Structural reform

There have been a few sizeable changes in the scores for competitiveness, governance, green transition and resilience over the past year (see Table S.1 and Chart S.1). In this analysis, a change is considered sizeable if it exceeds 1 standard deviation of all changes in scores across all qualities and economies during the period 2018-19.

Changes to competitiveness scores largely reflect gradual improvements in the business environment, with a number of countries (including Azerbaijan, Georgia, Morocco and Turkey) making progress in this area. Meanwhile, Albania, Armenia, Hungary and Uzbekistan have all embarked on major reforms of their tax regimes, and new mechanisms supporting access to finance for SMEs have been introduced in Belarus, Georgia, Ukraine and Uzbekistan. Several countries (including Cyprus, Greece, Ukraine and Uzbekistan) have also made further efforts to restructure state-owned enterprises and banks. In contrast, Romania’s business environment has deteriorated, resulting in a modest decline in its competitiveness score.
As regards governance reforms, a number of countries (including Azerbaijan, Cyprus, Georgia and Kazakhstan) have recently embarked on judicial reforms and introduced alternative dispute resolution mechanisms. At the same time, several countries have adopted policies that could potentially restrict the independence of judges and undermine public trust in the judicial system.

Green scores – measuring transition to a green economy – have been revised upwards in several countries (including Egypt, Kazakhstan, Ukraine and Uzbekistan) on the back of progress with intended nationally determined contributions (INDCs) and carbon-pricing mechanisms, while Montenegro, North Macedonia and Russia have now ratified the Paris Agreement on climate change. In the area of inclusion, various countries (including Russia, Tunisia and Uzbekistan) have adopted new laws and regulations aimed at strengthening gender equality in the workplace.

Changes to resilience scores have been driven largely by declines in levels of non-performing loans (with Cyprus and Greece making particular progress in this area), as well as improvements to the regulatory environment and standards of governance in the financial sector (albeit some worsening of scores has also been observed in this area).

Changes to integration scores – measuring the degree of economic integration across the EBRD regions – have largely been limited to a few declines in central Europe and the Baltic states (CEB) on account of reduced capital inflows. At the same time, a number of countries (including Albania, Greece, Kazakhstan, the Kyrgyz Republic, Serbia, Ukraine and Uzbekistan) have adopted measures aimed at reducing barriers to cross-border trade and improving air connectivity.

Several countries have implemented reforms in the area of competitiveness with the aim of improving their tax regimes, developing support mechanisms for SMEs and restructuring state-owned enterprises. In May 2019, for instance, Hungary announced a series of measures aimed at simplifying its tax regime, lowering the tax burden on firms and facilitating access to finance for SMEs. Similarly, amendments to the tax regime aimed at reducing incentives for SMEs to evade tax have now come into force in Albania. Reforms aimed at simplifying the tax regime have also been launched in Uzbekistan. These include simplified tax reporting, the reduction of rates for several types of tax, and broadening of the base for VAT, with a revised tax code expected to come into force in January 2020. Similarly, Armenia amended its tax code in June 2019, switching to a flat income tax with a view to improving compliance. Meanwhile, a package of tax reforms adopted in Azerbaijan in December 2018 aims to address tax evasion and pervasive informality.

A number of countries have introduced new institutional structures with the aim of strengthening their competitiveness. In particular, following up on recommendations by the Council of the European Union, an Economy and Competitiveness Council was set up in Cyprus in 2018 with the aim of monitoring the competitiveness of the Cypriot economy and making policy recommendations in this regard. Meanwhile, Ukraine established an SME Development Office in 2018 to boost the competitiveness of SMEs, and Uzbekistan has established a similar agency with a view to supporting entrepreneurs and providing training in the area of business standards.

Several countries have taken steps to improve access to finance for SMEs. In some countries this has involved reforms to existing credit guarantee schemes, while other countries have launched new programmes. For example, a credit guarantee fund that was set up in Belarus in April 2019 is able to guarantee up to 60 per cent of the principal amount of a loan or leasing contract, while a credit guarantee scheme that was launched in Georgia in April 2019 targets sectors where SMEs have limited access to finance. Meanwhile, Tajikistan has established a modern collateral registry for movable property with a view to facilitating the use of such assets as collateral – particularly by SMEs. Similar reforms aimed at expanding credit information systems or improving laws and systems to support the collateralisation of movable assets have been carried out in Azerbaijan, Egypt, Jordan and Turkey. In addition, some countries have made progress with legal and regulatory reforms aimed at supporting the take-up of non-bank financing instruments such as leasing and factoring (Kosovo and Montenegro) and investment-based crowdfunding (Kazakhstan, Morocco and Turkey).

Several countries have continued to work on reducing state-owned enterprises’ footprints in the economy. Ukraine, for instance, has continued to successfully implement the small-scale privatisation programme that it launched in 2018 using the Prozorro.Sale electronic sales platform, with a privatisation programme for large state-owned enterprises expected to follow in 2020. Meanwhile, a large-scale privatisation programme that was launched in Uzbekistan in April 2019 is aiming to sell shares in 29 companies in the chemicals, oil and gas, construction and food processing sectors, among others. In addition, Uzbekistan adopted its first law on public-private partnerships (PPPs) in May 2019 with a view to boosting private-sector participation in a number of areas that are traditionally dominated by state owned enterprises. With that in mind, a newly established PPP Development Agency has been tasked with planning and implementing PPP projects.

At the same time, several countries have adopted policies that could potentially undermine their competitiveness. For example, Turkey has ordered retail chains to freeze or reduce the price of food products following significant declines in the value of its currency, while an emergency order that was issued by the Romanian government in December 2018 introduced additional taxes in the banking sector, price caps and distribution restrictions in the electricity and gas markets, and new capital requirements for private pension funds. Those measures, which were introduced without public consultation, were partially reversed in early 2019 following strongly negative feedback from the private sector.

While some countries have succeeded in reforming state-owned enterprises, many economies’ privatisation programmes have lacked momentum. This has been the case, for example, in Cyprus, Greece and Kazakhstan. Belarus has continued to reduce the amount of direct financial support and subsidies it provides to state-owned enterprises, but progress in terms of improving the governance standards and efficiency of state-owned firms has been slow. In Bosnia and Herzegovina, meanwhile, Aluminij Mostar, a major state-owned manufacturer of aluminium, has continued to experience financial difficulties as a result of its high level of indebtedness and the continued low-price environment for aluminium.

On the other hand, governance scores have been revised downwards in North Macedonia and Bosnia and Herzegovina, reflecting worsening scores for regulatory burdens, the protection of private property rights and judicial independence. Meanwhile, the downward revision seen in Mongolia reflects a lower score for compliance with standards for anti-money laundering and for countering the financing of terrorism (AML/CFT). In Tajikistan, scores for judicial independence and regulatory burdens have been revised downwards. Reduced scores for perceived independence of the judicial system also contributed to the declines seen in the overall governance scores of Croatia and Poland.

A number of countries have launched reforms aimed at increasing the efficiency of the government and improving the quality of public services. For instance, a third anti-bureaucracy package adopted in the Slovak Republic in November 2018 includes 36 measures aimed at expanding the provision of government e-services and simplifying procedures for granting and renewing business licences. And in May 2019, Armenia approved a restructuring package aimed at increasing the effectiveness of government operations. As part of that restructuring, the number of ministries was cut from 17 to 12, with some being turned into government agencies.

Several countries have embarked on reforms of their judicial systems. For instance, Cyprus has begun the process of establishing new specialist courts, including a Commercial Court, a Court of Appeal and an Administrative Court for International Protection. However, the implementation of that judicial reform programme (which includes an e-justice system) has been slow overall, and Cyprus remains one of the lowest-ranked economies in the EU’s Justice Scoreboard. In Azerbaijan, meanwhile, a Law on Mediation was adopted in March 2019 with a view to enabling alternative dispute resolution mechanisms to operate in commercial, civil, family, labour and other disputes. Azerbaijan has also begun establishing specialist commercial courts to provide entrepreneurs with access to efficient dispute resolution.

In Kazakhstan, new legislation adopted in January and February 2019 seeks to improve the selection and training of new judges, strengthen judicial independence and reduce courts’ caseload by promoting more efficient out-of-court resolution options for certain types of commercial dispute. In addition, the Astana International Financial Centre has introduced a new arbitration-mediation mechanism, which seeks to resolve commercial disputes in a cost-effective manner. Similar initiatives aimed at reforming the judiciary have also been launched in Georgia (albeit their implementation has been subject to delays), with the Georgian government indicating a willingness to establish specialist commercial chambers within courts to make dealing with commercial disputes more efficient. Meanwhile, Georgia’s new insolvency law, which will seek to strengthen the protection of creditors’ rights and increase the efficiency of insolvency procedures, has yet to be finalised.

A number of countries have adopted measures aimed at fighting corruption. In December 2018, for instance, the Lebanese parliament adopted legislation establishing a new National Anti-Corruption Commission, which is responsible for initiating anti-corruption investigations looking at public officials. The establishment of that commission followed the adoption of a series of laws aimed at curbing corruption, including a 2017 law on the right to access information, a 2018 law on protecting whistleblowers and a 2018 law on fighting corruption in oil and gas contracts. Meanwhile, Uzbekistan’s State Anti-Corruption Programme for 2019-20, which was adopted in May 2019, seeks to strengthen the independence of the judiciary, gradually introduce income declarations for public officials and establish effective means of protecting whistleblowers.

Despite these positive developments, there is cause for concern in other parts of the EBRD regions in the area of governance. In a report published in June 2019, the Council of Europe’s Commissioner for Human Rights raised a number of concerns regarding the judicial reforms that have been implemented in Poland in recent years, calling for efforts to ensure that those reforms do not curtail the independence of Poland’s judiciary and undermine confidence in the judicial system. In Mongolia, meanwhile, concerns have been raised regarding legislative amendments that were approved in March 2019 concerning the status of judges and their independence. In particular, those amendments give Mongolia’s National Security Council greater powers to revoke the mandates of chief judges, the head of the state prosecutor’s office and the head of the country’s anti-corruption agency. Similarly, legislative amendments giving the executive branch greater influence over the appointment of judges were approved in several SEMED economies during the past year, giving rise to concerns about the potential impact on the independence of the judiciary.

Another worrying development is the fact that Hungary has gone from a “free” to a “partly free” country in Freedom House’s latest assessment of key freedoms. That change in status follows a number of recent developments in the country that are regarded as having negatively affected the operations of the media, civil society and other key institutions. Hungary has also dropped 14 positions (to 87th place) in the latest World Press Freedom Index following increases in the concentration of media ownership in the past year, leading to concerns about weaker competition in the media sector and reduced pluralism. Similarly, the Slovak Republic has fallen 8 positions in that list this year (now standing in 35th place) on account of a deterioration in press freedom, having already fallen 10 positions in the previous year.

Several countries have enhanced their regulatory environments in this regard. In Egypt, Ukraine and Uzbekistan, for instance, increases in green scores reflect progress with the implementation of carbon pricing. On the other hand, slow implementation of carbon-pricing mechanisms has resulted in scores falling in Estonia, Poland and Slovenia. Meanwhile, Kosovo has adopted a new law on energy efficiency, equivalent legislation is in the process of being drafted in North Macedonia, and Uzbekistan has adopted a number of policies aimed at increasing the energy efficiency of its economy. Support schemes for renewable energy have undergone changes in a number of countries (including Kazakhstan, Latvia and Ukraine), and Kazakhstan, Kosovo and Ukraine have all established specialist funds with the aim of assisting firms with energy efficiency.

A number of countries have adopted legislation aimed at addressing the gender pay gap and strengthening gender equality. In November 2018, for instance, Tunisia adopted a law guaranteeing equal treatment of men and women in relation to inheritance practices. Uzbekistan, meanwhile, adopted a comprehensive new law on equal rights and opportunities for men and women in August 2019. That law introduces the concept of gender discrimination, as well as a framework for reviewing new legislation to ensure that principles of gender equality are upheld. It also calls for the collection of data in order to monitor progress against national gender equality targets. In Russia, a new regulation will reduce the number of occupations that are officially closed to women from 456 at present to 100 by 2021. Examples of positions that will be opened up to women include jobs driving tractors, trains and lorries.

Several countries have reformed their vocational education and training systems. Croatia, for example, has established a network of regional centres of competence, with the first 25 vocational education and training schools joining the network in July 2018. Those schools are expected to cooperate closely with potential employers. Serbia, meanwhile, has made further progress with reforms to its qualifications framework. Following the adoption of a law on the national qualifications framework in April 2018, it has established sectoral skills councils and a dedicated Qualifications Agency. These reforms have created formal feedback mechanisms that can help to ensure that the evolving needs of the job market are reflected in education programmes.

Several countries have improved the risk management practices in their financial sectors. Legislation adopted in Latvia in June 2019 aims to help tackle money laundering and strengthen supervision of the country’s banking system, in line with the recommendations of the Council of Europe’s MONEYVAL committee (which evaluates anti-money laundering measures) and the provisions of the European Union’s Fifth Anti-Money Laundering Directive. In Kazakhstan, meanwhile, the country’s central bank, the National Bank of Kazakhstan, has introduced risk-oriented supervision of the banking sector as of 2019. This should allow the bank to conduct a more holistic evaluation of the sector and its participants (including as regards the nature and complexity of operations, corporate governance standards and capital adequacy) and identify early risks that could potentially affect the overall resilience of the banking sector. In addition, an asset quality review (AQR) looking at the 14 largest banks in the country is expected to be completed by the end of 2019. Following the completion of a similar AQR exercise in Mongolia, the country’s central bank, the Mongol Bank, is carrying out a forensic audit of all banks that require recapitalisation on the basis of the recommendations of the AQR.

In some countries, authorities have initiated reforms with the aim of improving the governance and efficiency of state-owned banks. In Ukraine, for instance, a law on the functioning of the financial sector was adopted in October 2018 with a view to improving corporate governance practices in several state-owned banks and increasing the professionalism of their supervisory boards. Uzbekistan, meanwhile, has announced plans to partially privatise selected banks.

Further progress has also been made with the restructuring of Moldova’s banking sector, following the crisis of 2014. In March 2019, for example, a Bulgarian investment fund acquired a controlling stake in Moldindconbank, Moldova’s second-largest bank. This followed the purchase of the state’s 41 per cent stake in Moldova Agroindbank (MAIB), the country’s largest commercial lender, by a consortium of international investors (including the EBRD) in October 2018. The country’s third-largest bank, Victoriabank, had already been acquired earlier in 2018 by Banca Transilvania, a Romanian lender, in partnership with the EBRD. Such strategic investment in the country’s three largest commercial banks should help to restore confidence in Moldova’s banking sector. In Serbia, meanwhile, the privatisation of Komercijalna banka, the country’s third-largest commercial lender, has gained momentum. The government has increased its stake in the bank to 83 per cent with a view to offering it to a strategic investor through a tender procedure. That tender procedure, which was launched in May 2019, was still ongoing when this report went to print.

At the same time, a number of developments in the financial sectors of economies in the EBRD regions have prompted concerns. Turkey’s financial resilience score has fallen, for example, reflecting a decline in its score for risk management practices and weaknesses in its governance standards. The unexpected dismissal of the governor of the Central Bank of Turkey has also been viewed with concern by market participants. Scores have also declined in Poland, owing to a reduction in the percentage of assets held by private banks.

As indicated above, an emergency order issued by the Romanian government in December 2018 introduced additional taxes in the banking sector, price caps and distribution restrictions in the electricity and gas markets, and new capital requirements for private pension funds. Moreover, those measures were introduced without public consultation. Although some of the measures have already been reversed, they appear to have affected international investors’ confidence in Romania’s economy. Despite recent reform efforts, there remains significant scope for progress as regards the governance standards of financial institutions (including state-owned banks) in a number of countries (including Azerbaijan, Belarus, Tajikistan, Ukraine and Uzbekistan).

A number of countries have adopted measures aimed at bringing energy-sector regulation closer to the standards applied in the European Union. The Albanian government, for instance, has announced plans to establish a national power exchange in order to operate day-ahead and intraday trading platforms. This will help the Albanian energy sector to meet its obligations under the Energy Community acquis and pave the way for further deregulation of the electricity market. Meanwhile, the Ukrainian parliament has ratified the updated annex to the EU-Ukraine Association Agreement with a view to bringing the country’s energy-sector regulation into line with EU law. This updated document covers the whole of Ukraine’s energy sector, including electricity, gas, oil, renewable energy and nuclear energy. Full implementation will result in a significantly reformed regulatory environment in Ukraine’s energy sector.

At the same time, Romania’s energy resilience score has been revised downwards following the issuance of the abovementioned emergency order in December 2018. That order demanded that electricity be supplied to distribution companies (which, in turn, supply electricity to households) at regulated prices. The government also capped the price of gas produced in Romania and stipulated that gas could not be sold to suppliers until household demand had been met. These policies undermine the functioning of Romania’s open energy markets and are not in line with key provisions of the EU’s Electricity and Gas Directives. Following criticism from the business community, the Romanian parliament’s Industrial and Services Committee has now voted to cancel the gas and electricity price caps and return to liberalised price-setting in the energy market. Those revised provisions, if adopted by the Romanian parliament’s Chamber of Deputies, will align Romania’s energy market with the Gas and Electricity Directives and should help to restore investor confidence.

Several countries have also taken steps towards improving air connectivity and the quality of related infrastructure. In February 2019, for example, Greece signed a concession agreement for the construction, operation and maintenance of a new international airport on Crete, the country’s largest island, in order to address capacity constraints at the existing airport. In addition, in April 2019 Greece initiated concession procedures for 23 regional airports that are not yet in private hands or operating under concession agreements. The Greek government has also announced a plan to sell its remaining 30 per cent stake in Athens International Airport. The modest increase in Greece’s integration score also reflects larger non-FDI capital inflows and an improved assessment of the quality of roads.

In Serbia, the concessionaire that had been selected to develop Belgrade’s airport took charge of airport operations in December 2018. This – the country’s first ever large-scale airport concession agreement – is expected to significantly increase the airport’s passenger and cargo capacity.

In January 2019, the Kyrgyz Republic approved the open skies policy and the fifth air freedom (thus lifting restrictions on foreign carriers flying to and from the country’s airports). This is expected to contribute to increases in passenger and cargo traffic and improve the affordability of air services. Uzbekistan, meanwhile, has announced the adoption of the open skies policy and the fifth air freedom in respect of four regional airports, effective from October 2019. In addition, the Uzbek government has unveiled a plan to unbundle Uzbekistan Airways, the country’s state-owned airline, creating two separate companies: an airline and an airport operator. A number of regulatory functions and responsibilities that were previously assigned to Uzbekistan Airways have been transferred to the sectoral regulator. These changes should help to modernise the regulatory environment in the aviation sector and facilitate the further development of Uzbekistan’s aviation industry.

At the same time, the integration scores for Croatia and Slovenia have been revised downwards, reflecting declines in net capital inflows in 2018. Russia has also seen a small reduction in its integration score, reflecting a more restrictive regime for FDI.

This approach measures the state of each quality and its components in a given economy, as compared with the other economies in the EBRD regions and a few select developed economies,1 against a frontier. The frontier is set either by the best performance in this group of economies or by an unobserved theoretical value and provides a common benchmark against which all economies are assessed consistently and comparably. The same frontier values are also applied across the years to ensure that computed scores are comparable and capture changes in underlying indicators through time.

Assessments of Transition Qualities (ATQs) are composite indices combining information from a large number of indicators and assessments in a consistent manner. The underlying indicators within each ATQ are constructed using a wide range of sources, including national and industry statistics, data from other international organisations and affiliated databases (World Bank, IMF, UN); surveys (The Business Environment and Enterprise Performance Survey (BEEPS); Life in Transition Survey (LiTS) and assessments prepared internally by EBRD experts (see Table M.1 below for the list of indicators).

The computation of ATQ indices involves multiple steps, namely: data preparation, normalisation and aggregation. Details of each of these steps are provided below.

For the regional disparity component of the Inclusive ATQ, imputations for the southern and eastern Mediterranean (SEMED) economies and Turkmenistan are necessary due to the LiTS (source of the data for this indicator) not being administered in these economies. In particular, a new series is generated for a full set of economies including SEMED and Turkmenistan based on available indicators on rural-urban disparities from other sources. Using the statistical relationship between the scores produced by this series and LiTS-based regional inclusions scores, missing SEMED and Turkmenistan values were imputed. Further details of this imputation are available on request.

To mitigate the effect that extreme values may have on scores, observations that lie above the 98th percentile are considered outliers and replaced by the next value within the acceptable range. Outlier detection and replacement is only applied to select continuous variables.