical work, provide technical assistance to the government and engage in selected investments.

ELINA BEKETOVA: Of course, we will talk about these four fields narrowly. Let’s start with business. A World Bank mission is working in Ukraine to evaluate progress in business reform. Has it become easier to do business?

SATU KAHKONEN: It has become easier, over the years to do business in Ukraine. Ukraine has done number of important steps to improve business and regulatory environment, and the result of this steps Ukraine’s ranking in the Doing business has improved steadily over time, in 2013 Ukraine ranked 140th, among the all the countries in the world. And this year, in 2017, Ukraine has risen to the 80th place, that’s a significant achievement, but I have to mention that despite the significant progress, Ukraine is behind its neighbors. The Eastern European countries, they are systematically ranked among 20-50, Belarus is number 27, Moldova – 44, so Ukraine still has more to do to catch up.

ELINA BEKETOVA: What are the reasons for slowing down these business reforms in Ukraine?

SATU KAHKONEN: Business reforms haven’t slowed down. But other countries have moved to have it even faster. Because you have to keep in mind what Ukraine does – affects the ranking, but also – what the other countries do – will affect their ranking. So, Ukraine should run faster that the neighboring countries to get there. And we see three areas where Ukraine would need to start running faster. One is the enforcement of the rule of law. And the corruption measures. Second is further stream lining of licenses, permits, and inspections. And the third is systematic enforcement of the competition policy. To level the plain field between the private sector and the state owned companies.

ELINA BEKETOVA: Recently Bank’s experts have revised upwards the forecast for GDP growth. Mainly because of the stable situation in commodity markets. What is the forecast and expectations and for GDP growth here, for Ukraine?

SATU KAHKONEN: In fact, we’ve revised downwards our GDP forecast for 2017. Initially for projecting 2.8% GDP growth for this calendar year, but as the result of the trade blockade, we’ve revised our projects and down to 2%.  The trade blockade is reducing the exports of steel, and it is increasing imports of coal for Ukraine. And that’s going to make the difference in this calendar year.

ELINA BEKETOVA: The Prime Minister of Ukraine says that we are on the way to recovery of the economy. Is it true that we are on this road or are we way behind it?

SATU KAHKONEN: Ukraine is on the way to recovery. Your government has taken very decisive measures, to reduce the macroeconomics imbalances in the past 3 years. And in 2017 the economy finally stabilized. And in fact turned to growth. The economy turned to growth. We saw finally a modest growth of 2.3 percent. So, this is a significant achievement again for the government and it provides crunch for optimism. But then when we look where Ukraine is now – we are very happy that economy has turned to corner. But to achieve the lasting economic recovery, sustainable recovery and also for the incomes of the people, to reach the levels that were prior to the crisis, the growth has to be even faster. And Ukraine has the potential for that. Ukraine has the potential to grow by 4% over the medium term. But that won’t happen without further acceleration of reforms. So, basically, keeping the foot on the reform battle is going to be very important. In the next year or two.

ELINA BEKETOVA: If we talk about sustainable recovery of the economy, what should be done at first so that Ukraine had the same level of economy that it was before the crisis? By the way, are we talking about the crisis of 2008, or 2013?

SATU KAHKONEN: We are talking about the crisis in 2014-2015, so the most recent crisis after the Maydan revolution. Because Ukraine experienced significant GDP construction to the turn of 16% of GDP. That’s significant. Now Ukraine should do to help recovery of incomes to the pre-crisis level. In fact, actions should be taken on multiple fields. But on the view of the World Bank, there are five reforms that are critical at the moment. And the most important reform from the point of view would be the land reform. The other four reforms or reform areas are state and enterprise sector reform, to make space for private sector, pension reform because the current system is fiscally unsustainable, medical reform - to keep the population healthy – and then last but not least, the area of corruption, that’s still to be more to be done in this area.

ELINA BEKETOVA: How do you evaluate the fight with corruption in Ukraine?

SATU KAHKONEN That’s the number one problem. According to the people of Ukraine. And we also think it’s an impediment to the economic progress in the country. This is area where the Ukrainian government has taken significant steps in the past three years. The establishment of national anticorruption institutions, SAP, NABU, was the major step forward. Also, the electronic asset declaration was another important measure. And the electronic procurement system Prozzoro provides a lot of promise in terms of coping corruption. Is it enough? Unfortunately, not. The verification of asset declarations should be continued and should be continued decisively. And then the enforcement of the results. If the verification of asset declaration shows that some people were engaged in incorrect activities, then the sanctions and enforcement should follow.

ELINA BEKETOVA: The land reform – what is your forecast for lifting the moratorium of land? What will its extension cause to the economy and investment climate?

 The land reform in our view is one of the key priorities for Ukraine. It’s the most transformative reform that Ukraine could undertake. It could unleash the significant agricultural potential that Ukraine has. It could raise the productivity in the country, it could bring in significant investment to the agricultural sector. At this moment Ukraine has comparative advantage in agriculture but this potential is not realized. You have exceptionally fertile land, one third of world’s black soil is here. But the average yield in agriculture are fraction of the yields elsewhere in Europe. Elsewhere in Europe where the land is less fertile. So, today there very few incentives to invest in production technics, and to ensure to further fertility of the land over time. And that partly because at the moment there are no proper land prices, and the land market is not functioning, is non-existed. The most important step Ukraine could take now to let the economy grow is to lift the moratorium on land-market sales, and allow finances, banks to step in, to provide credit and financing to individuals and agro-business, in particular the small and medium ones. And according to our assessments, that would unleash the growth that you would see 1.5 percent of growth in your GDP very fast, significant revenues coming to the government budget coming from land sales and also land leases. So, it’s a very transformative reform that could be taken. You ask whether the government is ready. There is a lot of work in the coming weeks and months for the government to take. If they want to lift the moratorium by the January, 1. In our view, if there is a political will to do the work, they can lift a moratorium on January, 1.

ELINA BEKETOVA: There are concerns, some experts says, and that Ukrainian land can be sold out to foreigners. There are such concerns, Should we believe them?

SATU KAHKONEN I have heard also those concerns. Some of this concerns are real. We have listened to the concerns. When the moratorium is lifted, there is no need to let the foreigners to allow them to buy the land. There are number of countries in Europe that are prohibiting the sale of agricultural land to foreigners. So, Ukraine wouldn’t be an exception in doing that. But what is critical – is that Ukrainian individuals, are allowed to step in and buy land and sale land if it is needed.

ELINA: Let’s concentrate on other reforms you told about. The pension and medical reforms. We know, these documents should be voted in Ukrainian parliament. How do you evaluate the proposals of the Pension reform approved by the Government and introduced to the Ukrainian parliament? Will it stabilize the pension fund?

 

SATU KAHKONEN This is a very good question. Pension reform in the view of World Bank, is not just necessary, it is urgent. And I’m saying this because the current pension system is fiscally and socially unsustainable. Today, Ukraine spends 11 percent of its GDP on pensions. This is high number to international standards. More than half of this - 6 percent of GDP – is funded by the budget. And it is fiscally unsustainable. At the same time, the average pension in Ukraine is $ 2 per day and there is hardly any differentiation between pensions – if you have worked 35 years or 15. If nothing is done to the pension system now, those pensions will go significantly further down.

ELINA BEKETOVA: Like for 1 dollar a day?

SATU KAHKONEN Yes, I mean, it will be significant drop that would happen in the next 10 years. That’s why we think this is a critical reform that should be moved forward. Today, a quarter of Ukrainians receive some sort of pension, benefit, because of early retirement, early retirement age, because of privileges, special pensions ... So, there is too little for too many. And that is what this package should address to. The reform package that is in Parliament now, we are very supportive of that and we also hope that the Parliament is going to approve it.

ELINA BEKETOVA: Your forecast – will they approve it or not?

 SATU KAHKONEN: We hope. We do not know, because this is exactly the decision of Parliament, but we hope that they will approve it, because this package will help current and future pensioners. So, it’s going to address this fiscal and social sustainability of the system. What’s the package that there is being discussed is going to do? It’s going to restore the justice to the existing pensioners, it is going to restore pension indexation, which was discontinued for number of years, in particular, during the crisis. For the future pensioners, it’s going to make sure, that the government will have the adequate financing to pay these pensions in the future, so that people are not going to look at 1 dollar a day, when they retire. And then both for current and future pensioners, it’s going to ensure proper indexation, so that the real pensions are going to remain and pensioners will be living decently. In our view, this is a package that is very much needed today, and we hope, that Rada, members of Rada will approve the package. 

ELINA BEKETOVA: Any risks in this package?

SATU KAHKONEN: It depends on how you look at it. I think, the area that people consider a risk is that the package provides the incentives to work a little bit longer and to contribute to the system. So what the package will provide is actually very fair. It provides justice for the people: those who worked longer and contributed to the system - can retire earlier. But if you haven’t worked very long and you havne’t contributed, the new pension system giving you the option – to work a little bit longer. So, it’s trying to provide the proper incentives for everybody to contribute and then to pay to pensioners according to your contributions and according to your years of service.

 

ELINA BEKETOVA: One of the innovations of this bill is that it will be possible to buy pensions insurance record. They say, it will cost 704 UAH (which is about $ 27). We have a minimum salary of $ 123 a month. Is it typical for European countries to buy this insurance record?

SATU KAHKONEN: What the new bill is providing is basically giving an option for the people to buy additional years of service. What the pension system is requiring is that need to have minimum years of service to receive a full pension. And the minimum years of service will be adjusted somewhere upwards over the next 10 years, to make the system fiscally sustainable. But it then provides an option for people to buy additional years of service so that they reach certain limits.

ELINA BEKETOVA: Do other European countries have the same system?

SATU KAHKONEN: it’s done elsewhere. Every country is unique. The pension reform package for Ukraine is tailored to the Ukrainian circumstances. But it very much follows the international practice. It’s not only system that’s decided for Ukraine. It’s based on international principles, principles that are inherited to another countries.

ELINA BEKETOVA: Do Moldova and Belarus have the same pension systems and the same service of buying additional years?

SATU KAHKONEN: They have slightly different systems. What usually countries do, I mean, they raise the start of the retirement age to make systems more fiscally sustainable. That was not the route that the government of Ukraine chose to take. In most countries they start the retirement age, that’s done. But in Moldova, in fact, these further discussions on the pension reform are going now.

ELINA BEKETOVA: To sum it up, if Parliament don’t vote for pension reform, do you think it will have some consequences for collaboration with our international creditors?

SATU KAHKONEN: As you know, the pension reform is a requirement also for IMF program. So yes, it would then have consequences on that regard.

ELINA BEKETOVA: But we heard that it’s only recommendations from the International Monetary Fund and if we can’t pass it, it’s okay, because it’s only recommendation, but do you think the consequences may be more serious?

SATU KAHKONEN:  I would expect that the consequences would be more serious but this is obviously the question to my colleagues in the International monetary fund.

 

ELINA BEKETOVA: Now let’s focus on healthcare reform. Why do you think this medical reform has such resistance in the Ukrainian parliament?

SATU KAHKONEN: It’s another reform that is very important. And very urgent in our view. And why is urgent let me tell a few words about it. Ukraine is spending a lot of money on health. 7% of GDP annually. That is again high by international standards. But the health outcomes are very weak. In fact, if you look at life expectancy, the average life expectancy in Ukraine is 71 years. It’s 10 years less than life expectancy in other European countries. Then if you look at tuberculosis and HIV-AIDS prevalence, unfortunately, in Ukraine those are in increase not a decline like in other countries.  And then, only 10% households in Ukraine are happy and satisfied with healthcare. So that to me is very alarming. A lot of these alarming trends that we see – and I have visited hospitals and health centers…

ELINA BEKETOVA: Here, in Ukraine?

SATU KAHKONEN: Yes, and I have seen the need to reform the system. What the government is now doing – there was no reform in healthcare since the independence, since 1991. The system that you have now is still the old soviet style system, with all its problems. So, we welcome the very courage’s effort by the current government to reform healthcare. It’s critical because it will benefit all the Ukrainians. Why is the opposition? To me, I was wondering when I saw how much opposition there was, I was questioning myself, “Why?” This is a reform that would benefit all Ukrainians, that is needed, because Ukrainians are dying. There is no justification not to proceed with the health reform. Unfortunately, there is lots of interest. People, who are not necessarily gain from the reform, are gaining for the status quo. That is unfortunately, the situation today. But what I’m hearing from the civil society – what I’m hearing from a lot of people – there is an enormous support for the reform to move forward. What is ministry of health is trying to do today – is they are trying to modernize the system, they are trying to bring it to 21 century, they are trying to implement the international practices that had produced results elsewhere  in the world. And that have raised the life expectancy in other countries. It sounds what they are proposing and again from the side of World Bank, we very much hope that the draft law related to healthcare reform will be passed by Parliament.

ELINA BEKETOVA: Now let’s switch to the topic of Ukrainian roads. Do you see changes in the field of reconstruction and repair of Ukrainian roads when you became working with Ukraine? May be you can tell the most massive projects that the World Bank is working with right now?

SATU KAHKONEN: Thank you for that question. I was surprised that there are over 4000 traffic deaths annually in Ukraine. And more people are injured on the roads every year. And also because of the poor road conditions, there are billions of hryvnias that are lost every year. From that point of view, the road and traffic safety are important for Ukraine’s development. We have funded 2 projects that are supporting road and safety. We have specifically focused on Kyiv – Kharkiv road M03, we have upgraded significantly part of this road. And I hope, people are now seeing the difference in the road today. We have also addressed many of the safety black spots that there were. The result of that – traffic fatalities on that part of the road have decreased quite a bit. So, we are having our investment operations that are improving the road conditions. But that’s not all that we do. We also work very closely with the government to prioritize road sector investments. So, we are analyzing what should be the priorities for investments in the short, medium and long term, basically using the traffic data, the market data. What would bring the biggest bank for hryvnia. Interestingly, the result shows that today the government should invest not in the construction of roads, but in maintenance and rehabilitation. If the current roads are not maintained and rehabilitated, the road network will deteriorate even further. 

ELINA BEKETOVA: What is the amount of money that was spent on Ukrainian roads?

SATU KAHKONEN: In total, our portfolio on roads, undispersed portfolio is about 800 million US dollars. It’s a significant portion of the portfolio that we have and that is telling you that we do consider transport field is very important part of our operations here in Ukraine. 

ELINA BEKETOVA: And this year what amount of money will be spent on Ukrainian roads and may be you can name a few directions?

SATU KAHKONEN: This year, we are simply focusing on implementation of the existing transport projects that we have. As I said, we have about 800 million US dollars undispersed, that is significant amount of money. If that money is implemented and investments proceed, that would make significant difference for the people on the ground.

ELINA BEKETOVA: And then you can give more loans, because now money are undispersed, right?

SATU KAHKONEN: Yeah, at this moment we would like to see these projects moving, and getting implemented before we provide another loan for transport. While we are implementing existing loans, existing projects, we are focusing very much on technical assistance. And another area where we are giving technical assistance, is for example the way and motion control, automated traffic monitoring, etc.

 

ELINA BEKETOVA: Do you have specification, for instance, are you giving money to the regional roads, big roads, or can you give money to small roads in Kyiv? Does it depend on something?

SATU KAHKONEN: It always depends on criticality of the investments. Current transport portfolio is focusing on motorways, on the main roads, rehabilitation and upgrading motorways to international standards.

ELINA BEKETOVA: As we see, one of the problem in relations between the World Bank and Ukraine - is that Ukraine has not always been able to spend money reserved for it. As for instance with Ukrainian roads. What is the problem with it? Why does it happen? And can it be fixed?

 

SATU KAHKONEN: We have a large portfolio of investments projects here in Ukraine. And at this moment the undispersed amount is about 2 billion US dollars. That’s significant. And if that money did move, got invested rapidly, projects were implemented, it would make a major difference to the Ukrainian economy. It would give the nice fiscal stimulus for the country. And we would see roads built, hospitals built, and facilities upgraded. Unfortunately, there has been delays with disbursements, these delays are nothing new. There is no fast remedy to address the slow disbursement in Ukraine, it’s a problem that not only affecting the World Bank’s portfolio, but also the portfolio of other international partners. We have done quite a bit of analyses, trying to identify what are the systematic factors that are hindering the disbursements and portfolio performance. And based on this analyses and the result, we had then taken jointly with the government, we have restructured the number of our projects to make them simpler, so that they are implemented faster. We have also canceled those portions of the projects that have not moved forward, you know where money was just sitting and nothing was happening. We have also intensified our supervision, of so-called problem projects. We have strengthen the capacities of our projects implementing units, so that they know what to do, they can solve problems better. We work very closely with the government to address the problems. Because for us is that what matters – we provided these loans to Ukraine, in order to help ordinary people, to build the hospitals, to build the roads, and we would like to see these investments happening. So that people will get the benefits.

 

 

ELINA BEKETOVA: What’s the reason behind of that not spending money? Is it a matter of bureaucracy or someone in the government who doesn’t understand how to implement the projects?

SATU KAHKONEN: It is a very good question. Because indeed what you are saying that is on the surface – it should be simple. And we see our projects in other countries. And in most other countries they are moving very well, and getting implemented fast. Here are the couple of factors that caused the delays of the disbursements. First of all, our portfolio is relatively young. During the crisis years of 2014-2015, the Bank increased the support to Ukraine very significantly – between May 2014 – June 2016, we provided 4.6 billion to Ukraine in support. Half of that went to investment projects that was a lot of money coming to the country very fast. And when we talk about the complex investments projects, it takes a little bit of time for these projects to implement. That’s one factor that is causing delays with disbursements. The second – there were changes in the government side in the past three years. And every time people change, they have to learn what to do, and that again causing delays. Unfortunately, there has also been corruption. And every time there is a corruption case, the implementation gets delayed.

 

ELINA BEKETOVA: And the last question – you have been working in Ukraine for already a year – since July 2016. What is the most significant change in Ukraine that has been done during this one year?

SATU KAHKONEN: I started working in Ukraine almost a year ago. And the time has flown by, I have to say. I’ve remembered when I started working on Ukraine, I wasn’t sure how determined is the government’s move towards reforms. And I have to say that I have been positively surprised. In the past few months, the government has moved ahead with the number of significant reforms. If you look back – they started with increasing of energy tariffs. But what I think was even more significant – was the introduction of electronic asset declaration last fall. Then the actions that the government and the central bank took on the banking sector side – they nationalization of the “Privatbank” – that was a significant step that the government took. And now government is moving ahead with the land, pension and healthcare reforms, these are major reforms. And I applaud to government for having put them into agenda and moving forward with them. I have, and I think, everybody in Ukraine, has reason for optimism – if these pace of reform continues.

 

 

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