enepo 2nd workshop warsaw, april 12 1 wp11, chapter 4 cost of institutional harmonization veliko...

ENEPO 2nd workshop Warsaw, April 12

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WP11, Chapter 4WP11, Chapter 4Cost of institutional harmonizationCost of institutional harmonization

Veliko Dimitrov

Institute for Market Economics

Sofia, Bulgaria


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Some notes

• ENP countries = neighboring countries = CIS countries: Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine + Russia

• Standards or regulations = technical requirements but not “EU regulations” as an autonomous part of EU law


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Coverage of Chapter 4

• Areas and degree of harmonization

↓

• Ways of measurement

↓

• Estimation of costs


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If all put in a single equation, …

• State of institutional development at the starting point;

• Areas to be harmonized over time;

• Desired or required final state of harmonization by areas, institutions or units, disaggregated to a level at which transformation can be assessed and measured;


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If all put in a single equation, … (2)

• Cost of “one unit harmonization” representing transformation at a such disaggregated level;

• Velocity or years of implementation


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What costs are we looking for ?

Direct costs

Direct budgetary costs – directly paid from the state or regional budgets in order to fulfil certain requirements (administrative, regulatory, technical)

Direct private corporate costs – directly payable by companies in order to achieve a minimum required level of compliance with a variety of standards and norms

Indirect costs, second-round effects, negative implications

Indirect budgetary costs – costs not directly payable by the state budget but emerging due to changes in the institutional environment

Indirect private corporate costs – indirect costs for company owners and investors as a result of company failures and bankruptcies


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Main harmonization areas in the ENP countries

1. Internal market – free movement of people, single market for goods, services and capital;

2. Food safety

3. Competition rules

4. Customs rules

5. Employment and social policy


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Main harmonization areas in the ENP countries (2)

6. Enterprise policy

7. Environment

8. External trade

9. Public procurement

10. Transport sector

11. Energy sector

12. Agriculture


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Free movement of people

• H: abolishment of all discriminatory measures based on nationality of migrant workers in regard of working conditions, remuneration and dismissal

• NH: free movement of EU citizens within the Union, Schengen information system, penetration of external borders, visas, asylum, immigration, rights of non-EU nationals, relations with non-EU member countries, recognizing qualifications, skills and mobility and social protection of workers


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Single market for goods• H:gradual removal of all export and import

restrictions according to the PCAs, gradual liberalization of trade in steel products and gradual removal of export duties on ferrous scrap and voluntary harmonization with EU technical requirements

• NH: consumer health, genetically modified organisms, community patents, biotechnological inventions, etc.


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Single market for services

• H: removal of obstacles according to WTO services commitments, effective implementation of legislation setting out basic principles of non-discrimination, compliance with the IMF recommendations, etc.

• NH:recognition of qualifications, competitiveness of services related to businesses, liberal professions, inland navigation, intra-Community air routes, postal services, etc.


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Free movement of capital• H: protection of foreign investments as well as

to liquidation or repatriation of these investments and of any profits resulting from them

• NH: consumer credit, actions for injunctions, common taxation of parent comoanies and their subsidiaries, indirect taxes on the raising of capital, Statute for a European Company, Investor compensation schemes, late payments, etc.


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Food safety• H: approximation in the sphere of food hygiene, including

food processing, convergence with EU food traceability legislation, general food safety principles and requirements (Regulation (EC) No 178/2002), implementation of the Hazard Analysis Critical Control Point system at enterprises and controlling bodies, including the fish industry

• NH: labelling, presentation and advertising of foodstuffs, deregulation of pack sizes, prices of products offered to consumers, frozen food, genetically modified organisms, novel foods and novel food ingredients, nutrition and allergens, etc.


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Competition rules

• H: state aid policy, anti-trust legislation, control regimes

• NH: calculation of fines, immunity from and reduction of fines, information on infringements and complaints, exemptions of agreements of minor importance as well as the competition rules applicable to specific sectors: agriculture (state aid in the agricultural sector, state aid to small businesses) and postal services


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Customs

• H: general legislation aligned with the international practice, adoption of the harmonized system in use, risk based customs control, well-trained customs officials

• NH: Community customs code, the Common Customs Tariff and the Integrated Tariff, customs check and exemptions at internal and external borders, the specific schemes and the agreements with third countries


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Employment and social policy

• H: non-discriminatory treatment of migrant workers, trade unions’ rights and core labour standards based on European standards

• NH: Partnership for growth and employment, the legal instrument for Community employment policies, incl. the quality of employment as well as reporting and the statistics, job creation measures, social protection, etc.


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Enterprise policy

• H: national registration system for companies, adoption and implementation of a system of impact assessment of regulatory measures, consultation of stakeholders, etc.

• NH: small and medium-sized enterprises, multiannual programme for enterprises and entrepreneurship, financing, corporate social responsibility, etc.


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Environment• H: strategic planning of environment issues and

co-ordination between relevant actors, establishment of procedures regarding access to environmental information and public participation, structures and procedures to carry out environmental impact assessments

• NH: biodiversity, genetically modified organisms, management of specific soil types, discharge of substances, civil protection measure, noice management and the cooperation with third countries


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External trade

• H: gradual removal of restrictions and non-tariff barriers, harmonization of the remaining import licensing and registration requirements with those of the EU, etc.

• NH: export credit insurance rules, dual-use items and technology, exports of cultural goods, rules for imports from certain non-EU member countries, anti-dumping measures, anti-subsidy measures, defence against trade barriers, etc.


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Transport• H: co-operation in satellite navigation (including

joint research actions and applications), improved efficiency of freight transport services (including issues of border crossing procedures), incl. multi-modal services and address issues of interoperability

• NH: carriage of passengers, employment and working conditions, technical harmonization of motor vehicles, inland waterways navigation, the Single Sky and air traffic management, bio fuels, passenger rights, intelligent transport systems, European space policy


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Energy• H: gradual convergence towards the regulatory

principles of the EU internal electricity and gas markets, including price formation, reduction of network losses, nuclear safety standards

• NH: climate change, greenhouse gas emission allowance trading scheme, energy taxation, European Strategic Energy Technology Plan, sustainable power generation from fosil fules, “Intelligent Energy – Europe” programme for innovation and competitiveness, etc.


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Limited scope of harmonizationAreas Coefficient of limited harmonization [0;1]

(1=full harmonization)

Agriculture / Food safety 0.15

Competition 0.5

Customs 0.4

Employment and Social Policy 0.1

Energy 0.7

Enterprise 0.2

Environment 0.4

External Trade 0.6

Free movement of people 0.3

Single market for goods 0.85

Single market for services 0.3

Free movement of capital 0.65

Company law 0.2

Public procurement 0.75

Intellectual property 0.8

Transport 0.3


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How it is done?

• Based on the relation between the respective activity area containing all measures (full harmonization) and those that the ENP countries are supposed to harmonize

• Main weakness: arbitrary judgment


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Example – public procurement

• H: establishment of open and competitive award of contracts in all areas – goods, services and construction works, possibility of independent review in the event disputes and effective dissemination of tendering opportunities and time-limits

• NH: public awarding in the water, energy, transport and postal services sectors, defence procurement, eGovernment measures, public procurement partnerships and concessions under the Community law


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Example – public procurement (2)

• The number of areas to be harmonized and not to be harmonized is generally the same

• The first category encompasses more general and wide-ranging measures (presumably more resource-intensive)

• The second one consists of specific and some sector-oriented measures, i.e. presumably the weighted share of all harmonization-related costs, will be less than 50% (assigned coefficient 0,75)


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Existing studies IndicatorCountry

Agriculture Environment Transport

Bulgaria - 15 billion euro (Angelov, 2001);

- 8,6 billion euro (EC, 2001);- 11,7 – 15,0 billion euro (IIASA,

1999)

5,3 billion euro (Angelov, 2001)

Cyprus 1,1 billion euro (EC, 2001)

Czech Republic - 6,6 – 9,4 billion euro (EC, 2001);

- 10,4 – 13,4 billion euro (IIASA, 1999)

Estonia - 4,4 billion euro (EC, 2001);- 1,5 billion euro (IIASA, 1999)

Hungary - 4,1 – 10 billion euro (EC, 2001);

- 10,4 – 13,4 billion euro (IIASA, 1999)

Latvia - 1,5 – 2,4 billion euro (EC, 2001);

- 1,71 billion euro (IIASA, 1999)

Lithuania 2-2.5% of GDP - 1,6 billion euro (EC, 2001);- 2,38 billion euro (IIASA, 1999)


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Existing studies (2)Poland 2-2.5% of GDP (172

million euro annually, representing 75% of the total cost); (CEPS, 2006)

- 30,4 billion euro in 1999 (CEN, 2003);

- 22,1 – 42,8 billion euro (EC, 2001);

- 34,1 – 35,2 billion euro (IIASA, 1999))

Romania 538 million euro (EIR, 2004)

- 22 billion euro (EC, 2001);- 29,5 billion euro (Ministry of

Environment of Romania);- 20,2 – 22,0 billion euro (IIASA,

1999)

18,3 billion euro (EIR, 2004) *

Slovakia - 4,8 billion euro (EC, 2001);- 4,8 billion euro (NPPA,

Slovakia, 2000)- 4,1 – 5,4 billion euro (IIASA,

1999)

3,5 billion euro (NPAA, Slovakia, 2000)

Slovenia - 2,4 billion euro (EC, 2001);- 1,84 billion euro (IIASA, 1999)

CEE countries - 79 – 120 billion euro (estimation of the European Commission);

- 78 – 85 billion euro (IIASA, 1999)

90 billion euro (Angelov, 2001)


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Theoretical ways of estimation

• Survey-based approaches

• Impact assessment

• Linking similar harmonization costs in the past to observable economic indicators


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Survey-based approaches

• Can give insights into cost expectations of different categories of agents, time horizon of implementation of different requirements in the public and the private sector, etc.

• Some credibility problems

• Don’t have any appropriate


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Survey-based approaches (2)

Country / Indicator Mean Standard Deviation Min Max

Bulgaria 2.15% 2.52 0.13 9.68

Czech Republic 5.71% 9.12 0.05 31.88

Poland 3.84% 10.99 0.03 55.65

Average 3.74 8.26 0.03 55.65


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Survey-based approaches (3)

• The higher the GDP per capita, the higher the share of the compliance costs

• Somewhat confusing results: intuitively one could think of the need of more investments in comparatively backward countries since the level of harmonization with EU standards that has to be achieved is relatively the same across the Union.


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Impact assessment

• Bottom-up calculations

• Summing all retrieved results at the end (costs and benefits)

• Highly realistic results due to disaggregation

• Demanding upon the information

• Many different methodologies


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EC Impact Assessment Guidelines• Impact on operating cost and conduct of business:

- Will it impose additional adjustment, compliance or transaction cost on business?

- Does the option affect the cost or availability of essential inputs (raw materials, machinery, labour, energy)?

- Will it entail the withdrawal of certain products from the market?

• Public authorities

- Does the option have budgetary consequences for public authorities at different levels of government, both immediately and in the long run?

- Does the option require a significant establishing of new or restructuring of existing public authorities?


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EC Impact Assessment Guidelines (2)

CGE models Macro-econometric models

Sectoral models

Single-market analysis without economy-wide impacts X

Single-market analysis with economy-wide impacts X X

Multi-market analysis with effects in secondary markets

X X


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EC Impact Assessment Guidelines (3)

• Appropriate for the estimation and valuation of legislative measures’ impacts on GDP, unemployment, international trade, households income, etc.

• We need costs borne by private entities and the public sector given a variety of options and measures to be undertaken


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Linking harmonization costs to observable indicators

Quadratic Fit

Number of population

Cos

t of e

nviro

nmen

tal c

ompl

ianc

e

79.7 7090.2 14100.7 21111.2 28121.7 35132.2 42142.7


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Proposed estimation of harmonization costs

• Determination of major areas of harmonization;

• Calculation of how much was spent in the CEEC in each of the areas (PHARE, ISPA, SAPARD) as a % of total or sector value added where appropriate

• Correction coefficients based on the relation of the EU assistance and the average value of total harmonization costs by areas

• Adjustment for the degree of limited harmonization


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Some preliminary results – USD, millions

(calculated using …)

Applied CEE average % of VA

Armenia Azerbaijan Belarus Georgia Moldova Ukraine

Administrative capacity

(total VA)0.04387 1,98 5,12 11,26 2,68 1,10 31,96

Internal market(total VA)

0.019173 0,86 2,24 4,92 1,17 0,48 13,97

Agriculture - limited

(VA in agriculture)

0.5773 5,30 6,71 15,71 7,17 2,40 54,75

Transport – limited harmonization – 0,3

(total VA)

4.988 67,45 174,66 383,98 91,43 37,37 1090,08


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Some preliminary results – USD, millions (2)

(calculated using …)

Applied CEE average % of VA

Armenia Azerbaijan Belarus Georgia Moldova Ukraine

Energy and nuclear safety

(VA in industry)

0,417684 0,82 3,01 4,19 0,61 0,25 9,81

Environment – limited harmonizatio (0.4)

(total VA)

6,381 115,06 297,92 654,96 155,95 63,75 1859,35

Employment, social affairs and health

(total VA)

0.0877 3,95 10,24 22,50 5,36 2,19 63,89


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Thank you for your attention!

Veliko Dimitrov

IME

[email protected]

mailto:[email protected]

enepo 2nd workshop warsaw, april 12 1 wp11, chapter 4 cost of institutional harmonization veliko...

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