According to the World Bank’s Doing Business ranking, Ukraine places 83rd out of 189 countries. The experts that compile the rating system take into account the business registration process, quality of connection to the power grid, tax system, and other indicators when determining where a country falls in terms of ease of doing business. What prevents Ukraine from rising in the list to the level of European countries? How can Ukraine solve the urgent problems its small and medium-sized businesses is facing?
Thanks to the EU project, Forbiz, which was officially launched in September 2016, Ukrainian entrepreneurs will be able to get advice and support from qualified experts. 15 counseling centers will be opened throughout Ukraine, staffed by 35 experts from Ukraine and EU countries. Today pilot offices are welcoming businesspeople in Lviv and Kyiv.
According to the Ukrainian First vice-prime-minister – Minister of Economic Development and Trade, Stepan Kubiv, over 95% of businesses in Ukraine are small or medium-sized and these should form the basis of the Ukrainian economy. Despite their prevalence, Ukrainian small and medium-sized businesses face many challenges. These issues are a topic of frequent conversation among entrepreneurs and the government also acknowledges the concerns. Once possible explanation for the lack of development in the Ukrainian business sphere is mutual distrust between government and business.
“The relationships between business and government are built on fear. They were built incorrectly right from the start. The state has the preconception that businesses are trying to evade taxes. The business world, in turn, thinks that the government is only concerned with benefitting certain select officials,” says business analyst and head of the Better Regulation Delivery Office (BRDO), Oleksiy Honcharuk.
Talking about the concrete problems of local entrepreneurs, BRDO’s chief analyst, Ihor Lavrynenko, points to the unpredictability of tax policy, the low value of the hryvnia, and the inadequate regulation of business.
The BRDO and Forbiz, the principal project that aims to improve the business climate in Ukraine, were created with the goal of solving the regulation problem. They aim at promoting effective business regulation, consulting entrepreneurs and the government, establishing a dialogue between government officials and business owners, and, as a result, boosting Ukraine in the Doing Business rating.
There are 82 official business permits in Ukraine, but the actual number of such documents in the country is much greater. The permit application process is excessively burdensome, putting pressure on businesses and causing bureaucracy and corruption. Businesses sometimes have to wait months for permission to start operating. To speed up the procedures, business owners often resort to bribes.
In order to relieve some of this burden on businesses, the Ukrainian Cabinet approved an action plan on deregulation that provides for a reduction of permits by 25%. But simply reducing the permit requirements will not solve the whole problem. Steps must be taken to ensure that the regulations are clear and that businesspeople understand them.
“It is a very common practice, when any regulation is just an imitation. Sometimes there is regulation just for regulation’s sake or for corrupt purposes. Our task is not to abolish regulation but to raise the question, “what is the purpose of this regulation?,” and to determine whether it achieves that goal,” says Lavrynenko.
The BRDO is now working in different areas to make life significantly easier for business owners. For example, office focused on improving legislation on the connection of businesses to the power grid. Currently, there are no clear rules in this area. BRDO’s second initiative is the abolition of the threshold payment, which is actually a tax on investment. Furthermore, BRDO is developing a mechanism to obtain property from companies that go bankrupt. The new system will mean bankrupt companies’ assets will be sold at higher prices, allowing the Fund to use money from these sales to compensate the creditors’ losses.
“The country can’t be good when it has no initiative business”
It is not just the government causing problems for Ukrainian businesses. According to Inna Sosnovska, the head of the international branch of the consulting company, Strategic, Ukraine has not created the conditions for business and has no competitive products for export.
“Historically, Ukraine has always produced raw materials. Today, raw has no value, so we sell it in small quantities. The real competition is on the market for finished products and services,” Sosnovska says.
In her opinion, many Ukrainian businesspeople, having produced and sold the same products on the local market for years, are not always willing to take on the investment and effort required to change. Nevertheless, Sosnovska believes that if local entrepreneurs have the ambition not only to develop, but also to enter the international market, it is possible for them to succeed even within Ukrainian realities. “You just need to consider if the product is competitive, who will be the customer, and what will be the value added?“
On the other hand, if the state wants entrepreneurship and exports to increase, those active businesspeople seeking the right business model need support.
Sosnovska says that for this we need to think beyond just investment and lending. “Some (businesses) can be supported by allocation of sites, some need education, and in some cases international consultants will be helpful. Each business has individual needs, but in all cases, this is called ‘support’,” says Sosnovska.
If the government wants to develop business systematically, it must consider what industries are the backbone of the economy and which products are suited for international markets. When the government ensures the conditions are right, that is when innovative entrepreneurs and businesses models will appear. When business and government work in harmony to contribute to these goals, both sides benefit from the result.
Forbiz: consulting for business and beyond
Deputy Minister of Economic Development and Trade, Maxim Nefyodov, says Forbiz has several components. “It is focused both on strategic things like development strategy for small and medium-sized businesses, and more practical things, such as deregulation and the ongoing revision of outdated regulations.”
As a part of EU4Business initiative FORBIZ supports Ukraine’s reform agenda and its economic recovery by proposing a systemic change to business-friendly environment. The project has three main tasks: improvement of regulatory policy in priority sectors, support for effective policies for small and medium-sized businesses, and building constructive dialogue between businesses and government.
“The project’s priority sectors are construction, infrastructure, energy & utilities, agriculture & food safety, international trade, oversight, and information technology,” says the Forbiz project manager, Matthias Halder.
So that entrepreneurs can learn about the changes, Forbiz is creating an online portal where it will publish information about the new rules.