copy the linklink copied!Chapter 1. Level playing field in the Eastern Partner countries

This pillar analyses the horizontal aspects of the business environment that ensure competitive neutrality and equal access to inputs and markets for all firms, regardless of their size and ownership type. In the framework of this report, the “level playing field” covers the areas of competition, contract enforcement and alternative dispute resolution, and business integrity. While these factors affect all firms SMEs are often disproportionately affected, and they often lack the resources that allow large and/or state-owned firms to operate in severely flawed institutional environments.

In terms of competition, the basic building blocks for functional competition regimes are present in all EaP countries, but actual implementation remains a challenge. Moreover, competition authorities often lack sufficient resources to fulfil assigned responsibilities, and more effort is needed to ensure enforcement in the areas of cartels and merger control. While all EaP countries have ongoing reforms in the justice sector (contributing to improved contract enforcement procedures), governments should continue working towards a more predictable, transparent, adequately staffed and qualified judiciary. Ensuring equal protection of SME property rights vis-à-vis SOEs and public authorities is another area of focus. In addition, promoting alternative dispute resolution in commercial matters could be an important step towards facilitating SME access to justice. In the area of business integrity, all EaP countries have put significant effort into fighting corruption in both the private and public sectors, but more needs to be done to strengthen enforcement of anti-corruption legislation and promote business integrity principles, with a focus on SMEs.

    

copy the linklink copied!Introduction

Dynamic business entry, growth and development require not only friendly administrative, tax, investment, and trade regimes, but also more fundamental and horizontal aspects of the business environment such as the level of competition, the strength of the rule of law, the transparency of business operations, and the overall quality of public governance. Shortcomings in the institutional framework hindering these factors, of course, affect all firms. However, they place particular burdens on SMEs, since smaller firms lack the resources and political clout that often enable large and/or state-owned firms to operate in severely flawed institutional environments. In fact, in the absence of strong institutions, markets are likely to be dominated by larger businesses with close ties to government that can engage in anti-competitive behaviours and abusive practices towards SMEs. Those abusive practices translate into artificial market entry barriers. Ensuring a level playing field for all firms – in other words, a business environment in which all participants compete under the same conditions – is an important prerequisite for SME development as it reduces opportunities for corruption and creates more space for entrepreneurs and SMEs to grow.

This is especially true in the EaP region, where, despite the significant government efforts described in this report, SMEs continue to face important challenges when it comes to equal treatment vis-à-vis SOEs (e.g. enforcing court decisions against SOEs), as well as high market concentration in certain sectors. In addition, weak and lengthy contract enforcement procedures, as well as inefficient dispute resolution systems, impede access to justice for SMEs, while weak enforcement of anti-corruption laws and low levels of transparency in business operations hamper investment, contribute to the growth of the informal economy, and undermine trust in state institutions.

Ensuring level-playing-field conditions for all firms could have a positive impact on SMEs in a number of areas, such as the following, to only name a few:

  • SME access to finance: Unlike large firms, which tend to develop important political ties to ensure greater profitability and growth, SMEs often lack political resources, which constrains their access to state financing (e.g. credits and grants). And although politically connected firms proved to have easier access to state finance, they are also less profitable, less prone to invest, and less capitalised than politically unconnected enterprises (Bussolo, Maurizio; De Nicola, Francesca; Panizza, Ugo G.; Varghese, Richard, 2019[1]). As a result, SMEs disproportionately bear the costs of distortions in state-capital allocation, the latter leading to important welfare costs for the population and further losses in productivity and growth. Thus, ensuring that all firms have equal access to state financing through proper enforcement of competition and anti-corruption policies could facilitate SME access to finance.

  • SME internationalisation: By ensuring transparency of their business operations through compliance with state regulations (e.g. proper auditing and reporting mechanisms), including with anti-corruption legislation, and by adopting business integrity practices (e.g. codes of conduct and integrity pacts), SMEs could boost investor confidence and further attract FDI. They also increase their chances for linking with large and/or multi-national enterprises, and are more likely both to integrate into global value chains and to establish sustainable cross-border partnerships building on the “clean SME reputation.

  • Operational environment for SMEs: An effective, transparent and independent judiciary facilitates SME access to justice and ensures that SME rights are properly enforced by the law. Thus, a well-functioning judicial system creates a climate of certainty and reliability that enables forward business planning, encourages development of new supplier and customer relationships, and boosts innovation and investment (EU, 2017[2]). In addition, the consistent and rigorous implementation of state policy against corruption in both private and public sectors minimises the risk of corruption – while increasing firms’ productivity (Amarandei, 2013[3]), decreasing SME operation costs, and reducing the share of firms operating in the shadow economy.

This pillar covers level-playing-field conditions along three dimensions that analyse 1) the degree to which the competition policy regimes ensure fair competition for all companies, 2) the efficiency of the contract enforcement system and alternative dispute resolution mechanisms, and 3) the extent to which business integrity policies are in place and promoted by the government in order to prevent corruption in the private sector.1

copy the linklink copied!Competition

Fair competition is critical to both economic growth and poverty reduction. A large body of evidence across both developed and emerging economies suggests that enhancing competition can help raise productivity growth through a number of channels, including the direct impact of competition on market efficiency and technical efficiency (Nicoletti and Scarpetta, 2003[4]; Conway, Janod and Nicoletti, 2005[5]), as well as its indirect impact via the role of competition in spurring innovation (Aghion et al., 2005[6]). Finally, Alesina (Alesina A., 2003[7]) finds that reforms that liberalise entry are likely to spur fixed investment in some sectors.2 Competition creates an environment in which economic actors are incentivised to be more efficient, invest, innovate, and attract customers by offering better goods and services at lower prices. Consumers benefit from greater choice, advanced products and services, higher quality and greater value for money.

Fostering competition in EaP countries, as in many other post-communist economies, has presented a particularly daunting challenge – not only because the suppression of competition was integral to the socialist system, but also because the industrial structures bequeathed to the transition countries by central planners were often highly concentrated. Yet successful, competition-oriented reform has been rewarded: where reformers have been more successful in fostering competition, performance has tended to improve (see e.g., (EBRD, 2002[8]; Carlin W., 2001[9]; Vagliasindi, 2001[10]). Competition can also help promote a cleaner, fairer business environment in which success comes to those firms best able to meet their customers’ needs, rather than to those with the best connections or the deepest pockets (OECD, 2014[11]).

Sound and effective competition does not always arise naturally from private decisions. The temptation is strong for economic players to restrict competition: for greater profits and for “an easier life”.3 While competition law and policy do not specifically target SMEs, a broad and effective competition law enforcement is essential to ensuring a level playing field that will in turn benefit them. “Competitive neutrality” is critical here – the principle according to which all enterprises, public or private, domestic or foreign, face the same set of rules, and where government’s contact, ownership or involvement in the marketplace, in fact or in law, does not confer an undue competitive advantage on any actual or potential market participant (OECD, 2015[12]; OECD, 2018[13]).

From this flows naturally the need for an independent referee that applies “the rules of the game” in a fair and impartial manner, to instil trust in all market players that their efforts to compete on the merits will pay off, and will not be obstructed by private or public restrictions to competition. That is why governments around the world have adopted competition policies, consisting of competition laws and competition authorities to enforce them. Today, approximately 130 jurisdictions have competition regimes, most of which have been adopted in the last 20 years.

This chapter summarises the findings on the competition policy regimes in the six countries of the EU’s Eastern Partnership (EaP). The analysis and recommendations, which stem from these findings, focus on the aspects of a competition law regime that provide for a neutral and effective legal framework while ensuring that the enforcement body is competent, objective and independent in its application.

Assessment framework

The analytical framework applied to the six economies in this dimension draws on a questionnaire investigating four sub-dimensions that are widely agreed across the OECD as forming the foundations of an effective competition policy regime: scope of action, anti-competitive behaviour, probity of investigation, and advocacy (Figure 1.1).

The questionnaire does not seek to create complete and detailed accounts of competition policy regimes, but rather to broadly measure their scope and strength. It has a much stronger focus on the de jure characteristics of a regime than on its de facto enforcement and implementation. While the background research and the fact-finding missions have provided some insights into the actual workings of the various regimes, a fair assessment of their actual implementation may require individual and in-depth evaluations, such as, for example, peer reviews.4

Unlike other chapters of this report, where policy dimensions are assigned a synthetic score from 1 to 5, assessment in this chapter is based on “yes” or “no” answers to the 73 questions of the above-mentioned questionnaire. Where a response to a question is “yes”, then it is referred to as an adopted criterion. Each of the four sub-dimensions has a different number of possible criteria that can be quantified as having been adopted. The assessment also draws on the opinions of OECD competition experts familiar with the EaP economies.

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Figure 1.1. Assessment framework – Competition
Figure 1.1. Assessment framework – Competition

Scope of action

This sub-dimension assesses the scope of competition regimes’ powers to uncover, remedy, deter and penalize anti-competitive behaviour and mergers: It asks the following questions: Is the competition authority invested by law with the power to investigate and sanction anti-competitive practices? Does it have the remit to investigate, remedy, or block anti-competitive mergers? What is the authority’s budget and number of staff?

The scope of action is assessed across four thematic blocks:

  • The competences block covers public and foreign firms’ exemptions from competition law and the competition authority’s financial and human resources.

  • The powers to investigate and powers to sanction/remedy blocks encompass the statutory powers of the authority both to investigate and punish competition law infringements and to investigate and remedy or block anti-competitive mergers.

  • The private enforcement block assesses the extent of provisions for civil action by individuals, firms or groups of consumers seeking compensation for financial damage incurred as a result of competition law violations.

Anti-competitive behaviour

An effective competition law and policy regime ensures that anti-competitive behaviour is punished and anti-competitive mergers are remedied or blocked. It also requires that investigations of alleged antitrust infringements or anti-competitive mergers include an assessment of the economic impact of each case and consider potential efficiency gains. In order to prosecute competition law violations effectively, the competition authority not only needs formal powers to investigate and impose a sanction or remedy, but should also be adequately resourced and skilled.

This sub-dimension gauges those powers and resources across four thematic blocks (mergers, horizontal agreements, vertical agreements, and exclusionary conducts) and asks the following questions: How does competition policy prevent and prosecute exclusionary vertical and horizontal agreements and anti-competitive mergers? Which factors are considered when ascertaining whether anti-competitive practices took place?

It also assesses whether the anti-competitive behaviour is prohibited, what tools authorities have at their disposal when investigating allegedly anti-competitive behaviour, and their enforcement track record.

Probity of investigation

Probity of investigation plays an essential role in fair and effective law enforcement. Companies must be safe in the knowledge that their practices conform to the applicable laws in the economies where they operate. They must also be able to interpret legal procedures correctly and to know and understand the workings of the statutory authority (or other body) that oversees them. Should they have to mount a defence in court, they need to be informed properly of the allegations against them and in good time. Freedom from political influence is a prerequisite of fair and equal competition law enforcement, to ensure that cases are brought or dropped only on their merit (OECD, 2016[14]).

This sub-dimension gauges the fairness of competition law enforcement and the degree to which competition authorities are independent and accountable. It involves three blocks (independence, accountability, procedural fairness) and asks the following questions: How independent and accountable are the institutions enforcing competition law? How transparent are they? How fair are their procedures?

Together, these blocks assess the absence of government interference in investigations or decisions in antitrust infringements and mergers, the rights of companies under investigation, and the transparency of the authorities’ actions and activities, as well as their accountability in court.

Advocacy

Competition may be inhibited by policies, laws and regulations that create barriers to entry or distort incentives for firms. Some distortions are unnecessary and can be eliminated without affecting other government policy objectives. The mandate of a competition authority should therefore extend beyond merely enforcing competition law to addressing the additional obstacles to competition. A competition agency should also participate in formulating public policies to ensure they do not adversely affect competitive market structures, business conduct or economic performance, which would benefit in particular SMEs. In order to foster a widespread competition culture in a society, and to support businesses in their compliance efforts, agencies also need to reach out to various stakeholders and explain whenever possible the benefits of competition.

This section considers the capacity of the competition authority to advocate for a more competitive environment at various government levels. Such advocacy can involve 1) reviewing new and existing regulations to identify any unnecessary distortions to competition and 2) performing market studies that may lead to policy recommendations to make the regulatory environment more pro-competition. It also looks at outreach to public procurement bodies, which play an important role in the fight against cartels, and at wider advocacy activities and asks the following questions: What activities are used to further promote a competitive environment? Are market studies and reviews of new laws and regulations conducted for any distortionary impact on competition?

Analysis

Fair competition is critical to both economic growth and poverty reduction. Competition creates an environment in which economic actors are incentivised to be more efficient, invest, innovate, and attract customers by offering better goods and services at lower prices. While competition law and policy do not specifically target SMEs, a broad and effective competition law enforcement is essential to ensuring a level playing field that will in turn benefit them. This dimension focuses on the aspects of a competition law regime that provide for a neutral and effective legal framework, and that ensure that the enforcement body is competent, objective, and independent in its application.

Although most of the basic building blocks necessary to create functional competition regimes are present in all six EaP countries (Figure 1.2), actual implementation remains the largest challenge. Legal frameworks for competition are generally well developed in all six EaP countries, and cover most basic provisions of functional competition policy regimes. All economies prohibit anti-competitive agreements and abuses of dominant behaviours, and have merger control provisions in place. In all six economies, competition law applies equally to all enterprises irrespective of their size and form of ownership; that is, neither state-controlled nor foreign enterprises are exempted from its scope. However, with the exception of Moldova and Ukraine, which show significant cartel prosecution and/or merger control activities, implementation of the competition law is insufficient. This may be due to a lack of necessary tools, a reluctance to use the available powers, inadequate funding and staffing of the competition agencies, or political factors. Apart from Belarus and Azerbaijan, where competition authorities operate under local ministries, the competition authorities in EaP jurisdictions are formally independent institutions. The competition authorities in all EaP jurisdictions conduct competition assessment of laws and regulations and all six economies consider barriers to entry for SMEs when conducting competition assessments. As for other advocacy activities, such as training for public procurement officials in the prevention and detection of bid rigging in public procurement procedures, training is currently organised in three of the six evaluated countries: Azerbaijan, Georgia and Moldova.

The results of the analysis of competition policy in the EaP countries, based on the number of criteria adopted in each country, are shown in Figure 1.2.

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Figure 1.2. Competition policy: Number of adopted criteria
Figure 1.2. Competition policy: Number of adopted criteria

Note: The maximum number of adopted criteria is 73. The data refer to the number of competition policy criteria formally adopted in the legal framework rather than actual enforcement activity in terms of relevance or quantity. Much also depends on the relevance of the criteria lacking or met, which is not reflected here.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086527

Solid legal frameworks are in place, but implementation is insufficient

Legal frameworks for competition are generally well developed in all six EaP countries, and they cover most, if not all, basic provisions of functional competition policy regimes. All economies prohibit anti-competitive agreements and abuses of dominant behaviours, and have merger control provisions in place. The legal frameworks mostly provide for investigative powers and sanctions, as well as equal treatment of all undertakings irrespective of their size, form of ownership or nationality. Formally, competition authorities are separated from the government in most economies and do not receive directions from other government institutions. Most competition authorities publish regular reports on their activities and are active in competition advocacy – they conduct market studies and comment on laws and regulations, paying attention to entry barriers for SMEs. Most agencies communicate actively with their stakeholders by organising various events that target businesses, representatives of government institutions, lawyers, academia, and media.

With the exception of Moldova and Ukraine, which show significant cartel prosecution and/or merger control activities, implementation of the competition law is insufficient. This may be due to a lack of necessary tools, a reluctance to use the available powers, inadequate funding and staffing of the competition agencies, or political factors. Competition authorities in Belarus and Azerbaijan lack institutional independence, and all EaP economies would benefit from better and more-stable funding of their competition enforcers. The transparency of the legal framework and its implementation is often low, and the business community lacks guidance by the competition authorities. When the competition authorities conduct market studies and comment on the laws and regulations, governments often fail to act on their recommendations. In half of the EaP economies, no due attention is paid to communication between competition authorities and public procurement administrators, to prevent and detect bid rigging in public procurement.

Wide range of tasks, but lack of essential investigation tools

Figure 1.3. shows how the six EaP countries score in terms of the number of criteria adopted in the scope of action sub-dimensions.

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Figure 1.3. Scope of action: Number of adopted criteria
Figure 1.3. Scope of action: Number of adopted criteria

Note: The maximum number of adopted criteria is 27. The chart above refers to the number of competition policy criteria formally adopted in the legal framework rather than actual enforcement activity in terms of relevance or quantity, or about the relevance of the criteria lacking or met.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086546

In all six economies, competition law applies equally to all enterprises irrespective of their size and form of ownership; that is, neither state-controlled nor foreign enterprises are exempted from its scope. Co-operation between the competition authority and sectoral regulators is a regular occurrence.

When investigating an antitrust infringement, some competition authorities lack the power to compel enterprises under investigation, as well as third parties, to provide the necessary information. When investigating a merger, Belarus, Georgia and Ukraine have no or limited powers to enforce information requests. The competition authorities in Armenia, Belarus and Georgia lack the power to conduct unannounced on-site inspections ("dawn raids"), which is the major tool in cartel investigations. Moldova and Ukraine make frequent use of the tool, with positive implications for cartel enforcement in the countries.

Most competition authorities have the power to impose sanctions on undertakings that have committed antitrust infringements, fail to comply with remedies5 or cease and desist orders, hinder an investigation, or do not comply with a merger decision. Most competition authorities also have the power to impose remedies on undertakings in order to clear a merger. However, this does not seem to be a widely used tool across the EaP economies. In Georgia, the competition authority is exceptionally weak on this score: it cannot impose remedies or cease and desist orders in merger cases. While Azerbaijan, Belarus, Ukraine and Moldova can enter into settlements to bring antitrust infringements to a quick end, this is not the case in Armenia and Georgia.

Private enforcement is possible in principle in all six EaP economies for individuals and legal entities. However, this is little help in jurisdictions with low public enforcement activity. Public enforcement is usually the basis for any private enforcement actions to be successful.

The competition authorities usually have a wide range of tasks, often including consumer protection, unfair competition, public procurement or state aid supervision, or sectoral regulation. The overall budgets and average salaries are, in contrast, quite low, and often just a third to a fifth of the average salaries of sector regulators or the central bank (see Figure 1.4. ).

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Figure 1.4. Annual budget of competition authorities (2014-18)
% of gross domestic product (GDP)
Figure 1.4. Annual budget of competition authorities (2014-18)

Note: Data not available for Belarus for 2014-2018 and Azerbaijan for 2014-2016 and 2018.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086565

Hard-core cartels are not prosecuted, and the number of reviewed mergers is low

Figure 1.5 shows how the six reviewed economies score on the number of adopted criteria in the anti-competitive behaviour sub-dimension.

In Azerbaijan, Moldova and Georgia the number of notified mergers is very low, which indicates a lack of compliance on the part of businesses and/or a lack of effective enforcement of the merger rules on the part of the competition agencies. Ukraine stands out – it considered 666 mergers in 2017 and 532 in 2018. With the exception of Georgia and Azerbaijan, all competition authorities blocked or cleared with remedies at least one merger during 2014-18.

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Figure 1.5. Anti-competitive behaviour: number of adopted criteria
Figure 1.5. Anti-competitive behaviour: number of adopted criteria

Note: The maximum number of adopted criteria is 15. The chart above refers to the number of competition policy criteria formally adopted in the legal framework rather than actual enforcement activity in terms of relevance or quantity, or the relevance of the criteria lacking or met.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086584

Although anti-competitive horizontal agreements, including cartels, are prohibited in all six jurisdictions, cartel enforcement activities are insignificant to non-existent in most. The most likely reasons for this are the above-mentioned gaps in investigation and enforcement powers, particularly in Armenia, Azerbaijan, Belarus and Georgia. When leniency programmes exist, as in Armenia, Georgia, Moldova and Ukraine, they are not successful, which may be explained by a lack of enforcement and/or inadequate sanctions. Again, Ukraine stands out, as it investigated 288 hard-core cartels in 2017 and 144 hard-core cartels in 2018, the majority of which were bid-rigging offences.

Anti-competitive vertical agreements are prohibited in all six jurisdictions. Similar to cartel enforcement, the activity of the competition authorities in this field is low, with only Ukraine and Georgia having imposed sanctions or remedies on anti-competitive vertical agreements during 2014-18.

Exclusionary conduct is prohibited in all six EaP jurisdictions, and authorities claim to conduct an economic analysis of the competitive effects of exclusionary conducts when investigating them. Over 2014-18, competition authorities in all jurisdictions, except for Georgia, imposed sanctions and/or remedies on at least one firm for exclusionary conduct.

Transparency and predictability support agency independence

Figure 1.6. shows how the six reviewed economies score on the number of adopted criteria in the probity of investigation sub-dimension.

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Figure 1.6. Probity of investigation: number of adopted criteria
Figure 1.6. Probity of investigation: number of adopted criteria

Note: The maximum number of adopted criteria is 20. The chart above refers to the number of competition policy criteria formally adopted in the legal framework rather than actual enforcement activity in terms of relevance or quantity, or the relevance of the criteria lacking or met.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086603

Independence is important for the effective enforcement of competition rules. It enables competition authorities to take decisions based solely on legal and economic grounds, rather than on political considerations (OECD, 2016[14]). The competition authority is considered independent when it performs its duties and exercises its powers impartially, in particular when the persons making decisions in the competition authority are able to perform their duties and do not seek or take instructions from government or other public or private entity.6 Apart from Azerbaijan and Belarus, where competition authorities operate under local ministries, the competition authorities in EaP jurisdictions are formally independent institutions. They do not obtain any binding directions from the government or ministers on whether they should open or close an investigation on an alleged antitrust infringement, impose or refrain from imposition of specific remedies when closing an investigation on an alleged antitrust infringement, or undertake (or not) a given market/sectoral study. Similarly, the government or ministers have not overturned decisions concerning the clearance or prohibition of a merger in all evaluated economies during the last five calendar years.

As for accountability, competition authorities in almost all evaluated jurisdictions publish reports on their activities and decisions that ascertain the existence of an antitrust infringement, block a merger or clear a merger with remedies. However, such decisions are not publicly available in Azerbaijan, which is also the case with decisions on mergers in Belarus. In all EaP countries, decisions on antitrust infringements and mergers can be subject to judicial review.

In terms of procedural fairness, some of the evaluated jurisdictions still have a long way to go, while others have coped successfully with transparency issues. Most countries provide the parties under investigation for an antitrust infringement with opportunities to consult on significant legal, factual or procedural issues during the course of the investigation, and grant the right to be heard and present evidence, as well as access to file before the imposition of any sanctions or remedies for having committed an antitrust infringement. Armenia, Azerbaijan, and Belarus publish either no or very few guidelines to explain to businesses how the regulator applies competition substantive and procedural provisions.

Competition assessment is essential, but advocacy should also target the private sector

Figure 1.7. shows how the six reviewed economies score for the number of adopted criteria in the advocacy sub-dimension.

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Figure 1.7. Advocacy: number of adopted criteria
Figure 1.7. Advocacy: number of adopted criteria

Note: The maximum number of adopted criteria is 11. The chart above refers to the number of competition policy criteria formally adopted in the legal framework rather than actual enforcement activity in terms of relevance or quantity or the relevance of the criteria lacking or met.

Source: SBA assessment questionnaire 2019.

 StatLink http://dx.doi.org/10.1787/888934086622

The competition authorities in all EaP jurisdictions conduct competition assessment of laws and regulations. It is worth noting that the competition authority of Moldova is becoming increasingly active in this field; for instance, the agency issued 71 recommendations for change in 2017 and 241 recommendations in 2018. At the same time, governments often do not follow such recommendations, without giving reasons for doing so. All six economies consider barriers to entry for SMEs when conducting competition assessment.

Market studies assess the level of competition in a particular sector, identify factors that prevent or distort competition, and issue recommendations to private firms and public bodies on how to improve competition in the sector concerned, or help to determine enforcement priorities for competition authorities (OECD, 2018[13]). The competition authorities in all six EaP economies can conduct market studies, and they have done so over 2014-18. Such market studies include an opinion or recommendation of the competition authority to the government to remove or reduce an obstacle or a restriction to competition caused by an existing public policy, but the government is often not required to respond publicly, as is the case in Armenia, Azerbaijan and Belarus.

As for other advocacy activities, such as training for public procurement officials in the prevention and detection of bid rigging in public procurement procedures, training is organised in half of the evaluated countries, namely in Azerbaijan, Georgia and Moldova.

The way forward

In order to ensure fair competition for all firms in the EaP region, and in particular for SMEs, countries need to boost their competition enforcement efforts, especially in the areas of cartels and merger control:

  • Cartels are the most clear-cut and undisputedly harmful competition law violation, and they affect every country. In particular, small economies with limited openness to trade and small numbers of major economic actors seem to face an even higher risk of becoming victims of cartels than large, open economies (i.e. Armenia, Azerbaijan, Belarus, and Georgia). This comes at a high cost to the consumers and taxpayers (10 – 20% higher prices for goods and services). As cartels often target public procurement, public services come at a much higher cost to taxpayers as well. While leniency programmes can help, they are not a silver bullet and require determined enforcement in the first place in order to be attractive at all.

  • In order to improve merger control, the competition authorities need to ensure that all mergers that meet the legal thresholds are duly notified (i.e. Azerbaijan, Georgia and Moldova). These mergers should then be analysed using sound economic methods where necessary. Authorities should consider a prohibition decision as a realistic option in problematic cases, when competition concerns cannot be appropriately addressed with remedies. If remedies are considered, structural merger remedies should be the preferred option (OECD, 2011[15]).

  • All competition agencies need to have the sufficient investigation and sanctioning tools as an enabling condition for strong enforcement. Four economies – Armenia, Azerbaijan, Belarus and Georgia – do not have effective dawn raid powers, which are a universally agreed-upon indispensable tool for uncovering illegal cartels and bid rigging.7 In addition, sufficient powers to investigate and sanction for non-compliance with orders and requests in all enforcement areas are a necessary tool for all agencies, including in Ukraine and Moldova. This will enable them to base their decisions on a sound factual and economic basis. Competition and procedural laws of advanced jurisdictions can serve as an inspiration and blueprint for necessary changes.

  • Effective and impartial enforcement requires highly qualified enforcers who act in an institutional environment that assures independence from public or private stakeholder interventions and guarantees an absence of corruption. Azerbaijan and Belarus should consider converting their competition enforcement bodies into government-independent institutions. Independence also hinges on competition authorities having sufficient resources, and on the existence of a functional decision-making body at all times, with members being appointed on merit. In order to attract and retain highly qualified lawyers and economists, the salaries of all agencies would need to increase significantly. While effective competition enforcement comes at a cost, all the agencies that have conducted an assessment of the impact of their actions (OECD, 2014[16]) can usually show that they offer an excellent business case.8 Every euro invested in an agency can be expected to generate many euros of consumer savings every year.

  • Governments should ensure that their competition authorities are always involved in drafting or reviewing laws and regulations that have the potential to affect competition in a sector. The authorities should be given sufficient time to comment. Their recommendations should be taken seriously, and governments should commit to publicly explaining themselves when they do not follow them (i.e. Armenia, Azerbaijan, Belarus). The OECD’s Competition Assessment Toolkit9 is a practical methodology for helping competition authorities and other decision makers identify and evaluate existing and proposed policies to see whether they unduly restrict competition (OECD, 2016[17]). Where a detrimental impact is discovered, the toolkit helps to develop alternative ways to achieve the same objectives, with minimal harm to competition.

  • As part of their advocacy activity, and to fight in particular bid rigging in public procurement, EaP economies should enhance (i.e. Azerbaijan, Georgia, Moldova) or start (i.e. Armenia, Belarus, Ukraine) activities to train and educate public procurement officials to draft tenders in a way that prevents bid rigging, and to detect suspicious signs of bid rigging. OECD materials on fighting bid rigging in public procurement10 can offer valuable guidance, and are a standard tool used by many jurisdictions around the world.

copy the linklink copied!Contract enforcement and alternative dispute resolution

Efficient enforcement of contracts and the ability to resolve disputes in timely and cost-effective manner are fundamental elements of a sound business environment. Good enforcement procedures enhance predictability in commercial relationships and reduce uncertainty between the parties, among particular investors, by assuring that their contractual rights will be upheld promptly by the local courts (OECD, 2015[18]). Cumbersome and overly bureaucratic court procedures, as well as lengthy and costly dispute settlements, impose additional costs on firms and may cause them to reduce their activities, disengaging from trade and investment. In particular, they raise the risk of arm’s-length transactions, thus reducing the range of potential suppliers and/or customers with whom the firm can do business. A well-functioning judicial system creates a climate of certainty and reliability that enables forward business planning, encourages the development of new supplier and customer relationships, and promotes innovation, investment, business creation and fair competition – all of which are elements of performing economies (EU, 2017[2]).

The efficiency of the judiciary is particularly important for SMEs, which bear disproportionally higher costs when resolving disputes than larger enterprises, due to their size and limited resources (OECD, 2017[19]). Governments should thus ensure the efficiency and independence of their judicial systems in order to create a climate conducive to SME development.

Assessment framework

This dimension assesses the effectiveness of the contract enforcement and alternative dispute settlement mechanisms in the six EaP countries, paying particular attention to SME-relevant aspects, along three sub-dimensions that cover 1) actual enforcement of contracts by the judicial system; 2) mechanisms for protection of property rights of businesses, including IP rights; and 3) the use of alternative dispute resolution (ADR) mechanisms.

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Figure 1.8. Assessment framework for contract enforcement and alternative dispute resolution
Figure 1.8. Assessment framework for contract enforcement and alternative dispute resolution

Enforcement of contracts by the judicial system

This sub-dimension looks at the time and costs required to enforce a contract in a jurisdiction, as well as at the overall quality of the judicial process. In particular, the assessment considers the existence and quality of case management tools to ensure the timely and organised flow of cases through the court from initial filing to disposition. These tools can simplify SME access to justice and include the availability of specialised commercial courts, the existence of small claims courts or simplified procedures for small claims, and court automation.

Specialised commercial courts contribute to a significant reduction in the number of cases pending before the main first-instance courts, shorter resolution times, consistency in the application of the law, and more qualitative dispute resolution, as judges build up their expertise.

Small claims courts and simplified procedures for small claims use informal hearings, simplified rules of evidence and more streamlined rules of civil procedure, including the possibility for the parties to represent themselves, which increase SME access to justice. They also play an important role in reducing backlogs and caseloads in higher courts and provide for faster and less costly dispute settlement.

Court automation includes random case assignment to judges (which minimises opportunities for corruption) and the automation of key court procedures, such as filing of the court appeal, notification of a legal action taken against a business (i.e. process), payment of court fees, and publication of judgements – all of which improve the transparency and predictability of the judicial system.

Mechanisms for protecting companies’ property rights

Protection of property rights is a crucial element for the effective functioning of a market economy as it ensures the secure and peaceful possession of property by businesses and individuals and contributes to long-run economic growth, investment, and financial development (Acemoglu, 2005[20]). Given that cases of direct expropriation of small businesses are very rare, this assessment considers the protection of property rights against indirect expropriation, that is, a situation where the state interferes in the use of property or in the enjoyment of its benefits even if the assets are not seized and their legal title is not affected (OECD, 2015[18]). The protection of the property rights of businesses is analysed through the prism of mechanisms available to SMEs to appeal an administrative decision affecting their property rights, and looking at the efficiency of the enforcement of court decisions against public authorities.

Intellectual property rights (IPR) protection is another element covered by this sub-dimension. A well-designed IPR system and its effective enforcement provide an important incentive for firms to invest in research and development and fosters the creation of innovative products and processes (OECD, 2015[18]). This component of the sub-dimension assesses the ways in which SMEs can ensure the protection of their IPR, i.e. the enforcement of the IPR by the judicial system and the efficiency of IPR dispute resolution mechanisms.

Alternative means of resolving commercial disputes

Alternative dispute resolution (ADR) mechanisms represent an alternative means of resolving commercial disputes, especially when traditional courts lack efficiency due to lengthy formal procedures, high filing fees or delays in case processing. ADR thus provides SMEs with more accessible and affordable channels to settle commercial disputes.

The best known and most frequently used ADR mechanisms, including for the settlement of commercial disputes, are arbitration, mediation, conciliation, mini-trials, and the ombudsman mechanism. They are usually performed by industry bodies, specialised agencies or third party evaluators at the national or international level. In the scope of this report, which is SME-specific, the analysis focuses on the availability of the mediation mechanism for settling commercial disputes, the business ombudsman mechanism, and government efforts to promote ADR as a means of conflict resolution between businesses.

Analysis

Efficient enforcement of contracts and the ability to resolve disputes in a timely and cost-effective manner are fundamental elements of a sound business environment. The efficiency of the judiciary is particularly important for SMEs, which bear disproportionately high costs when resolving disputes, due to their size and limited resources. This dimension assesses the effectiveness of the contract enforcement and dispute settlement mechanisms in the six EaP countries with regard to three elements: include enforcement of contracts by the judicial system; mechanisms for protection of property rights of businesses, including IP rights; and the use of alternative dispute resolution mechanisms in commercial cases.

According to the World Bank’s Doing Business 2020 report (World Bank, 2019[21]), five EaP countries have advanced in implementing justice sector reforms and have improved their performance on the “enforcing contracts” indicator, except for Belarus (Table 1.1. ). Thus, the time required to enforce a contract is very long in Armenia and Moldova, cost requirements are still very high in Moldova and Ukraine, and the quality of the judicial process leaves much room for improvement, particularly in Azerbaijan, Belarus, Moldova and Ukraine. In addition, according to the latest assessment of European judicial systems by the Council of Europe, the EaP countries11 lack an efficient enforcement framework, as the execution of court decisions is excessively lengthy and is often subject to the unlawful practices of the enforcers, as well as the non-execution of decisions against public authorities and state institutions (Council of Europe, 2018[22]). In order to facilitate SME access to justice, all countries have introduced simplified procedures for small claims and court automation is under way.

At the same time, evidence shows that the EaP region still struggles to ensure independent judicial systems due to high corruption risks and undue government influence on the judiciary, which is an important impediment to quality contract enforcement.

The problem is exacerbated by the modest budgetary allocations to judicial systems in Armenia, Azerbaijan and Georgia, when compared to EU countries. (Council of Europe, 2018[22]) (Figure 1.9. ). In case of Moldova and Ukraine, where the budgets for judiciary have increased following reforms in the sector, the allocated funds do not always translate into the efficiency of judiciary.

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Figure 1.9. Allocated budgets to judiciary
% of GDP and per inhabitant, 2016
Figure 1.9. Allocated budgets to judiciary

Note: Belarus is not included in the assessment.

Source: European Judicial Systems database, 2016.

 StatLink http://dx.doi.org/10.1787/888934086641

In addition, the results of the World Economic Forum’s 2019 Global Competitiveness Index (World Economic Forum, 2019[23]), which looks at judicial independence and the efficiency of the judiciary in settling disputes, highlight the need for continued government efforts in this area (Figure 1.10. ), with all EaP countries participating in the exercise showing modest results ranging from 2.3 to 4.6.

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Figure 1.10. EaP countries in the WEF Global Competitiveness Index, selected indicators
Scale from 1 (lowest) to 7 (highest)
Figure 1.10. EaP countries in the WEF Global Competitiveness Index, selected indicators

Note: Data for Belarus not available.

Source: World Economic Forum, Global Competitiveness Index 2019 database.

 StatLink http://dx.doi.org/10.1787/888934086660

In terms of protection of business property rights in litigation against public authorities, EaP countries struggle with the enforcement of court decisions against state institutions and state-owned or controlled companies. In order to protect legitimate business rights against unlawful decisions by public authorities, Ukraine and Georgia have established a Business Ombudsman mechanism, while Armenia and Azerbaijan have plans to establish one. Although IPR protection has been strengthened over the last decade in all EaP countries, its effective implementation is challenged by weak enforcement mechanisms, and, often, by the lack of qualified judges to treat IP disputes (except for Belarus). When it comes to alternative means of resolving of commercial disputes, mediation (as the most affordable ADR mechanism for SMEs) has been introduced in all EaP countries except for Ukraine. However, ADR has not gained ground in commercial dispute settlements, and SMEs have little awareness of ADR benefits. Government efforts to promote ADR have been limited to legal incentives, with a few actions taken to raise SME awareness on ADR.

Legal frameworks for contract enforcement are largely in place and the justice sector reforms are ongoing

This sub-dimension looks at the time and costs required to enforce a contract in a jurisdiction, as well as at the overall quality of the judicial process. According to the World Bank’s Doing Business 2020 report (World Bank, 2019[21]), five EaP countries have advanced in implementation of the justice sector reforms and have improved their performance on the “enforcing contracts” indicator, except for Belarus (Table 1.1. ). However, the time and cost of enforcement are still very high in some countries (e.g. Armenia, Moldova and Ukraine), and the quality of the judicial process (i.e. court structure and proceedings, case management, and court automation) could be further enhanced- particularly in Azerbaijan and Belarus.

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Table 1.1. Enforcing contracts in EaP countries, WB Doing Business 2020

EaP countries

Time (days)

Cost (% of claim value)

Quality of judicial process

(0-18, 18 the highest)

Overall ranking

for indicator

Armenia

570

16

12

30

Azerbaijan

277

18.5

8

28

Belarus

275

23.4

7.5

40

Georgia

285

25

12

12

Moldova

585

28.6

11

62

Ukraine

378

46.3

11.5

63

Source: World Bank’s Doing Business 2020 database.

In all EaP countries, contractual disputes are heard within the first instance civil courts. Azerbaijan, Belarus and Ukraine have established specialised commercial courts to provide for quality dispute resolution, and Armenia, Georgia and Moldova have opted for judges specialised in commercial matters within common civil courts. In order to facilitate SME access to justice, all countries have introduced simplified procedures for small claims, with the peculiarity of Belarus, which has an extensive practice of using writ proceedings as a simplified means to resolve commercial disputes.12

All EaP countries reported at least some initiatives to automate court procedures. In particular, in 2019, Ukraine launched a pilot version of an upgraded Single Judicial Information and Telecommunication System, an automated system for key court procedures and communication, that covers all local and appeal courts. In Georgia, the automated case management and communication system now covers all courts across the country; in Belarus, a similar system is expected to be finalised in 2020. Azerbaijan continued its efforts to implement a President’s Decree on the establishment of the Electronic Judicial Information System providing for court automation, while in Moldova, the modernisation of the courts ICT system is under way and not all courts have had their key procedures automated. With regard to random case assignment to judges, Armenia, Georgia and Ukraine have automated this procedure for all courts across the countries. Conversely, in Moldova and Azerbaijan random case distribution is only partial (i.e. 60% in Azerbaijan) (ACN, 2019[24]) and in Belarus judges are assigned cases manually.

Property rights of SMEs face challenges when it comes to litigation against public authorities and enforcement of IP rights

This sub-dimension covers mechanisms available to SMEs to appeal an administrative decision affecting their property rights, the efficiency of the enforcement of court decisions against public authorities, and the enforcement of the IPR by the judicial system. EaP countries’ performance on protection of both physical and intellectual property rights suggests the need for further government actions to strengthen the legal framework and secure enforcement by an independent and effective judiciary in the context of a stable and predictable legal environment. According to the International Property Rights Index 2018, EaP countries perform quite low on property rights protection, with Ukraine and Moldova lagging behind (Figure 1.11. and Table 1.2. ).

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Figure 1.11. International Property Rights Index 2018
Scale from 1 (lowest) to 10 (highest).
Figure 1.11. International Property Rights Index 2018

Note: Data for Belarus is not available.

Source: Property rights alliance (2018[25]), International Property Rights Index.

 StatLink http://dx.doi.org/10.1787/888934086679

The enforcement of property rights in private-to-public litigation remains a problematic issue across the EaP region, as the evidence suggests that court decisions against public authorities are rarely executed (Council of Europe, 2018[22]). For instance, in Ukraine, the law prohibits the enforcement of court’s decision against the property of any business in which the state holds 25 % of stakes or more. In Azerbaijan and Moldova, court users complain on frequent non-execution of court decision against public authorities. Thus, public authorities and SOEs may directly or indirectly enjoy preferential treatment when it comes to the enforcement of court decisions, which ultimately breaches the principle of equal treatment of parties in the litigation. Reasons for poor enforcement in this area include restrictions in the public sector budget legislation (e.g. regulations on amount of and periods for, payments; and difficulties in determining the source of the state funds for the payment, etc.). Others include the absence of provisions on the satisfaction of the judgement debt for certain public entities (EBRD, 2014[26]), and the lack of knowledge and capacity of enforcement agents to execute court’s decision against public authority or state-owned entity. When it comes to IPR protection, all EaP countries have put in place a legal framework regulating the use and protection of IPR, including introduction of administrative, civil and criminal (mainly concerning counterfeiting and piracy) liability for IP violations. The state agencies dealing with intellectual property (i.e. AGEPI in Moldova, the National Centre on IP in Belarus, Sakpatenti in Georgia, the IP Agency in Armenia, Ukrpatent and the National IP Office in Ukraine, and the Copyright Agency in Azerbaijan) are responsible for granting patents and treating appeals of agencies’ decisions through the special appeal committees or boards.

Armenia, Azerbaijan and Georgia have established departments with judges specialised in IP matters within courts of first and second instances (e.g. the Tbilisi City Court and the Tbilisi Court of Appeal in Georgia). Ukraine and Belarus have made a further step in this regard by introducing dedicated bodies to treat IP disputes at the level of the highest courts: a Specialised Tribunal for Intellectual Property under the Supreme Court of Belarus and the newly established High Court on Intellectual Property of Ukraine. However, given the current state of IP litigation and in spite of certain country achievements in enhancing the efficiency of IPR protection framework (e.g. Ukraine), EaP governments show overall modest results on the Property rights and Intellectual Property protection Index 2019 (Table 1.2. ). Governments should continue working to improve the actual enforcement of the IPR protection system by the judicial system and to build the capacity of judges treating IP disputes (through training and the exchange of good practices with other jurisdictions) so they can provide timely and quality services.

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Table 1.2. Property rights and intellectual property protection in EaP countries, 2019
Scale from 1 (lowest) to 7 (highest).

EaP country

Property rights

Intellectual property rights

Armenia

4.8

4.2

Azerbaijan

5.1

5.2

Georgia

4.7

3.8

Moldova

3.9

3.8

Ukraine

3.3

3.4

EU-13 average

4.5

4.5

Visegrad average

4.3

4.3

Note: Belarus is not included in the assessment.

Source: World Economic Forum, Global Competitiveness Index 2019 database.

Business ombudsmen are still rare in EaP countries. Only Georgia and Ukraine (see Box 1.1) have introduced such institutions to provide for the protection of legitimate business rights against the unlawful decisions by the public authorities. This is particularly relevant for SMEs, which, due to their relative lack of resources and influence over the decision of the public authorities, may find it more difficult than the large companies to appeal the administrative decisions affecting their property rights.

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Box 1.1. The Business Ombudsman Council in Ukraine: Protecting business rights against the malpractice of public authorities

With the support of EBRD and OECD, Ukraine’s Business Ombudsman Council was established in 2014 with the aim of being the first contact point for companies seeking redress against unfair treatment by public authorities. It is an alternative mechanism for resolving administrative disputes – between a company and a state institution, civil servants, or state-owned or state-controlled companies – in cases when an entrepreneur has attempted but failed to do so through administrative appeal process.

In order to seek the Council’s assistance, an entrepreneur can file a complaint online providing all the supporting evidence. Upon receipt, the Council will assess the eligibility of the complaint, conduct the investigation, issue recommendations to the relevant public body and then monitor their implementation. To increase transparency, the outcome of the investigation is published on the Council’s website and is communicated to complainants, relevant government agencies, and to the media.

Over the first four years of its operation, the Council received over 5 000 complaints of state bodies’ malpractice and managed to close over 3 000 cases, resulting in companies recovering a total of UAH 13.3 billion (EUR 465 million). In 2018, the Council received 1792 complaints, 73% of them coming from SMEs, and mostly concerning tax issues (61%), the actions of law enforcement bodies (14%), malpractice by state regulators (7%) and local municipalities (4%).

The Business Ombudsman Council also monitors systemic issues and recommends changes to the legislation affecting business environment as a whole. For instance, in 2018 the Council published two reports covering labour-related issues and main business challenges in dealing with customs administration.

Source: Business Ombudsman Council (2018[27]), Annual Report.

Alternative dispute resolution mechanisms should be further promoted by the EaP governments

This sub-dimension covers 1) available ADR for settlement of commercial disputes by businesses and 2) government efforts to build an ADR culture within the business community, with a focus on SMEs. While ADR mechanisms are not yet a distinctive trait of EaP countries’ judicial cultures, all countries have established important legal grounds for ADR implementation.

Mediation, the most affordable option of ADR for SMEs, has been embedded into the law in all EaP countries, except for Ukraine. Mediation services are mostly provided by the private sector, i.e. mediation centres connected to Chambers of Commerce at national and regional levels (i.e. Ukraine, Georgia) and other free-standing private organisations (e.g. Ukrainian Mediation Centre, Centre for Mediation and Negotiation in Belarus), with some cases of court-annexed mediation (Belarus13), and state-regulated mediation services provision (Moldova14). Ukraine represents an interesting case as it has an extensive practice of mediation in spite of absence of a law regulating mediation. Furthermore, the profession of mediator in Ukraine is included in the national occupational standards and mediation is provided by the recently established centres within the Chambers of Commerce across the country.

Nevertheless, despite the availability of mediation as an alternative mechanism of dispute resolution for SMEs in most EaP countries, evidence gathered during the SBA assessment suggests a lack of SME awareness of mediation and general preference among small businesses to settle disputes on their own without going to the courts or addressing to the third parties. In addition, SMEs in the region generally lack trust in mediation, as ADR has not gained ground in commercial dispute settlement in the region and is more familiar as a mechanism for settling other civil disputes (i.e. child-care, divorce, etc.).

When it comes to promoting ADR in the EaP countries, government efforts remain limited to legal incentives for ADR use in commercial disputes, whereas training and awareness-raising activities are for the most part provided by non-governmental organisations. Thus, mechanisms encouraging ADR use by businesses introduced by the states vary. In Ukraine and Belarus, for example, they include the reimbursement of up to 50% of court fees in case of dispute settlement through mediation; and in Georgia, a reduction of the state fee from 3% to 1% for parties engaged in mediation is in place. The requirement for pre-filing mediation for certain type of litigations will take effect in 2020 in Azerbaijan, and the possibility of referral to mediation with all parties’ consent, as well as introducing ADR clauses in commercial contracts, are available in all EaP countries.

Arbitration, both domestic and international, is recognised across countries (except for Azerbaijan, where only a foreign arbitration mechanism is in place) and domestic courts have the de jure obligation to enforce foreign arbitral awards following the six countries’ adherence to the New York Arbitration Convention.15 However, given that arbitration is a costly mechanism that also imposes certain thresholds for claims, it is not accessible to the majority of SMEs, i.e. micro and small enterprises, and is generally more suited for medium-sized and large companies.

Another ADR mechanism – the business ombudsman – has lately gained prominence in Georgia and Ukraine, and is experiencing an uptake in Armenia and Azerbaijan. The business ombudsman plays an important role in resolution of private-to-public disputes, in particular when it comes to unfair treatment of businesses or the malpractice of the state authorities, civil servants, and SOEs. The ombudsman intervenes by studying the case and providing relevant conclusions and recommendations to the concerned public body, with the mandate to flag important systemic issues businesses face to the high government officials in order to seek a structural solution to the problem (i.e. the development of amendments to the law, regulations, etc.). For example, in Georgia, the Business Ombudsman Office is also present on the dispute resolution board of the Ministry of Finance and of the State Procurement Committee of Georgia, which enables the Office to represent business rights on relevant issues before the public bodies.

The way forward

Going forward, to provide for an efficient contract enforcement across EaP countries, the governments have to continue their efforts to ensure a predictable, transparent, adequately staffed and qualified judiciary. In addition, working towards strengthening legal frameworks for ADR in commercial matters and carrying out awareness-raising activities to promote ADR use by businesses, would be an important step towards facilitating SME access to justice. Thus, governments could consider the following:

  • Accelerate court automation procedures, expanding e-court mechanisms16 for countries where those are not widely adopted (Azerbaijan, Armenia, Belarus, Moldova), and introducing monitoring mechanisms to address the deficiencies of the systems for countries where an e-court is already operational (Georgia, Ukraine).

  • Ensure proper qualification of judges treating IP disputes within common civil courts of first instance (i.e. Armenia, Azerbaijan, Georgia, Moldova) through provision of regular training courses in IP law, and build the capacity of dedicated IP courts (i.e. Belarus, Ukraine) to provide timely and quality IPR resolution.

  • Consider strengthening the ADR infrastructure by embedding certain mechanisms into the law (i.e. mediation in Ukraine; business ombudsman (or similar) in Armenia, Azerbaijan, Moldova, and Ukraine) to provide for efficient dispute resolution for SMEs, including when it comes to litigation with public authorities.

  • Stepping up efforts to raise SME awareness of ADR and its benefits in resolving commercial disputes by developing of a comprehensive approach to promotion activities (e.g. organisation of information campaigns; training courses; conferences for businesses, judges and lawyers; etc.). This would be another important element of building ADR culture within the business community in EaP countries.

copy the linklink copied!Business integrity

Business integrity refers to internal company programmes, functions, people, processes or controls that seek to prevent, detect and address “serious corporate misconduct” (OECD, 2015[28]). This comprises such corrupt practices as bribery, money laundering, financing of terrorism, facilitation payments, unethical provision and acceptance of gifts, and favouritism in concluding contracts.

Business integrity is a shared responsibility of governments, business associations, NGOs and companies, as their joint efforts can lead to reduced corruption and increased levels of compliance in the private sector. This dimension focuses on the role of governments in ensuring the integrity of enterprises, while it does not minimise the importance of actions taken by business associations and companies in this regard. On the one hand, the state can set up mechanisms to counter and eradicate corruption through preventive and enforcement measures. On the other hand, the state is the ultimate standard setter for business operations, including in such high-corruption risk areas as financial reporting and auditing, and can also assist companies in the implementation of business integrity standards.

Compliance with regulations on business integrity implies different costs for companies of different sizes and often reflects firms’ assessment of the costs of non-compliance. Thus, large enterprises are believed to have greater reasons for seeking to detect, prevent and address corporate misconduct due to their complex and often decentralised structures, and the perceived high costs of non-compliance (i.e. company losses, reputational damage, decrease in investments, risk of enforcement actions, personal liability, etc.) (OECD, 2015[28]). At the same time, it may be easier for SMEs – due to their size, simpler corporate structure and smaller scale of operations – to ensure integrity, as they do not face the same corruption risks as large companies.

However, a number of SME-specific factors make them particularly exposed to corruption. These include, but are not limited to, the absence of an integrity function within the company (often due to limited resources to afford such a function); a short-term perspective (which often leads to the pursuit of short-term benefits of corruption rather than considering its long-term consequences); lack of knowledge of laws regulating business operations; and lack of legal support. Also contributing to SME fragility in the face of corruption are 1) limited bargaining power over state institutions and public officials when receiving requests for unofficial payments and 2) a lack of transparency, knowledge and skills required for quality bookkeeping and internal audit, which contribute to SME fragility in face of corruption (UNODC, 2012[29]). Governments can generally act along two directions to promote business integrity practices in the SME sector. On the one hand, awareness-raising activities can communicate the benefits of business integrity measures for SMEs, such as enhancing the firm’s reputation and potential to attract investment. On the other hand, governments can incentivise SMEs to invest in business integrity practices, using them as conditions for easier participation in public procurement, tax reductions and exemptions from inspections (Box 1.2).

This section presents recent policy developments in the field of business integrity in the EaP countries, outlines major challenges, and provides recommendations to EaP governments on further strengthening the business sector’s integrity, with a particular focus on SMEs.

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Box 1.2. Incentives for anticorruption compliance: Implications for SMEs

To complement enforcement actions against corruption in the private sector, governments can introduce incentives to promote compliance with business integrity standards and reward firms for good practice. At least four categories of incentives may be considered:

  • Penalty mitigation. Penalty mitigation is used to encourage companies to report corruption and to co-operate during the investigation. Companies may be rewarded with reduced fines or charges, or even through a defence against corporate liability offences (i.e. committed by an employee or an agent).

  • Procurement preference. This includes benefits for companies that demonstrate a meaningful commitment to integrity practices and could take form of an eligibility requirement or affirmative competitive preference. For SMEs, a minimum threshold for certain formal practices may be set to allow small enterprises to satisfy integrity requirements without having to invest into full-fledged integrity programmes.

  • Access to government benefits. This measure foresees preferential access of a compliant company to state support or services. Benefits may include a “fast-track” access to customs services, preference in export credit support, corporate tax benefits, exemptions from inspections, etc. Such benefits could contribute to reducing regulatory burden and facilitating SME access to finance.

  • Reputational incentives. Public acknowledgement of a company’s commitment to combating corruption can be an important tool for encouraging corporate integrity. Governments can reinforce the effect of the good reputation by establishing whitelists of compliant firms, attributing certificates and integrity awards to enterprises. SMEs can draw a particular benefit from public recognition of their efforts in meeting anti-corruption requirements, because they can signal reliability and increase their chances of co-operation with large and international business partners.

Source: UNODC (2013[30]), A Resource Guide on State Measures for Strengthening Corporate Integrity.

Assessment framework

The assessment framework for this dimension looks at 1) the overall institutional and legal framework for business integrity policy; 2) mechanisms for prevention and enforcement of corruption in the private sector; and 3) activities carried out by the governments to promote business integrity measures (Figure 1.12. ).

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Figure 1.12. Assessment framework for business integrity dimension
Figure 1.12. Assessment framework for business integrity dimension

Legal and institutional framework for business integrity

Business integrity is an aspect of anti-corruption policy. It includes laws and regulations on detection, prevention, investigation and prosecution of corruption in the private sector. To ensure the effectiveness of policy on business integrity, governments should adopt a risk-based approach to policy development, based on a study of business integrity risks17 carried out in close co-operation with business associations, NGOs and enterprises. In addition, the institutional framework for policy implementation plays an important role, as independent, adequately staffed and professional anti-corruption bodies are essential for effective fight against corruption.

Mechanisms for prevention and enforcement of corruption in the private sector

Key mechanisms for prevention and enforcement of corruption in the private sector considered in the assessment are as follows:

  • Disclosure of beneficial owners of companies. The beneficial or ultimate owner of the company, also referred to as final beneficiary, is the natural person who ultimately owns or controls a legal entity through a variety of means (e.g. holding more than 25% ownership interest of a legal person, or possessing significant voting rights over the company’s decisions and the entity’s board of directors) (OECD, 2019[31]). The identification of a beneficial owner is a complex process often requiring a case-by-case approach, and has an important impact on the transparency and integrity of the business sector. By creating a complex ownership structure,18 the ultimate owner of a company can conceal his identity and interests, and attempt to conduct illegal economic activities that are difficult to detect for law enforcement authorities (i.e. corruption, tax evasion, money laundering, financing terrorism, etc.). Establishing mandatory disclosure of beneficial owners and related mechanisms to check the information provided are good tools for preventing of corruption in the private sector.

  • Criminal liability of legal persons for corruption can take different forms depending on jurisdictions, but it always aims to ensure effective, proportionate and dissuasive sanctions for corruption crimes committed by legal persons (OECD, 2015[32]). Sanctions include fines (most frequently used), confiscation, restriction of corporate rights, and dissolution of the legal entity (exceptional penalty). Criminal liability of legal persons is more effective than administrative liability as it allows for a larger set of investigative tools and coercive measures, mutual legal assistance between jurisdictions and longer periods for crime investigation.

  • Mechanisms for reporting corruption and whistle-blower protection. The availability and accessibility of various channels to report corruption for businesses is an important element of corruption detection. These should be complemented by a strong system for whistle-blower protection against discriminatory or retaliatory actions, providing guidance and information to prospective whistle-blowers on the existing system of protection and enforcement of their rights (OECD, 2010[33]).

Promotion of business integrity measures by the government

Governments can play an important role in incentivising businesses to comply with existing integrity standards and in promoting the adoption of compliance programmes. This can be done via a wide range of financial incentives that include, but are not limited to, tax reductions, benefits when applying for a loan, easier participation in public procurement, and attribution of financial awards, as well as non-financial incentives, such as integrity awards and whitelists of compliant companies that can bring a positive impact on a company’s reputation.

Moreover, conducting awareness-raising activities with a focus on SMEs (e.g. training events, seminars, round tables) and supporting existing integrity initiatives through business associations helps to strengthen business integrity and make it part of the business culture of a country.

Analysis

Business integrity is an important part of government actions to prevent and combat corruption, both in private and public sectors, and to increase the levels of compliance with state policies and regulations in the private sector. This dimension analyses recent policy developments in the field of business integrity in the EaP countries, focusing on the overall institutional and legal framework for business integrity policy; mechanisms for prevention and enforcement of corruption in the private sector; and activities carried out by the governments to promote business integrity measures.

Since 2016, the EaP governments’ efforts to improve business environment and to enforce anti-corruption policy in both public and private sectors at different levels of governance have resulted in some important advances for countries in World Bank’s Doing Business 2020 rankings (i.e. Azerbaijan, Georgia) (World Bank, 2019[21]). However, the EaP region cannot boast the same progress in the Transparency International Corruption Perception Index (CPI) (Table 1.3.). EaP countries’ performance in CPI, except for that one of Georgia, remains well below the EU 13 or Visegrad average (Figure 1.13. ).

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Table 1.3. EaP countries progress in Corruption Perception Index ranking

Corruption Perception Index

EaP countries

2016*

2018**

Armenia

113

105

Azerbaijan

123

152

Belarus

79

70

Georgia

44

41

Moldova

123

117

Ukraine

131

120

* Total number of countries = 176.

** Total number of countries = 180

Source: Transparency International, Corruption Perception Index 2016 and 2018 data.

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Figure 1.13. Corruption Perception Index
Values range from 0 (highly corrupted) to 100 (very clean).
Figure 1.13. Corruption Perception Index

Notes: * Total number of countries = 176.

** Total number of countries = 180.

Source: Transparency International, Corruption Perception Index 2016 and 2018 data.

 StatLink http://dx.doi.org/10.1787/888934086698

Thus, progress in the CPI remains very modest for all EaP countries, with incremental changes in countries with low rankings, i.e. Moldova and Armenia each moving 5 and 8 positions up, respectively; Azerbaijan sliding back to the 152nd position; and Ukraine making the most progress to reach 120th position. The results suggest that despite the success of reforms to improve the overall business conditions, EaP countries need to step up their efforts towards better governance, rule of law, greater transparency and accountability of public and private sectors, including through eradication of corruption.

To be sure, perception indexes can be a misleading indicator of corruption levels; for example, a single high-profile case can have a big impact on outsiders’ perceptions, for better or for worse, whereas gradual improvement or deterioration may be registered only with a delay. However, this is true only up to a point. The evidence suggests that countries with a reputation for corruption generally do have serious problems with it (Mocan, 2008[34]; Olken, 2009[35]).

Moreover, surveys of ordinary citizens across EaP countries also point to high levels of corruption in public institutions, even when they ask direct questions about respondents’ own experiences of paying bribes. While there are no very recent comparable data covering the six EaP countries, the last Transparency International’s most recent Global Corruption Barometer found that in Azerbaijan, Moldova and Ukraine that more than 30% of citizens reported having paid a bribe when in contact with a public service in the preceding 12 months. Belarus and Armenia fell into the 20-30% bracket, while in Georgia fewer than 10% of respondents had done so (Transparency International, 2017[36]). These data reflect responses at the start of the current assessment period, so one cannot rule out improvements since then, especially with the development of e-services; nonetheless, they underscore the fact that certain realities are indeed mirrored in the perceptions index.

Business integrity is becoming an increasingly important part of anti-corruption frameworks in EaP countries, but it still lacks a risk-based approach. Despite the EaP countries’ steps to promote business integrity through a number of laws on corruption prevention and prosecution, effective enforcement of these laws remains a challenge, due to the weak institutional anti-corruption infrastructure and lack of progress in reforming the judiciary. In terms of prevention of corruption and enforcement of anti-corruption legislation, all EaP countries except Azerbaijan have introduced mandatory beneficial ownership disclosure, but the mechanism lacks the tools required to effectively verify the validity of provided information. Criminal liability of legal persons for corruption has been introduced into all EaP countries’ legislation, excepting Belarus and Armenia, but its enforcement often lacks effective co-ordination and implementation mechanisms. In addition, while EaP countries have put in place various means of reporting corruption and integrated the protection of whistle-blower rights into their respective legislations, these efforts still do not provide reliable protection due to persisting loopholes in the legislation, lack of independence of the judicial system, and weak institutional frameworks for corruption prevention across the EaP region. Moreover, EaP governments’ initiatives to promote business integrity practices are scarce and rely extensively on donor or private sector support. Comprehensive awareness-raising programmes on business integrity and meaningful financial and other incentives to encourage SME adoption of integrity practices are lacking in all EaP countries.

Institutional and legal frameworks for business integrity need to be strengthened

This sub-dimension assesses the legal framework for business integrity, namely available provisions within the anti-corruption legislation, and institutions implementing anti-corruption policy. Business integrity is becoming an increasingly important part of anti-corruption frameworks in EaP countries. Moldova included business integrity in its Anti-corruption Strategy for 2017-2020, Azerbaijan foresees promoting transparency and accountability in the private sector under its National Action Plan on Promotion of Open Government 2016-2018, while Belarus is tackling corruption in the private sector through its National Programme for Combatting Crime and Corruption 2017-2019. Armenia, Georgia and Ukraine plan to introduce business integrity as one of the directions in their anti-corruption strategies.

However, such positive developments were not based on comprehensive studies of business integrity risks.19 The few available reports assessing the corruption risks for businesses (with no particular focus on SMEs) have either been carried out by private research institutions (Moldova), or are the result of a risk-based approach to tax inspections (Belarus and Ukraine).

EaP countries are also promoting business integrity through laws on corruption prevention and prosecution, bribery, money laundering, terrorism financing, and integrity of the public service. However, effective enforcement of these laws remains a challenge, due to the weak institutional anti-corruption infrastructure lacking an appropriate mandate, adequate financial and human resources and independence from vested interests. In this regard, Ukraine has advanced the most since 2014, with the establishment of a number of specialised anti-corruption institutions: the National Agency for Corruption Prevention (NACP); the National Anti-Corruption Bureau (NABU), which is in charge of investigation of corruption offences; the Specialised Anticorruption Prosecutor Office (SAPO), in charge of prosecution of corruption; the Agency for Recovery and Management of Assets (ARMA), in charge of identification, tracing and management of seized assets; and the High Anti-corruption Court, which considers corruption cases. However, the success of the newly established institutions has been considerably slowed down by the lack of reform in the judicial system and some other factors, including the Prosecutor General’s Office and the State Security Service challenging the mandate of NABU by not providing necessary co-operation and overtaking cases. In addition, NACP and SAPO have been sharply criticised for a perceived lack of political independence following their leadership’s involvement into some unethical and allegedly corrupt behaviour (ACN, 2019[37]; Lough, John; Dubrovskiy, Vladimir, 2018[38]).

Mechanisms for prevention and enforcement of corruption in the private sector lack efficient implementation

This sub-dimension focuses on the ways corruption is prevented and anti-corruption legislation enforced with regard to the private sector, namely the analysis of disclosure of beneficial owners, criminal liability of legal persons for corruption, and mechanisms for reporting and whistle-blower protection available in EaP countries. Although all EaP countries have advanced in the prevention of corruption in recent years by introducing a number of positive reforms, the reforms often lack appropriate mechanisms for implementation. Beneficial ownership disclosure has become mandatory in all countries, except Azerbaijan, where it only applies to financial sector operators. In some countries like Armenia, the law on disclosure is recent (adopted in 2019), whereas in others it has been operating for a longer period – e.g. Ukraine that established a database of beneficiary owners within its open-data government portal in 2017. While this is an important development, the absence of tools to verify information on beneficial ownership hampers the effectiveness of the disclosure mechanism.

In addition, Azerbaijan, Georgia, Moldova and Ukraine, and have taken important steps towards the criminalisation of corruption by introducing liability of legal persons for corruption offences. For instance, in 2018, Azerbaijan adopted amendments to the code of punishment that enabled applications of the criminal liability mechanism introduced in 2016. Ukraine introduced the principle of criminal liability of legal persons to the Criminal Code in 2013, Belarus is in the process of amending the Law on Combatting Corruption, and Armenia has submitted draft provisions to the Criminal Code for Government approval. However, despite these significant improvements, the enforcement of the principle seems to have not taken an important place on the governments’ agenda and lacks efficient co-ordination and implementation mechanisms (Council of Europe, 2018[22]). Governments should continue their efforts to reform the judiciary to enable its independence from vested interests and ensure that law enforcement officers, investigators and judges are well-trained to enforce corporate liability law and have both efficient investigative tools at their disposal and sufficient time to investigate corruption crimes committed by legal persons.

All EaP countries have put in place different mechanisms for reporting corruption, including through the website of the Prosecutor General’s Office (e.g. Azerbaijan, Belarus), the ministry of justice, or other ministries in charge of anti-corruption policy (Armenia, Georgia, Moldova, Ukraine). In addition, Armenia and Georgia have recently established dedicated whistle-blowing platforms: www.azdararir.am and www.mkhileba.gov.ge, respectively. In Moldova, the National Anticorruption Centre receives the reports on corruption by email or by phone, and in Ukraine businesses can blow the whistle through the National Agency on Corruption Prevention or file a complaint with the Business Ombudsman Council in case of presumed corruption acts by the public administration.20 In Belarus, the government has put in place a mechanism of financial reward for those who help detect corruption cases; the amount of the award varies from 10 to 50 “basic values”21 depending on the gravity of the corruption crime uncovered.

Protection of whistle-blower rights provides witnesses of corrupt behaviour with assurance and understanding of the mechanism for their actual protection in case they report corruption. All EaP countries, except for Azerbaijan, have integrated the protection of whistle-blower rights into their anti-corruption or other legislation (without, however, specific provisions for businesses). Nevertheless, the adopted reforms do not provide reliable protection and enforcement of whistle-blowers rights because of the existing loopholes in the legislation, lack of independence of the judicial system and weak institutional framework for corruption prevention (e.g. Georgia, Ukraine,) (OECD, 2019[39]). In addition, lack of data on the number of reports by businesses (except for Ukraine, where the data are partially provided by the Business Ombudsman Council), the difficulty of tracing enforcement actions following private sector reports, and the actual application of whistle-blower protection make it difficult to evaluate the efficiency of the protection system.

EaP governments’ initiatives to promote business integrity are limited

This sub-dimension assesses state efforts to promote of business integrity, including through dedicated financial and other incentives, and awareness-raising activities. The role of governments in promoting business integrity practices is not yet recognised as a strategic priority; it remains generally limited to ad hoc activities organised jointly by state agencies or ministries, or in co-operation with NGOs and the private sector.

Nevertheless, interesting examples can be found. In Armenia, the Ministry of Justice, in partnership with a telecom operator, has conducted training in compliance; in Moldova, the National Anticorruption Centre and the Competition Council initiated an online co-operation platform to promote integrity in the private sector through the exchange of good practices between businesses. In Georgia, the recent expansion of the Business Ombudsman’s mandate to encompass promotion of business integrity policy, has led to the organisation of business integrity seminars in the region and the launch of an e-platform for business complaints and requests. The Ukrainian Network for Compliance and Integrity (UNIC) has become an important actor in promoting business integrity (Box 1.3).

While these initiatives constitute an important development towards promotion of business integrity, no comprehensive or large-scale awareness-raising programme has been put in place by any government throughout the EaP region in order to encourage small companies to develop and adopt internal compliance programmes (i.e. code of conduct, integrity charts, etc.). Moreover, financial and other incentives encouraging businesses to adopt compliance mechanisms and meet the integrity standards are lacking in five EaP countries (Belarus excepted), and business associations and NGOs promoting the integrity of the private sector among their members could use some support from the government.

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Box 1.3. Promoting private sector integrity: The Ukrainian Network of Integrity and Compliance

Launched by the Business Ombudsman Council with the support of the EBRD and OECD in May 2017, the Ukrainian Network of Integrity and Compliance (UNIC) is the most active organisation in promoting ethical, transparent and responsible ways of doing business in Ukraine. UNIC’s role is threefold: it is a place for promotion of responsible business conduct, a platform for implementing integrity standards in line with best international practices, and lastly, an educational project fostering business integrity and transparency in the society and businesses community.

As of January 2019, the Network comprised 60 companies employing more than 63 thousand people in 46 cities in Ukraine. To become a member of the Network, a company should adhere to certain principles that include:

  • publicly available commitment towards integrity and anticorruption

  • development and implementation of internal policies and compliance rules

  • provision of support for compliance at the management level

  • improving business ethics awareness among partners and colleagues

  • training employees, customers and contractors

  • collaborating with partners and contractors sharing the same principles

As a member, the firm can enjoy the following benefits:

  • good business reputation

  • collective counteraction to corruption

  • reduction of regulatory pressure

  • easier access to finance (credit)

  • sharing the best compliance practices

  • use of the UNIC certification

UNIC has developed its own business certification procedure, is planning to establish a system to monitor the implementation of business integrity and compliance principles by its members, and supports the introduction of legal incentives for business integrity by the government.

Source: UNIC website, https://unic.org.ua.

The way forward

To enhance the integrity of SMEs in the EaP region, strengthen enforcement of anti-corruption legislation, and promote business integrity principles within the business community with a focus on SMEs, governments could do the following:

  • Conduct studies of business integrity risks, as an inherent element of anti-corruption policy. This will allow for design and implementation of targeted policy addressing actual risks SMEs face when operating in a given business environment.

  • Put in place a system to verify the validity of information on beneficial ownership. This would be an important step for all EaP countries towards ensuring the transparency of financial operations in the private sector and deterring potential infringements.

  • Adopt criminal liability of legal persons for corruption (i.e. Armenia, Belarus) and ensure effective enforcement of existing criminal liability provisions (i.e. Azerbaijan, Georgia, Moldova, Ukraine) through relevant training for law enforcers and judiciary, as well as the provision of effective investigative tools and reasonable time for the investigation of corruption crime.

  • Conduct analysis and gather data on the number and nature of corruption reports submitted by businesses through available platforms – i.e. dedicated whistle-blower platforms (Armenia and Georgia), hotlines to the Prosecutor General’s Office and ministries (Azerbaijan, Belarus, Ukraine), and the agency on corruption prevention (Moldova) – while adopting a focus on SMEs.

  • All EaP governments should engage in active promotion of business integrity through awareness-raising activities for SMEs, the introduction of incentives (including financial) for companies to adopt of compliance programmes by companies, and support for business associations in disseminating the information on the importance and benefits of integrity programmes for SMEs.

copy the linklink copied!Policy Instruments – Level playing field

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Table 1.4. Dimension challenges and policy instruments – Level playing field

Dimension

Challenges / Opportunities

Policy instruments

Competition

Institutional and budgetary independence

To fulfil their mandate, competition agencies need to be trusted, impartial, and competent. Investigations and decision making should not be an easy target of corruption allegations.

Provide competition agencies with a status of independence from the government. This will allow them to pursue their mandate in a neutral way.

Increase budgets to allow for the recruitment of highly qualified lawyers and economists and the purchase of the necessary IT equipment. This will allow for qualified and timely interventions against competition law violations.

Effective enforcement

Good legal frameworks are meaningless without effective enforcement. The consumers in all jurisdictions will benefit greatly from interventions – in particular those against cartels and anti-competitive mergers.

Boost cartel enforcement by granting effective powers to carry out unannounced inspections (dawn raids). They are a universally agreed upon indispensable tool for uncovering illegal conspiracies.

Strengthen investigation tools and sanctioning powers for all violations of the law, and for breaches of orders. This will enable proceedings based on sound facts and economics.

Ensure that mergers are duly notified, and that anti-competitive mergers are prohibited or remedied by mostly structural means. This will ensure that market structures remain competitive, and that dominance will be prevented.

Contract enforcement

and alternative dispute resolution

Courts system lacks the efficiency, independence and transparency necessary to ensure effective contract enforcement

Deficiencies in case management, lengthy court automation processes, and the lack of effective enforcement of court decisions complicates SME access to justice.

Accelerate on court automation, expanding e-court mechanisms for countries where they are not widely adopted, and introduce monitoring mechanisms to address the deficiencies of the systems for countries where e-court is already operational.

Provide for stronger enforcement mechanisms of court decisions against public authorities and SOEs, by ensuring legal grounds for timely reimbursement by the state, and that enforcements agents are well-trained, free from undue influence by the third parties, and have adequate workload.

Almost non-existent use of ADR mechanisms in resolution of commercial disputes by SMEs

Lack of legal grounds for ADR and gaps in SME awareness of ADR benefits for dispute settlement, as well as insufficient state efforts to promote relevant ADR mechanisms.

Consider strengthening ADR infrastructure by embedding certain mechanisms into the law to provide for efficient dispute resolution for SMEs, including when it comes to litigation with public authorities.

Step up efforts to raise SME awareness of ADR and its benefits in resolving commercial disputes through development of a comprehensive approach to the promotion activities (i.e. organisation of information campaigns; training programmes; conferences for businesses, judges and lawyers; etc.) would be another important element of building ADR culture within the business community.

Business integrity

Weak policy framework for business integrity in the context of lacking consistent enforcement of anti-corruption legislation

Institutional and legal frameworks in place could benefit from improvements to address existing weaknesses. Effective enforcement will contribute to greater integrity of the business sector.

Make the study of business integrity risks an inherent element of anti-corruption policy as it allows for the design and implementation of targeted policies addressing actual risks SMEs face when operating in the given business environment.

Adopt criminal liability of legal persons for corruption and ensure its effective enforcement – through relevant training for law enforcement and the judiciary and the provision of effective investigative tools and reasonable time for investigation of corruption crime.

Lack of government actions towards promotion of business integrity among SMEs

SMEs are unaware of the benefits deriving from adoption of business integrity practices and often lack sufficient resources to invest in integrity measures. In this regard, businesses could benefit from state support.

Actively promote business integrity through awareness-raising activities for SMEs, the introduction of incentives (including financial), for the adoption of compliance programmes by companies, and support for business associations in disseminating the information on the importance and benefits of integrity programmes for SMEs.

References

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[24] ACN, O. (2019), “Progress Report Update, Azerbaijan”, Istanbul Anti-Corruption Action Plan, Fourth Round of Monitoring, https://www.oecd.org/corruption/acn/OECD-ACN-Azerbaijan-Progress-Update-2019-ENG.pdf.

[37] ACN, O. (2019), “Progress Update Report, Ukraine”, 4th Round of Monitoring of the Istanbul Anti-Corruption Action Plan, https://www.oecd.org/corruption/acn/OECD-ACN-Ukraine-Progress-Update-2019-EN.pdf.

[6] Aghion, P. et al. (2005), “Competition and Innovation: an Inverted-U Relationship”, The Quarterly Journal of Economics, Vol. 120/2, pp. 701-728, http://dx.doi.org/10.1093/qje/120.2.701.

[7] Alesina A., E. (2003), “Fractionalization”, Journal of Economic Growth, Vol. 8/2, pp. 155-194, http://dx.doi.org/10.3386/w9411.

[3] Amarandei, C. (2013), Corruption and Foreign Direct Investment: Evidence from Central and Eastern European States, https://www.econstor.eu/bitstream/10419/198251/1/ceswp-v05-i3-p311-322.pdf.

[27] Business Omdudsman Council (2018), Annual Report, https://boi.org.ua/media/uploads/annual2018/annual_report_2018_en.pdf.

[1] Bussolo, Maurizio; De Nicola, Francesca; Panizza, Ugo G.; Varghese, Richard (2019), Political Connections and Financial Constraints, Evidence from Transition Countries.

[9] Carlin W., E. (2001), “Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-Country Survey”, William Davidson Institute Working Paper 376, http://dx.doi.org/10.2139/ssrn.270320.

[5] Conway, P., V. Janod and G. Nicoletti (2005), “Product Market Regulation in OECD Countries: 1998 to 2003”, OECD Economics Department Working Papers, No. 419, OECD Publishing, Paris, https://dx.doi.org/10.1787/783417550348.

[22] Council of Europe (2018), European Judicial Systems: Efficiency and Quality of Justice, https://rm.coe.int/rapport-avec-couv-18-09-2018-en/16808def9c (accessed on 4 April 2019).

[26] EBRD (2014), “Enforcing court decisions in the Commonwealth of Independent States, Georgia and Mongolia: comparative review”, Law in Transition 2014, pp. 34-51, https://www.ebrd.com/downloads/research/law/lit14e.pdf.

[8] EBRD (2002), “Transition Report: agriculture and rural transition”, Economic transition in central and eastern Europe and the CIS, https://www.ebrd.com/downloads/research/transition/TR02.pdf.

[2] EU (2017), The Quality of Public Administration “Toolbox”, http://dx.doi.org/10.2767/161784 (accessed on 24 July  2019).

[50] Hicks, J. (1935), “Annual Survey of Economic Theory: The Theory of Monopoly”, Econometrica, Vol. 3/1, p. 1, http://dx.doi.org/10.2307/1907343.

[38] Lough, John; Dubrovskiy, Vladimir (2018), Are Ukraine’s Anti-corruption Reforms Working?, https://www.chathamhouse.org/sites/default/files/publications/research/2018-11-19-ukraine-anti-corruption-reforms-lough-dubrovskiy.pdf (accessed on 19 July 2019).

[34] Mocan, N. (2008), “What Determines Corruption? International Evidence from Micro Data”, Economic Inquiry, Western Economic Association International, Vol. 46/4, pp. 493-510, http://dx.doi.org/10.3386/w10460.

[4] Nicoletti, G. and S. Scarpetta (2003), “Regulation, Productivity and Growth: OECD Evidence”, OECD Economics Department Working Papers, No. 347, OECD Publishing, Paris, https://dx.doi.org/10.1787/078677503357.

[31] OECD (2019), A Beneficial Ownership Implementation Toolkit, https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf (accessed on 15 July  2019).

[39] OECD (2019), Progress Update on Fourth Round Monitoring Report, Ukraine, https://www.oecd.org/corruption/acn/OECD-ACN-Ukraine-Progress-Update-2019-EN.pdf (accessed on 20 April 2019).

[48] OECD (2019), Recommendation concerning effective action against hard core cartels.

[46] OECD (2019), Recommendation for Co-operation between Member Countries in Areas of Potential Conflict between Competition and Trade Policies, https://legalinstruments.oecd.org/public/doc/190/190.en.pdf.

[40] OECD (2018), Business and Finance Outlook, http://www.oecd.org/fr/daf/oecd-business-finance-outlook.htm.

[13] OECD (2018), Market studies guide for competition authorities, https://www.oecd.org/daf/competition/market-studies-and-competition.htm.

[19] OECD (2017), Small, Medium, Strong. Trends in SME Performance and Business Conditions, https://www.oecd-ilibrary.org/docserver/9789264275683-en.pdf?expires=1563963427&id=id&accname=ocid84004878&checksum=D7DB1516A7FEA30B2DF04157415FE06C (accessed on 24 July 2019).

[14] OECD (2016), Independence of competition authorities: From designs to practices, https://one.oecd.org/document/DAF/COMP/GF(2016)5/en/pdf.

[17] OECD (2016), OECD Competition Assessment Toolkit, http://www.oecd.org/daf/competition/assessment-toolkit.htm.

[28] OECD (2015), “Corporate Governance and Business Integrity”, A Stocktaking of Corporate Practices, http://www.oecd.org/daf/ca/Corporate-Governance-Business-Integrity-2015.pdf (accessed on 3 March 2019).

[42] OECD (2015), Guidelines on Corporate Governance of State-Owned Enterprises, https://www.oecd.org/corporate/guidelines-corporate-governance-soes.htm.

[32] OECD (2015), Liability of legal persons for corruption in Eastern Europe and Central Asia, https://www.oecd.org/corruption/ACN-Liability-of-Legal-Persons-2015.pdf (accessed on 15 July  2019).

[18] OECD (2015), Policy Framework for Investment, https://www.oecd.org/daf/inv/investment-policy/Policy-Framework-for-Investment-2015-CMIN2015-5.pdf (accessed on 5 February  2019).

[12] OECD (2015), Roundtable on competitive neutrality, http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP(2015)5&docLanguage=En.

[47] OECD (2015), Trust and Business Report, http://www.oecd.org/daf/ca/Corporate-Governance-Business-Integrity-2015.pdf.

[11] OECD (2014), Factsheet on how competition policy affects macro-economic outcomes, https://www.oecd.org/daf/competition/2014-competition-factsheet-iv-en.pdf.

[16] OECD (2014), Guide for helping competition authorities assess the expected impact of their activities, http://www.oecd.org/daf/competition/guide-impactassessment-competition-activities.htm.

[43] OECD (2012), Recommendation on Regulatory Policy and Governance, https://www.oecd.org/gov/regulatory-policy/2012-recommendation.htm.

[41] OECD (2011), Guidelines for Multinational Enterprises, http://mneguidelines.oecd.org/guidelines/#_ga=2.25574333.1630870150.1559810553-724982119.1535700227.

[15] OECD (2011), https://www.oecd.org/daf/competition/market-studies-and-competition.htm, http://www.oecd.org/daf/competition/RemediesinMergerCases2011.pdf.

[33] OECD (2010), , G20 Anti-Corruption Action Plan, Protection of Whistleblowers, https://www.oecd.org/g20/topics/anti-corruption/48972967.pdf (accessed on 16 July 2019).

[49] OECD (2009), Guidelines for fighting bid rigging in public procurement, http://www.oecd.org/daf/competition/guidelinesforfightingbidrigginginpublicprocurement.htm.

[44] OECD (2009), Recommendation on Competition Assessment, https://www.oecd.org/daf/competition/oecdrecommendationoncompetitionassessment.htm.

[45] OECD (2001), Recommendation concerning Structural Separation in Regulated Industries, http://www.oecd.org/daf/competition/recommendationconcerningstructuralseparationinregulatedindustries.htm.

[35] Olken, B. (2009), “Corruption Perceptions vs. Corruption Reality”, Journal of Public Economics, Vol. 93(7-8)/August, pp. pages 950-964, https://ideas.repec.org/a/eee/pubeco/v93y2009i7-8p950-964.html.

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[30] UNODC (2013), A Resource Guide on State Measures for Strengthening Corporate Integrity, https://www.unodc.org/documents/corruption/Publications/2013/Resource_Guide_on_State_Measures_for_Strengthening_Corporate_Integrity.pdf (accessed on 23 July 2019).

[29] UNODC (2012), Corruption Prevention to foster small and medium-sized enterprise development, https://www.unodc.org/documents/corruption/Publications/2012/Corruption_prevention_to_foster_small_and_medium_size_enterprise_development_Vol_2.pdf (accessed on 3 March 2019).

[10] Vagliasindi, M. (2001), “Politique de la concurrence dans les économies en transition”, Revue d’économie financière, Vol. H-S/6, pp. 233-272, http://dx.doi.org/10.3406/ecofi.2001.4560.

[21] World Bank (2019), Doing Business 2020, https://www.doingbusiness.org/en/doingbusiness.

[23] World Economic Forum (2019), Global Competitiveness Index, https://www.weforum.org/reports/how-to-end-a-decade-of-lost-productivity-growth.

Notes

← 1. These three dimensions are introduced as additional areas of investigation for the first time in this SBA assessment. For this reason, the authors have chosen to assess the performance of EaP countries in these areas not by using the 1-5 SME Policy Index scoring methodology, but rather by supplying a qualitative assessment that refers to established international benchmarks whenever applicable.

← 2. Besides OECD recommendations, guidelines and instruments focusing on competition policy as such (www.oecd.org/daf/competition/), competition is an integral part of other OECD policy fields and instruments – such as the Policy Framework for Investment (PFI) (OECD, 2015[18]), the Business and Finance Outlook (OECD, 2018[40]), the Guidelines for Multinational Enterprises (OECD, 2011[41]), the Guidelines on Corporate Governance of State-Owned Enterprises (OECD, 2015[42]), the Recommendation on Regulatory Policy and Governance (OECD, 2012[43]), the Recommendation on Competition Assessment (OECD, 2009[44]), the Recommendation concerning Structural Separation in Regulated Industries (OECD, 2001[45]), the Recommendation for Co-operation between Member Countries in Areas of Potential Conflict between Competition and Trade Policies (OECD, 2019[46]), and the Trust and Business Report (OECD, 2015[47]).

← 3. “An easier life” is a quote from the economist John Hicks (1935[50]). While laying down the foundations of free economy theory, Adam Smith pointed to the risk of anticompetitive strategies: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (The Wealth of Nations). Hence the need to “lend a hand to the invisible hand” through competition law and enforcement.

← 4. More information is available at https://www.oecd.org/site/peerreview/ and https://unctad.org/en/Pages/DITC/CompetitionLaw/Voluntary-Peer-Review-of-Competition-Law-and-Policy.aspx

← 5. Remedies are structural or behavioural measures imposed on undertakings by competition agencies in order to solve a competition concern in abuse of dominance or merger cases. Compared to outright prohibitions, remedies can be a more proportionate means to safeguard or re-establish competition on markets.

← 6. Wouter P.J. Wils (2019) “Independence of Competition Authorities: The Example of the EU and its Member States”, World Competition, Volume 42, Issue 2, June 2019, p. 8, http://ssrn.com/author=456087

← 7. See also OECD Recommendations on effective action against hard core cartels (OECD, 2019[48]), with an explicit recommendation to confer dawn raid powers to competition agencies, and on fighting bid rigging in public procurement (OECD, 2009[49]).

← 8. For instance, the Competition Council of Lithuania has averaged a ratio of direct consumer benefits to budget of at least 7:1 since 2012 (Competition Council of the Republic of Lithuania, 2017). The estimated consumer benefit generated by the EC Directorate-General for Competition, averaged between 0.1 and 0.2% of GDP, amounting to between EUR 14.21 billion and EUR 28.72 billion (DG Competition, 2017). The UK Consumer and Markets Authority calculated that for the period 2014-17 the estimated direct financial benefit to consumers of its activities was GBP 3.7 billion in aggregate, representing annual average consumer savings of GBP 1.2 billion. The ratio of direct benefits to cost was 18.6:1 (CMA, 2017). The Dutch Authority for Consumers and Markets generated savings for consumers of around EUR 760 million in 2016 (ACM, 2017).

← 9. See https://www.oecd.org/competition/assessment-toolkit.htm

← 10. https://www.oecd.org/daf/competition/fightingbidrigginginpublicprocurement.htm.

← 11. Belarus is not included in the assessment.

← 12. See country chapter on Belarus.

← 13. In Belarus, mediation is also provided within the court system, i.e. court-annexed mediation that suggests that the court controls the procedure by setting the timeline for the dispute settlement (one month) and ensuring the enforcement of the agreement reached by parties as a court order.

← 14. In Moldova, mediation is regulated by the government and carried out by the private sector organisations. The Mediation Council established by the Ministry of Justice in 2007, organises and coordinates the work of mediators in the country and promotes mediation mechanism, including through certification of mediators, establishment of the list of accredited mediators, development of standards and training programmes, and awareness-raising campaigns on mediation. According to the data provided by the Council, 249 commercial disputes have been resolved through mediation in 2018 (vs 107 in 2017).

← 15. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958 https://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/New-York-Convention-E.pdf

← 16. E-court mechanisms or e-court system include availability of an electronic case management system; possibility to file initial complaint, to serve process, and to pay court fees electronically; online publication of judgments and automatic electronic case assignment to judges; inter-court electronic communication system. For more information, please see https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB16-Chapters/DB16-CS-EC.pdf.

← 17. Such a study would assess integrity risks at different levels of operations, i.e. in tax and customs sector, when applying for permits, licenses, complying with the state regulations, etc.

← 18. For instance, consider the case where a limited liability company (LLC) is declared as direct legal owner of a Joint Stock Company (JSC), while the beneficial owner of the LLC indirectly controls JSC through the LLC.

← 19. A study of business integrity risks is conducted with the involvement of the private sector and civil society to ensure that the identified measures are relevant and have the desired anti-corruption effect in practice, and that the private sector is committed to their implementation.

← 20. See Box 1.1.

← 21. As of 1 January 2019, the basic value equals BYR 25.5.

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