Memorandum submitted by the
Donetsk Chamber of Commerce (DCCI), Ukraine
Donetsk Region is
situated in the south-east of Ukraine, an hour by plane from the
capital, Kiev. It represents about 5% of Ukraine's landmass, with
a population of almost 5m - over 10% of Ukraine's population.
Donetsk city, with a population of 1m, is one of the largest industrial
cities of Ukraine (and was predominant in the former Soviet Union),
based on traditional heavy industries of coal and steel, although
the region has plenty of rich black agricultural soil. (The city
was founded by a Welshman, John Hughes, some 150 years ago, and
was originally called Hughesograd). The city is twinned with,
among others, Sheffield in the UK. The private sector, and SMEs
in particular, are emerging as a force in the region, although
progress is slow. DCCI is one of the leading advocates for the
development of this sector.
1. WHAT CAN PRIVATE
SECTOR DO FOR POVERTY ELIMINATION?
1.1 International experience
demonstrates that on the whole private sector and small business
play an important, and more often than not a critical role in
economic and social development, in coming-to-be of civil society.
This sector has proved to be of great significance especially
in crisis situations, related to deep structural changes in economy
of individual regions and whole countries. It is small business
that during structural restructuring and transition period - in
Ukraine in particular - compensates for job losses, provides citizens
with the principal and additional income, and offers financial
resources to the state and local self-governance bodies. As small
business grows stronger and stronger, this sector of the economy
becomes the testing area for new technologies and an active guide
of innovative economic growth.
1.2 One of the indicators, enabling
us to compare small business expansion from international and
interregional point of view is the number of small businesses
per ten thousand people. As is shown in the Table below, the number
of small businesses in Ukraine and in Donetsk Region (per capita)
is definitely less than in the European Union and in some developed
countries - EU members.
Number of Small Businesses per 10 000 people
|
| Countries, regions:
|
| EU countries (on average)
| 450 |
| Germany |
370 |
| France |
350 |
| Ukraine
| 57
|
| The Autonomous Republic of Crimea
| 69 |
| Nikolayev Region
| 62 |
| Lvov Region
| 59 |
| Kharkov Region
| 59 |
| Donetsk Region
| 55 |
In this rating of the Regions of Ukraine
Donetsk Region ranks No. 8.
1.3 The other indicator that more precisely
illustrates the role of small business in local economy is the
share of people engaged in small business in the total number
of the employed population (or the number of able-bodied population).
If we rely on the official statistics about the level of employment
in small business in Donetsk Region, we should acknowledge that
they are sufficiently lower than similar data not only in the
economically developed countries, but in Central and Eastern European
countries. The Table below compares the level of employment in
small business in Donetsk Region with some countries. This comparison
proves, that in Donetsk Region there is a great potential for
increasing the level of employment in small business.
| Country, region
| Share of people engaged in small business in the total number of the employed population, %
|
| France |
54
|
| Germany |
46
|
| Poland |
29
|
| Bulgaria |
37
|
| Donetsk region
| 14
|
1.4 At the same time private sector
in business, though more flexible and adaptive than large business,
is nevertheless more vulnerable and easily affected by the environment.
Weak points of small businesses, of individual and family businesses
(for start-ups in particular) are difficulties in entering markets
(including resource markets), relatively inexperienced managerial
and economic background, lack of considerable financial assets
with sufficient (for crediting institutions) collateral value.
This situation requires a thought-through systematic small business
support from the central authorities and local self-governance
bodies. The exigency of Ukraine as a whole and of its largest
industrial region (Donbass) in particular for such a support is
imminent, and some measures have been and
are being taken. But an absence of results points out the key
drawback - a deficit of an integral and
efficient small business development strategy both at the national,
regional and local levels.
1.5 The implementation of a joint project
of Donetsk Chamber of Commerce and Industry (DCCI) and the UK
Department for International Development (DFID) enabled us to
carry out an in-depth analysis of the private sector conditions
and entrepreneurship development in Donetsk Region.
2. WHAT HINDERS PRIVATE SECTOR DEVELOPMENT
IN DEVELOPING COUNTRIES AND AT WHAT LEVEL?
2.1 Implementation of DFID 'Improving
the Enabling Environment in Ukraine' Project in Donetsk Region
as a pilot provided an opportunity to carry out several analytical
surveys and to monitor business activity, and objective analysis
of them helped identify the key problems and causes that hinder
and impede development of the private sector and small business
at the territory of an individual region. Additional dissemination
of the Project outcomes to other regions of Ukraine showed the
same problems are faced by business in the whole of the country.
3. MACRO-LEVEL: ESTABLISHMENTS, LEGISLATION,
MANAGEMENT, MACRO-POLICY
3.1 Analysis carried
out during the Project implementation defined that the macro-level
mostly includes barriers related to obtaining permissions and
agreements, business registration, numerous check-outs and inspections,
imperfect taxation.
3.1 Complexity and Expensiveness
of the Procedure of Obtaining Permits
3.1.1 Today most of the private sector
representatives in the whole of Ukraine emphasize that the problem
of obtaining permits and agreements is the most complicated one.
For example, to construct a building (a
shop, an office, etc.), requires not less than 23 agreements and
permits from different institutions (21 agreements and permits
to start up a farm), and takes not less than 3 months and not
less than $600 to achieve it. Those problems can be resolved only
by introducing changes to active legislation and putting defining
documents of ministries and departments in good order and often
revoking them.
3.1.2 The design of the Law of Ukraine
'About Permit-Issuing System in the Economic Activity' and its
coming into force is the result of a large analytical and practical
work with the private sector. The purpose of the Law is to significantly
simplify permit-obtaining and agreeing procedures in economic
activity. According to it 'Unified Permit-Issuing Offices' (One
Stop Shops) will be established on the basis of local councils
in all towns/cities and Rayons (districts) of the Region - namely,
in 45 territorial units - and those Offices will issue permits
and agreements in one place, thus considerably reducing the time
required for following the procedure and financial expenses of
economic entities. The Law came into force on 6 January 2006.
3.1.3 As far as problems with state
registration of economic entities are concerned, the situation
in Donetsk Region changed dramatically due to the Law of Ukraine
'About State Registration of Legal Entities and Natural Persons
- Entrepreneurs' coming into force. Since the 1st July
2004 the registration was significantly simplified. In pursuance
of the Law, 45 'Unified Registration Centres' have been established
in the Region. There are virtually no registration problems in
Donetsk Region at the moment.
3.1.4 It should be noted that a year
prior to the Law coming into force the first 'Unified Registration
Office' was opened in one of the administrative districts of Donetsk
City within the framework of the DFID/DCCI Project. Opening of
the Office was practical implementation of the initiatives that
later laid the foundation of the aforementioned Law of Ukraine.
3.1.5 As of today, after 11 months of
2005-2006 the State Registration Board in Donetsk 1600 legal entities
and 5400 natural persons - entrepreneurs (2300 and 7400 correspondingly
- since it has been opened). The 'Unified Registration Centre'
activity let the time spent on such process be reduced to 2-3
days, simplified the registration procedures and documents circulation.
Moreover, now it is possible not only to go through registration
procedures, but to get registered with the statistics board, tax
administration, and social funds.
3.1.6 Such registration procedures have
become a really significant support, provided by legislative and
executive authority bodies, local self-governance bodies, international
donors and non-governmental associations of entrepreneurs.
3.2 Large number of inspections
from controlling bodies
3.2.1 During the survey entrepreneurs
also drew attention to this problem. Nowadays inspections of controlling
bodies in the Region are often illegal and chaotic. Defining documents
and regulatory acts describe authorities of inspectors in minute
detail, but offer no protection to the inspected. None of the
regulatory acts describes the procedure of an inspection, thus
the situation: there is no procedure, but lots of authorities,
so the inspector can do what he pleases.
3.2.2 The Council of Entrepreneurs at
the Cabinet of Ministers of Ukraine has drafted and submitted
under the Supreme Council consideration the Law 'About Control
Inspections'. This Law will take into account which rights and
procedure possibilities an inspection presupposes, and it should
cover all controlling bodies.
3.3.Flaws of Taxation Policy
3.3.1 Current taxation system of Ukraine
practically does not take into account activity of the private
sector. During the survey the majority of the entrepreneurs pointed
out complexity of existing taxation system, though the state offered
the possibility to use the simplified system of taxation and accounting,
and it is one element of no small importance of its small business
support policy. Two thirds of the total number of small businesses
in the Region paid their taxes, but their share in the total sum
of taxes, collected from enterprises of the Region, fell from
8.5% in 2002 to 6.4% in 2003, including the single tax (from 93.4%
to 74.7%). The single tax system has been chosen by over a half
of the small businesses and the overwhelming majority of entrepreneurs-natural
persons. But even this simplified system is not always the most
optimal one for economic business management. That is why many
private sector representatives advocate reviewing of the existing
system and implementation of taxation reform in Ukraine in the
near future. Tax reform should comprise several parameters, and
not only change the taxes patters and their sums, but modify administration,
make taxation understandable and well-defined. First of all legislation
should become transparent and understandable, because it is not
the sums of taxes that result in huge problems, but their ambiguous
treatise. Such taxation leads to many problems and troubles.
3.3.2 Taxation reform is not a momentary
process; it requires proper analytical work both at the national
and regional levels. Business Associations that have good practical
knowledge and skills and consolidate interests of entrepreneurs
at the regional level should participate in the process. Unfortunately,
issues of taxation reform depend mainly on the state passing relevant
regulatory resolutions and decisions, and not on willingness and
abilities of entrepreneurs.
4. MESO-LEVEL: ACCESS TO RESOURCES AND INFRASTRUCTURE
4.1 Complicated Access to Information,
Technologies and Knowledge
4.1.1 Dealing with those problems in
the region is first of all related to setting up an efficient
entrepreneurship support and development infrastructure. Difficulty
of private sector development in transition countries is intensified
by the fact that its mutual help skills here are not developed,
and private businesses are poorly coordinated unlike similar enterprises
in developed countries that have their own organizations, banks,
established system of co-operation. From this point of view, establishment
and development of network of associations and other forms of
unions of entrepreneurs different public, non-governmental and
not-for-profit organizations that could defend and implement rights
of entrepreneurs and businessmen, become rather significant.
4.1.2 The establishment of the SMEs
Development Centre by the DCCI together with DFID within the framework
of the 'Improving the Enabling Environment in Ukraine' Project
is a graphic example of successful activity in this sphere. The
purpose of the Centre is to provide a wide range of quality business
services to entrepreneurs that cover the following issues: starting
up a business and business activity, development of up-to-date
organizational and financial management skills, marketing, IT,
provision of legal, informational, consulting and educational
support to businesses. Today the Centre is the leading element
of the infrastructure that works with private sector and small
business in Donetsk Region. Over 5000 people used the Centre's
services last year.
5. MICRO-LEVEL: DIRECT BUSINESS SUPPORT,
MICRO-FINANCING
5.1 Hindered Access to Financial
Resources
5.1.1 The existing crediting practice
in Ukraine is such that the bulk of credits is
usually a short-term and target financing of concrete
projects. Long-term loans require substantial collateral. The
majority of small businesses and entrepreneurs can guarantee reimbursement
of a large investment credit neither by their own assets nor by
the system of guarantees or guaranties from small business support
funds or organizations due to insufficient development of such
support in the Region and the city. To gain greater understanding
of the possibilities which international technical assistance
can offer the private sector, DCCI were involved into a workshop,
run by Polish experts with significant practical experience of
project design/applications for project support, organized by
DFID 'Action Donbass' Project.
5.1.2 In 2002-2004 about $200K was allocated
from the Regional budget to support small businesses. In 2004
it was $40K. Eight business projects - $150K - were target-financed
from that sum and from means of the Regional Entrepreneurship
Support Fund. It should be noted that the money was allocated
mainly for developing public transport system in rural areas and
only one project was about setting up a small business in the
services sector. Thus, only one of eleven priority spheres of
small business activity, included in the Regional Programme of
Small Business Support for 2003-2004, was properly supported -
transport.
5.1.3 By beginning of 2004, 205 businesses
received credits for business development ($400K), residents of
rural areas received 198 credits ($70K). Financial assistance
to farmers came up to $310K.
5.2 Shortcomings (absence) of
efficient regional and national business support and development
policy
5.2.1 Unfortunately, it should be stated
that regional policy of small business development is mostly declarative
and populist. The regional policy is mainly about approving some
programmes of entrepreneurship development, the majority of which
are rather ineffective.
5.2.2 Regional and national Programmes
of small business development re aimed at increasing the number
of small enterprises and small businesses employees by setting
up a proper support infrastructure, developing mechanisms of financial
assistance for small businesses.
5.2.3 But the Programme is designed
as some kind of a regional summary table of the events, planned
by various state structures, local self-governance bodies, NGOs,
foreign technical assistance projects, etc. aimed at development
of entrepreneurship on the Region. Each of these organizations
has its own goals and concrete tasks for the planned period, i.e.
they might have different vision of small business development
strategy. Of course, those differences in the vision are not diametrically
opposite, but still from practical point of view it is impossible
to concentrate their efforts and means to stage by stage take
certain key measures, agreed in accordance with the time limits
and strategic goals of small entrepreneurship development in the
Region.
5.2.4 There is an objective need for
designing a long-term strategy of SMEs development in the Region
(at least for 5 years), which will act as a basis, used for designing
medium-term Programmes. It will help different organizations agree
the design of planned events and coordinate their further implementation.
Design of such strategy presupposes, first of all, SWOT-analysis
of SMEs development in the Region. A limited number of priority
directions of SMEs development should be identified on the basis
of the analysis (no more than 4-5, and not 11 like in the Programmes),
and determine cause-and-effect relations between those directions.
Those priorities can be supported by corresponding operational
objectives and tasks to be implemented in the short-term period.
Improving management of small business development at the Regional
level also requires that an institutional structure with clear
tasks of implementing the programmes and coordinating activity
of different executors should be developed.
5.2.5 Implementation of DFID 'Action
Donbass' Project at the macro-level enabled DCCI to start active
work on designing a sustainable Strategy of Small Business Development
for Donetsk Region. The Working Group has been established at
the Donetsk State Regional Administration, which is working on
designing a long-term Small Business Development Strategy for
10 years.
5.2.6 One of
the positive elements of implementation of the Ten Years Small
Business Development Strategy is establishment of Donetsk Investment
Promotion Agency at the DCCI, but with technical support from
DFID. Its goal is to create capacity in Donetsk Region for investment
promotion. Though the Agency has just started its activity, it
has already participated in events, targeted at attracting foreign
direct investments. As of today, a new short-term marketing strategy
of the Agency has been completed, which will help design methods
of attracting new investments to the Region to provide assistance
to existing companies, searching for business partners, and attract
new mobile international investments to Donetsk Region.
6. WHICH TYPE OF DONOR INTERVENTION
INFLUENCES CHANGES IN BUSINESS CLIMATE (IN PARTNER COUNTRIES)
IN RELATION TO PRIVATE SECTOR DEVELOPMENT?
6.1 Implementation of
donor programmes in developing countries contributes a lot to
poverty elimination and private sector and small business support.
Successful example of donor activity in Ukraine is DCCI/DFID 'Improving
the Enabling Environment in Ukraine' Project. It was a three year
initiative, funded by the UK Department for International Development
and aimed at creating business enabling environment. The DFID
acknowledged the importance of the role the DCCI plays in business
support in a large industrial and entrepreneurial region.
6.2 It stands to reason that Donetsk
Region was selected for the Project implementation. Just a brief
statistic illustration of private sector and small business development
as of 2004: in 1999-2004 the number of small businesses in Donetsk
Region has grown from 17 800 to 26 002, that is one
and half times (145.9%).
6.3 In the Region as a whole small businesses
are operating in the following spheres: commerce (41 %), real
estate activities (18.4%), industrial production (13.6%), construction
(9.5%), transport (4.2 %), agriculture (3.3 %), personal and collective
services (3.2 %), hotels and restaurants (3.2%), others (3%).
6.4 As of 2004, 161975 people were engaged
in small business. Donetsk Region is leading in entrepreneurship
development.
6.5 Implementation of the Project in
the Region offered large opportunities of improving private sector
development in the Region by active work in many spheres.
6.6 Within the framework of the Project
the DCCI designed a 3-year business plan, comprising all issues,
starting from marketing to financial planning and action plan.
Implementation of the business plan provided for development and
provision of local market orientated services, especially in the
context of growing importance of private sector and SMEs in Ukrainian
economy. It also helped ensure that actual needs of local entrepreneurs
are met and organizations are assisted in effective financial
management.
6.7 Having provided assistance in drafting
the corresponding strategy and interrelated action plan, the Project
helped the Donetsk CCI in developing its role as an effective
representative of its members. In particular, using in-depth understanding
of the local market, the Chamber cooperates with local administrations
in designing regulatory frameworks, which correspondingly counterbalance
needs of the government and entrepreneurs, thus contributing to
economic development. This work also facilitates the process of
rules and regulations acknowledging special characteristics of
SMEs.
6.8 The results of the Project were
widely disseminated among the CCIs of Ukraine in order to help
all Chambers of Commerce to develop their skills of effective
members' representation, to carry out effective measures on creating
business enabling environment.
6.9 On the whole results of the Project
helped identify main priority directions of donor intervention
for private sector development in the near future:
1. creating enabling environment by
means of providing technical assistance in the sphere of investment
promotion, regulatory environment and transparent competition;
2. funding private sector development.
All three positions need donor intervention: financing of risks,
financing of SMEs, business micro-financing.
3. changing markets in favour of the
needy presupposes reorganizing traditional markets, forming a
market of business products and services and establishing a professional
market of infrastructure services.
7. HOW IS THE SECTOR INVOLVED IN
DEVELOPMENT?
7.1 Implementation of DCCI/DFID 'Improving
the Enabling Environment in Ukraine' Project helped identify key
priority directions in organizing an effective dialogue between
the private sector and state authorities and local self-governance
bodies.
7.2 There are positive examples of it:
- Large business
forums - 'Development of Small Business in Donbass' regional and
national conferences - have been organized for the last 3 years.
Over 300 private sector representatives participated in each of
them;
- Business meetings
with senior officials from state authorities and local self-governance
bodies;
- Activity of
specialized Small Business, Construction, Light Industry and Ecology
Committees at the Chamber of Commerce;
- Regular organization
of business lunches;
- Organization
of business receptions for representatives of private sector on
various business directions;
- Provision
of specialized training, workshops and seminars.
7.3 On the whole, any form of private
sector and business environment support and development with the
help of international donor agencies should be strategic - both
at the national and regional levels. A long-term strategy, determining
key directions of private sector and small business development
and taking specifics of the territory into account, should be
used as a basis. Such strategy should be designed on a thorough
SWOT analysis of small business development in the Region as a
whole and on individual territories. This very approach will enable
us to create competitive advantages for business that is developing
in the region.
February 2006
| 
