Ukrainian Enterprises An IFC Survey of Ukrainian Business Report by IFC Ukraine Business Developn~entProject May 2001 Max Yacoub Bohdan Senchuk Taras Tkachenko Funded by The Ministry of Foreign Affairs of Norway and The United States Agency for InternationalDevelopment Survey conducted by Ukrainian Marketing Group CONTENTS CONTENTS CONTENTS ................................................................................................ 3 INTRODUCTION ....................................................................................... 5 SAMPLE SELECTION AND METHODOLOGY ...........................................7 EXECUTIVE SUMMARY .......................................................................... 11 MAINISSUES IN BUSINESS DEVELOPMENT IN UKRAINE ..................17 ENTERPRISE PERFORMANCE ................................................................19 FINANCIALPERFORMANCE...................................................................................19 EXPORTS............................................................................................................ 22 EMPLOYMENTAND LABOR PRODUCTIVITY.............................................................23 COMPETITION..................................................................................................... 25 SOFTNESS OF BUDGETCONSTRAINTS..................................................................26 ENTERPRISERESTRUCTURING............................................................................. 28 MANAGEMENTTURNOVER ................................................................................... 30 FACTORS THAT INFLUENCEENTERPRISEPERFORMANCE ......................................32 FACTORSTHATINFLUENCEENTERPRISERESTRUCTURING....................................33 PATERNALISM ..................................................................................................... 35 CAPITALEXPENDITURESAND WORKINGCAPITAL ..................................................37 ENTERPRISEPERFORMANCE CONCLUSIONS...................................................... - 41 BARRIERS TO MARKET ENTRY AND EXPANSION ...............................45 TAXATION...........................................................................................................45 Instability of Tax Laws and Regulations.......................................................................47 Tax Burden................................................................................................................... 47 Shadow Economic Activity........................................................................................... 50 Simplified Taxation....................................................................................................... 51 Conclusionsand Recommendations ...........................................................................52 UNFAIRCOMPETITION......................................................................................... 53 REGULATORYAND ADMINISTRATIVEENVIRONMENT............................................... 55 Unofficial Payments .....................................................................................................56 Instability of Business Legislation ................................................................................ 57 Import1Export Operations............................................................................................ 60 Permits and Permissions ............................................................................................. 60 BusinessLicensing ...................................................................................................... 63 Product Certification..................................................................................................... 64 Registration ................................................................................................................. 67 State Business Inspections..........................................................................................68 SME Inspections .......................................................................................................... 69 Inspections Perceptions...............................................................................................73 Inspection Consequences............................................................................................ 76 Unofficial Payments During Inspections ......................................................................79 TimeTax ......................................................................................................................80 BARRIERS TO RECEIVINGFINANCINGAND CREDIT................................................. 82 PERCEPTIONSOF THE EFFECTIVENESSOF LOCAL AUTHORITIESAND INFRAS-~RUCTURE ............................................................................................... 84 BARRIERSTO MARKETENTRY AND EXPANSION- CONCLUSIONS............................ 86 An IFC Survey of Ukrainian Business 3 Ukrainian Enterprisesin 2000 USE OF INFORMATIONTECHNOLOGIES ..............................................89 COMPUTERUSE..................................................................................................89 INTERNETUSE....................................................................................................90 EXTERNAL BUSINESS ASSISTANCE .....................................................97 BUSINESSPLANNING...........................................................................................97 OUTSOURCING .....................................................................................................99 TRAINING.......................................................................................................... I00 CONSULTING...................................................................................................... I01 BUSINESSADVOCACY......................................................................................... 102 SURVEY METHODOLOGY....................................................................................105 Firm Origin.................................................................................................................. 105 Sectors.......................................................................................................................105 Firm Size ....................................................................................................................106 Sample Selection....................................................................................................... 106 Structure of the Questionnaire................................................................................... 110 ANNEX 2 .................................................................................................. 111 FACTORSTHATINFLUENCEENTERPRISEPERFORMANCEAND RESTRUCTURING...111 Regression Analysison Enterprises Performance.....................................................112 Regression Analysis on Enterprises Performance.................................................... 113 FACTORSTHATINFLUENCEENTERPRISERESTRUCTURING..................................114 Regression Analysis on Enterprises Restructuring....................................................114 Regression Analysis on Enterprises Restructuring.................................................... 115 FACTORSTHAT INFLUENCE THE ATTRACTIONOF NEW OUTSIDEMANAGEMENT.....116 RegressionAnalysis on Management Turnover........................................................116 ANNEX 3 .................................................................................................. 117 BUSINESSENVIRONMENTINDICES......................................................................117 Index Calculation........................................................................................................117 Combined City Index of Unfair Practices...................................................................118 Combined City RegulatoryIndex...............................................................................119 Combined City Administrative Index.......................................................................... 120 Combined City Accessto Financingand Infrastructure Index...................................121 ANNEX 4 ...................................................................................................123 ANNEX 5 ..................................................................................................126 FIRMPERCEPTIONSOF THE STATE AND BUSINESSENVIRONMENTS......................126 Assessment of Local Business Environment............................................................. 126 Assessment of Local Services ................................................................................... 127 ANNEX 6 ............................................................................................... 128 STATE BUSINESSINSPECTIONS..........................................................................128 INTRODUCTION INTRODUCTION The International Finance Corporation(member of the World Bank Group) has been one of the most active players in private sector development in Ukraine. IFC has been particularly active in the development of the small business sector through such programs as Small Scale Privatization (privatization of the vast majority of small businesses); Divestiture of Unfinished Construction Sites; Land Privatizationand Agricultural Reform; Agri-Business; Mass Privatization (assisting enterprises undergoing voucher privatization); Corporate Governance; Leasing Reform. Since 1994 IFC has been heavily involved in providing direct services to Ukraine's emerging private sector through the Business Development Project, which established the Lkraine Consulting Network of 11 business consulting companies. The Business Development Project has conducted annual surveys of the small and medium enterprise sector in Ukraine since 1996 to gauge the overall-enabling environment for SMEs. These surveys have been targeted towards analyzing the role that the state has in influencing the operating environment for domestic business in Ukraine, particularly small business. These surveys have been influential in stimulating real debate among policy makers and government on private sector development issues as well as used to monitor the progressof variousreforms and changes in the businessenvironment. This report is published in both English and Ukrainian, however the English version will prevail in the event of any ambiguity.While every effort has been made to directly translate the English version into Ukrainian, in certain instances, form has been sacrificed to preservesubstance. The authors would like to thank the following people for their assistance and invaluable insights and comments. Oleksander Babanin of ICSP; Vladimir Dubrovsky of CASE Ukraine; Victor Chepenko of the Barents Group Fiscal Analysis Office; Oksana Kuziakiv of EERC. The authorsare especiallygratefulto Elena Voloshina and Igor Aksyonov of IFC for overviews and legal comments and Elena Beryozkina and Oleksandr Rybalko for their patienceand professionalism in the translationwork. The views and opinions expressed in this report are solely those of the authors and do not necessarily reflect the positions of the International Finance Corporation, World Bank Group, Norwegian Government, or the United States Agency for International Development. Funding for this survey was very generously providedby the Ministry of Foreign Affairs of Norway under the auspices of IFC's Ukraine Business Development Project, which is funded by the United States Agency for International Development.The actual survey field work was carried out by the UkrainianMarketingGroup RMG). Copies of this report in both hard copy and electronic format can be obtained from the authors at the followingaddress: In Ukraine In the United States International Finance Corporation lrina Likhachova sthFloor Room F10P-210 4, Vulytsya Bohomoltsya 2121 Pennsylvania Avenue, NW Kyiv, 01024 Washington DC, 20433 Ukraine USA Tel: +380 44 253 0539 Tel: +12024731813 Fax: +380 44 490 5830 Fax: +I202 974 4312 An IFC Survey of Ukrainian Business 5 SAMPLE SELECTION AND METHODOLOGY SAMPLE SELECTION AND METHODOLOGY IFC's annual surveys have traditionally covered the small and medium sized business sector. The 2000 survey has been expanded to include medium and large firms, as well as different forms of fmm origin (state-owned, privatized, and start-ups) to allow for better comparisons between different types of f m s . The survey has attempted to capture a representativepicture of business in Ukraine's oblast capitals and has therefore surveyed firms in every single oblast capital in Ukraine as well as Kyiv and Simferopol, that are engaged in commercial activity. In order to construct the survey sample, manufacturing firms were used as the baseline. 1,005 manufacturing f m s were selected, distributed proportionally amongst all cities based on their proportion of manufacturing f m s in Ukraine (in any case not less than 20 manufacturing f m s per city.) Please refer to Annex 1 for a full sample breakdown. For non-manufacturingsectors, fixed quotas were used for each city, but also ensuring that the total number of f m s in each sector was representative of the sector as a whole. This allows for comparisons across cities, but is not necessarily representative (with the exception of manufacturing) of sectors and overall business in each city. Further, it cannot be said that the findings of the survey reflect all business in Ukraine, nor that the proportions of each type of firm in the survey correspond to the overall breakdown of such f m s in Lkraine. The fixed quotas for each city were as follows: Construction:6 f m s Trade: 15 f m ~ sincluding 4 wholesale and 12 retail , Public Catering: 6 f m s , including 4 cafes and 2 restaurants Transport: 1 freight and 4 passenger transport firms Telecommunications: 2 f m s , including one internet service provider and one paging company.For Kyiv two vehicular communicationfirms were added. Other Servic'es: 12 firms including a hotel, travel agency, commercial bank, insurance company, domestic service firms and public utilities. Sectors The sectors (given above) were selected so as to encompass as much business in Ukraine as possible and also to follow the breakdown used by the State Statistics Committee of Ukraine in compiling national statistics. Agriculture, which accounts for a significant proportion of economic activity in Ukraine, was not surveyed at all as, due its specific nature, comparisons with other sectors would have been difficult. Further state-owned and primarily state financed entities (so called budget organizations) were not surveyed. This class of entities include hospitals, educational establishments,etc. Firms were selected based on their responses of what they considered to be their main area of business activity. Ukrainian firms in general are more diversified than their counterparts in more economicall~ldeveloped countries and it is not uncommon for large state-owned enterprises to have smaller, private (semi-independent fiom the parent enterprise) commercialentities in unrelated fields. Firm Origin Rather than attempt tlo provide information on different forms of fm ownership (14 legal forms of ownership were surveyed- see Annex l),this survey looked at fm origin instead. All companies were divided into three different types according to their origin: state- owned, privatized, and start-ups. An IFC Survey of UkrainianBusiness 7 Ukrainian Enter~risesin 2000 UkrainianEnterprisesin 2000 State-Owned Firms - These are f m s where majority ownership (not less than 50%), and hence control, is held by the government. Further state-owned enterprises have been divided into two categories, municipally owned and nationally owned. Municipally owned enterprises (i.e. communal ownership) include firms in all of the sectors surveyed (except telecoms.) Privatized Firms These are formerly state-owned f m s where a controlling stake (not less than 50%) has been divested through the privatization process. There were a large number of firms privatized in the period 1992 - 1995 and consequently privatized f m s have been further sub-divided into early and late privatized f m s , January 1, 1996 being th.e cut-off date. 54.7% of all privatized firms in the sample were early privatizations. Start-up Firms For comparison purposes the survey also included completely new private f m s that were established (since the establishment of such firms was allowed in the late 1980's.) Again, similar to privatized f m s , start-ups have been divided into early and late start-ups, with January 1, 1996 being the cut-off date. 38.7% of all start-ups in the sample were early start- ups. TableI Sample by Sector, Firm Size and Firm Origin Firm Size tc:!&, 1 Firm Orinin I I Upto 50 51350 State-Omed Privitized Start-ups Construction 96 55 18 1 14 3 45 28 40 39 1 169 Transport 40 35 40 12 22 22 27 7 25 115 Telecoms 44 2 4 7 1 2 14 26 50 Trade 362 45 11 10 7 72 57 76 196 418 Public Catering 134 11 0 18 3 26 30 26 42 145 Other Services 157 58 41 26 36 53 31 51 59 256 2: More than 250 83 46 155 107 ~ Total 215 94 509 423 356 " A y 8 PertinentInformation Medium and Large Trading;Firms: The sample contained medium and large trading f m s . Typically these were supermarkets aind larger wholesalers.There were also large state-ownedenterprises in this sector. State-OwnedPublic Catering;: - There are still some state-owned public catering firms. Typically, large canteens and restaurants that belong to state-owned f m s or are still majority owned by municipal governments. - Municipal Firms: Across all sectors in this survey there are f m s that have a majority stake held by municipal governments. These include hotels, service f m s , food processing, manufacturing, metal works, taxi firms, etc. Some public utilities have also been included as they are also a component of local business and charge for their services. SAMPLE SELECTION AND ME'THODOLOGY Telecoms: The telecoms sector was selected to compare firms in this dynamic, growth oriented, sector with other sectors in Ukraine. However,;here are only a limited amount of f m s that state that telecommunications is their primary field of activity. For example, there are only 7 national state-owned telecoms firms in our sample, no municipal telecoms f m s , only 1 early privatized fm and 2 late privatized firms. The rest of the 50 telecoms f m s surveyed were all start-ups. This is pertinent in comparingaverages. Sole Proprietorsand Micro-Firms: As this survey covered medium and large firms and attempts to draw comparisons between them, very small f m s (less than 5 employees) and sole proprietorshave not been surveyed. As with agricultural entities, very small firms, market traders and sole proprietors tend to have a differentset off issues than larger more established f m s . An IFC Survey of Ukrainian Business 9 Ukrainian Enterprisesin 2000 EXECUTIVE SUMMARY EXECUTIVE SUMMARY This report is based on a survey of Ukrainian enterprises and is designed to reflect as closely as possible the structure of business in Ukraine. The survey also covered the whole of Ukraine and therefore covers regional differences as well. This report is in four main sections: enterprise performance,barriers to market entry and expansion, use of information technologies and external business assistance. 2000 was the fust year of GDP growth in Ukraine since independence and this was reflected in enterprise performance over the year. A larger proportion of Ukrainian f m s were profitable in 2000 than in 1999 and there has been almost universal growth in value added activities. On the whole smaller f m s were more dynamic, and more of them were profitable than larger f m s . Further, start-up f m s l generally performed much better than either state-owned2or privatized3firms. Sales and Value Added Growth According to survey data real sales increased by 28% over 2000. Reflecting improved purchasing power, the sectors that had the best sales growth were trade (sales growth of 46%), telecoms with 41%, and public catering (i.e. cafes and restaurants) with 38%. Sales growth favored smaller enterprises rather than larger ones, small f m s (up to 50 employees) experienced sales growth of 38%, medium firms (51 - 250 employees)of 27%, and large f m s (more than 250 employees)the same as medium firms at 27%. Start up f m s who experienced 48% sales growth outperformed both state-owned and privatized f m s who had 18% and 30% respectively. The picture with value added is similar to sales growth. Overall value added increased by 11%. Trading f m s outperformed all others with value added growth at 33%. In second place was the service sector at 23%. Both public catering and the transport sectors experienced a very slight contraction in value added over 2000 of almost 1%. Again start up f m s were the best performers, collectively achieving 26% value added growth. Privatized enterprises as a whole performed worse than state owned f m s with only 6% value added growth compared with more than twice as much at state-owned firms (13%.) However, there is a large difference between early and late privatized f m s . Early privatized f m s , who have had more time to restructure and adapt under new private ownership, saw value added growth rates of 14% compared with late privatized firms who saw value added shrink by 3%. A more accurate comparison would be between privatized f m s and national state- owned f m s as they experience more competitive pressure than municipal firms. More municipal firms are monopolists or have a higher degree of market power than national state-owned f m s . National state-owned f m s experienced value Start-up firms in this report are defined as all newly created enterprises with majority of private ownership, and not as a result of privatization. In this report they are further divided into early and late start-ups, with January 1, 1996 being the cut-off date. State-owned firms are enterprises with not less than 50% stake hold by the state. In this report state-owned firms are split into two groups; nationally owned enterprises and municipally owned enterprises. Privatized f m s are previously state-owned enterprises that run through privatization process and have a majority non-state ownership. In this report they are split into early and late privatizations, with January 1,1996 being the cut-off date. An IFC Survey of Ukrainian Business I 1 Ukrainian Enterprises in 2000 added growth rates of 12% compared with 14% for early privatized firms and -3% for late privatized f m s . Profitability 4% more enterprises were profitable in 2000, 64% compared with 60% in 1999. Again, a greater proportion of smaller enterprises were profitable (7'0%) compared with medium sized firms (56%) or large f m s (53%). More start-up f m s were profitable (76%) than either privatized firms (55%) or state owned firms (52%). The worst performing sector was transport with only 38% of f m s profitable (up fiom 37% a year earlier.) The trade and services sector were the best with both sectors having 71% of firms profitable. Exports Only 20% of all companies exported in 2000, with exports accounting for 14% of the overall sales of all surveyed f m s . A larger proportion of large f m s exported their products (46%) compared with 23% of medium sized f m s or 10% of small firms. Large f m s also exported a greater proportion of their sales (16%) than either medium sized f m s (6%) or small f m s (5%). The best performers were privatized enterprises with around 20% of their sales exported. By far and away the most popular export market was the CIS with 14% of all Ukrainian firms (or 73% of all exporters) stating that that was their main export market, comlm.red with only 5% of all f m s who quoted Europe and the rest of the world as th~eirmain export markets. Employment and Labor Productivity Improved financial performance of surveyed firms was accompanied by a contraction in work forces of 3%. Only the telecoms sector experienced any significant job creation (6%). The construction sector contracted the most, losing over 8% of its work force. Start-ups again demonstrated their dynamism by employing an extra 4%, which was almost exclusively accounted for by late start- ups who employed an extra 8%. Amongst fm origin state-owned f m s overall contracted the most, shedding on average4.5% of their work forces. Labor productivity at surveyed f m s increased by 15% compared with 1999, with start-ups performing the best, increasing their labor productivity by 21%. Early start-ups (one fifth of all start-ups) increased their productivity by 30%. Start up service firms performed best of all experiencing 39% productivity growth. There was a very large difference in productivitygrowth between early and late privatized firms. Firms privatized prior to 1996 improved labor productivity b~y19% whereas those privatized in 1996 and later experienced a drop in productiviity of 1%. State- owned enterprises improved labor productivity overall by 18%, though this is probably due a proportionally greater reduction in work forces compared with firms in the private sector. Budget Constraints The softness of budget constraints (in this survey the degree to which enterprises can evade tax and payments for energy) has been acknowledged as one of the biggest problems in restraining fluther private sector development and restructuring in Ukraine. More state-owned f m s had significant tax and energy arrears compared to f m s in the private sector. 16% of state-owned firms compared with 9% privatized firms and an insignificant 1% of start-ups. Further the larger a company is the more likely it is to have budget arrears, with 12% of large firms in arrears, compared with only 2.7% of small firms. Further, a third of the sales of state-owned f m s were in the form of non-monetary instruments (which can also EXECUTIVE SUMMARY be considered to be a form of soft budget constraint, especially if the transaction is with a state-owned entity) compared with 17% of sales for privatized firms and 9% for start-ups. Enterprise Restructuring It is generally difficult to define enterprise restructuring as by definition it is a change from the old to the new and is unique to each enterprise. This survey defined restructuring as 13 activities related to changing products, technology, employment,markets and organizationalstructureover the last three years. The survey shows that the most important factor influencing both enterprise performance and enterprise restructuring is the level of competition. The more competition a firm faces the greater the likelihood of sales growth and the greater the chance of restructuring. Hard budget constraints imposed on enterprises correlate with more intensive strategic restructuring, whilst soft budget constraints are more conducive to more passive forms of restructuring, for example labor contraction and asset disposal. Firm origin also influences the likelihood enterprise restructuring. Unsurprisingly, the companies most actively restructuring or changing their operations in 2000 were privatized and start up companies. Early start-ups and late privatized companies were the most active at developing new products (58% and 47% respectively.)Start-upswere the best at attracting new clients, with over 40% doing so. Early privatized firms were the most likely to shed employees (50% of all early privatized fms), closely followed by late privatized f m s (46%) and nationalstate owned firms (45%.) Late privatized companies were the most active in changing their organizational structure with 22% doing so. On the whole nationally owned and municipally owned firms (together state owned firms) were the least dynamic and responsive in our survey. Capital Expenditures and Working Capital A relatively small proportion of firms experienced investment expenditure in 2000 ( 4I%.) The likelihood of investment into fixed assets does not seem to be strongly dependent on firm origin. More start-up firms experienced investment expenditure (44%) followed by state-owned firms (40%) and then privatized firms (38%). A larger range was observed with firm size, ranging from 35% of small firms to 44% of medium sized firms to 52% of large f m s experiencing investment into fixed asstes. The sector with the highest frequency of capital expenditure was telecoms with almost half of all telecoms firms (48%) investinginto fixed assets. New equipment and production facilities was the most popular form of investment expenditure into fixed assets. In 2000 28% of all f m s bought new equipment followed by repairs of premises (23%). The most common source of investment financing was retained earnings and depreciation.35% of all companies (or 86% of all companies experiencing fixed asset investment) financed their investment expenditures from retained earnings, followed by only 6% of all firms receiving bank credit for investment into fixed assets (with only 4% of small firms receiving bank credit.) Other sources of financing were not significant. The picture with working capital is a little more optimistic with double the amount of firms receiving bank credit for working capital (13%) as did for fixed assets (6%.) though this is still very small indeed. 9% of small firms were able to secure bank credit for working capital compared with 25% of large firms. Amongst firm An IFC Survey of Ukrainian Business 13 Ukrainian Enterprises in 2000 origin, more privatized f m s were able to secure bank credit for working capital than other classes of f m s . Firms were more optimistic about investment spending in 2001. 58% of firms plan to have investment into fixed assets in 2001 with 20% of them planning to obtain bank credit to fmance investment. Taxation Surveyed firms quoted taxation issues as the main constraint for market entry and expansion. Instability of tax legislation ranked as the biggest tax problem followed by tax burden in second place. The average number of taxes paid by all Ukrainian companies is 11, ranging from 9 for small firms to 14 for large f m s (out of a total of 17 national and 6 local taxes and duties that were applicable to surveyed firms.) This represents an overall tax burden of 24% of sales, with most f m s somewhere around this level. Trade firms had the least with 19% of sales turnover paid in tax and construction firms the highest with 28%. However, in terms of value added, the figures are very different. Over half (53%) of value added or wealth creation of all f m s was paid in tax with the service sector having the highest value added tax burden (60'36.) In terms of firm size this ranged fiom 44% for small firms to 52% for mediurl sized f m s to 56% for large f m s . The level of tax burden that f m s stated was tolerable was half of the actual value at 27% of value added. This is perhaps one of the reasons that 16% of all turnover was concealed fiom taxation and the state. Unfair Competitive Practices As effectively functioning markets and oversight in Ukraine is still nascent, the issue of anti-competitive business practices is still prevalent in Ukraine. Out of general business barriers this issue ranks fourth, behind taxation, low demand and inflation, with all f m s reporting some form of anti-competitive behavior. In addition to f m s experiencing unfair competition fiom shadow activities and competitors receiving more favorable tax treatment, the biggest impediment quoted by all sectors (except manufacturing) was privileged permits1 permissions given to competitors by local authorities. This was the most acute form of anti-competitive behavior across all sectors. However, looking at fm size, this issue was only in second place behind privileged access to credit which ranked first for both medium and large sized f m s . The anti-competitive barriers ranked third and fourth for all f m s were privileged access to clients and subsidies to competitors fiom the national government. Main Regulatoryand Administrative Barriers to Business Development The regulatory and administrative environment does not appear to have significantly changed over the last year. Ukrainian companies still complain of taxation problems and the very large role that the state plays in regulation and otherwise interfering in the operationsof business. Out of all regulatory and administrative issues, the most acute in 2000 was frequently changing business legislation, quoted by 94% of all respondents. Ln second place by severity customs procedures which, however, only applied to 44% of all f m s . In third place by severity, obtaining permits and permissions (which was applicable to 86% of all fms.) Out of the choices presented f m s ranked business registration procedures last. EXECUTIVE SUMMARY UnofJicialPayments All firms surveyed had to make some sort of unofficial payments in dealing with regulatory and administrative issues. 23% of all surveyed f m s had to make unofficial payments in obtaining permits and permissions, 15% in obtaining licenses, 15% in product certification. 28% of all firms had to make unofficial payments in relation to inspectionsand 39% of all firms had to make some form of 'voluntary' contributionto municipalor charitablefunds. Time Tax The survey shows that the average amount of work time that senior company management spent on various dealings with the state amounted to 16% over 2000. Small and medium f m s spent about the same amount of time (15% and 16% respectively) on dealing with the state, whereas larger f m s spent about 20% of their time. Among cities the largest time tax was in Lugansk with 21%, followed by Ivano-Frankivskwith 20%. The smallest time tax out of all oblast capitals was in Uzhgorod with only 9%, and there small firms had a time tax of 7%, and medium firms had the lowest level of time tax in Ukraineat only an average of 5% of senior management time. Licensing Due to the fact that a large sample of both private and state-owned, small, medium and large enterprises were surveyed, it is difficult to analyze this issue as different firms face different licensing requirements. The survey instead asked f m s whether they felt that business licensing presented an obstacle to business development. 72% of all firms had to undergo licensing in 2000, of which 42% felt that it presented a significant or major constraint to business development. 15% of these firms had to make unofficial payments in obtaining licenses. The most difficult licensing environments (according to the respondents) were to be found in Simferopol (54% stated that licensing was a significant or major barrier), followed by Dnipropetrovsk (53%.) The best environments were to be found in Chernigiv(26%),and Lutsk (28%.) Permits and Permissions 86% of all f m s faced the need to obtain permits1permissionsover 2000, of which 44% stated that permits and permissions presented either a serious or major barrier to market entry. The most problematic permits and permissionswere in connection with land and construction. 58% of all companies felt that it was difficult or very difficult to obtain a permit for the allocation of a land plot, followed by 43% of all firms who complained about the procedures for receiving permits and permission for construction. Inspections The overall level of state inspections of business in Ukraine has not declined over 2000. Across all firms the average number of inspections in 2000 was 14.4, with small f m s experiencing 11.5 inspections, medium sized f m s 16.8 inspections and large f m s 20.4 inspectionsover the course of 2000. The average total duration of all inspections was 26.6 days. Notwithstanding the fact that small firms had fewer inspections than large firms, smaller f m s had a much greater inspections burden. Micro firms (less than 10 employees) had more than 20 times more inspectionsper employee than very large fums (more than 500 employees.) An IFC Survey of Ukrainian Business 15 Ukrainian Enter~risesin 2000 Ir;!spectionConsequences 44% of all surveyed f m s faced some sort of sanction from inspec1:ing bodies. Of these, the most widespread was the use of 'kartoteka' (direct debit of fines and arrears from a company's bank account) faced by 18% of all companies. This was followed by repeated inspections in second place quoted by 17% of all f m s and frozen bank accounts in third place quoted by 13% of all firms. The average duration of kartoteka was 171 days, fm assets seized as tax collateral - 174 days and frozenbank accounts - 95 days. Barriersto Receiving Financing and Credit The biggest barrier to receiving commercial financing was high interest rates, followed by lack of long term credit. Medium sized f m s put lack of long term credit in first place as their biggest problem with obtaining financing. In third place for all firms was the issue of collateral requirements. Computer and Internet Use Three quarters of all surveyed f m s had at least one computer (on average 1 computer for 20 employees) and around a third of all firms had some sort of intemet access, with more larger firms (52%) having access than medium sized firms (31%) or small firms (27%.) The biggest barriers to intemet access were the low quality of phone lines and the high price of internet services. Internet use in Ukraine is still primarily passive with 80% of companies using internet access for email and 77% for obta.iningnews and information. MAlN ISSLlESIN BUSINESS DEVELOPMENT IN UKRAINE MAlN ISSUES IN BUSINESS DEVELOPMENT IN UKRAINE This report is based on a survey of 2,158 companies located in every oblast center in Ukraine and is therefore geographically representative. Further, it attempts to capture a representative picture of business4 in Ukraine and therefore surveyed small (5 to 50 employees), medium (51 to 250) and large (more than 250) companies; state owned, privatized and start up companies. State owned companies were divided into municipal enterprises5and nationally owned companies. Privatized enterpriseswere divided into early and late privatized companies with January 1, 1996 being the cutoff. Privatized enterprises were defmed as those that had a majority non-state ownership (i.e. not less than 50% privately owned.) Similarly startups were divided into early and late startups, with January, 1 1996 as the cut off date. Please refer to Annex 1 for a fill explanation of the survey methodology used. This survey looked at enterprise performance over 2000 and attempts to capture the main issues and problems faced by Ukrainian businesses. Broadly speaking, the main barriers facing Ukrainian firms can be divided as follows: Demandside restrictions: Low purchasingpower, low demand. Macroeconomic instability: High and changing interest rates, inflation, exchange rate volatility. Micro-level non-financial constraints: legal-institutional issues (taxation and regulatory climate), market failure due to anti-competitive practices, access to infi-astructure,difficulty in sourcing inputs, criminal pressure. Micro-level financial constraints: access to external financing, high cost of capital, underdevelopedfinancial markets. Corruption Survey respondents were asked to rate what they consideredto be the most important issues hindering their development and further growth. Fig.1 below shows the distribution of responses for 10 major business barriersin Ukraine. There is almost total unanimity across all firms on the major barriers facing business development, irrespective of firm size or f m origin. The issue of taxation emerged as the biggest barrier for all sectors and also for small, medium, large, state and private companies as well. This confms previous research carried out by IFC and other organizations, that consistently ranks taxation as the biggest business headache in Ukraine. As this report will later show, the biggest problem with taxation is not just high tax rates, but large number of different taxes and duties and fi-equently changing tax regulations, leading to inspections, unofficial payments and shadow economic activities. Again there is unanimity across the whole sample on the instability of the taxation regime in Ukraine as the main problem with taxation in Ukraine. Certain classes of firms were not surveyed, in particular agricultural producers and state financed enterprises (health care, educational establishments, etc.) More correctly 'communally owned' enterprises that are engaged in commercial activity, including transport, cafes and restaurants,construction firms, manufacturing firms, shops, hotels, etc. An IFC Survey of Ukrainian Business 17 Ukrainian Enterprises in 2000 FigureI Rating of Barriers Hindering Business Developmentin Ukraine6 (aristribufion of responses for all firms) Taxation (3.1') Low Demand (2.9) Inflation(2.8) Anti-CompetitivePractices(2.5) Corruption (2.3) Regulatory Environment(2.3) UnderdevelopedInfrastructure(2.2) Sourcing NecessaryInputs (2.0) Obtaining ExtemalFinancing(1.8) Pressure from Criminal Elements (1.6) Maior Obstacle aSianificantObstaclea Small Obstacle 0No Obstacle *Figure in brackets give the average score of answers on a 4-point scale from 1 - nlo obstacle to 4 - major obstacle,for each obstacle listed Across all f m s , general macroeconomic conditions, as characterized by low demand and inflation,' were cited as being the next most important issues for Ukrainian business. It is probable to assume that higher input prices in Ukraine have lead to cost-push inflation over 2000 leading to producers attempting to pass on higher costs to consumers. Low demand is ranked in second place for f m s in the survey. This is followed by Ukrainian f m s complaining of anti-competitive behavior, discrimina- tory practices and a non-level playing field for all. The issue of corruption ranked as next most important in fifth place. This is followed by the general regulatory environment and access to infrastructure. Interestingly, in general f m s ranked access to external financing almost in last place. Given the low level of investment, retained earnings and credits, in Ukraine, this is very surprising indeed and implies that the administrative, regulatory and business environment is much more important to the immediate operatioils of Ukrainian k~usinessesthan obtaining financing. No real differences are observed between private or state companies amongst the rating of the main business problems in Ukraine, and in most cases the responses of state owned en- tlerprises are identical with the responses of the entire sample. There was only one excep- tion, and that is the issue of corruption. State owned enterprises ranked corruption as eighth most important compared to the whole sample ranking of fourth. Please refer to Table 21 for breakdown of main barriers by firm size and origin and Table 80 for sectoralbreakdown. Inflation for 1999 - 19%,for 2000 - 26%. ENTERPRISE PERFORMANCE ENTERPRISE PERFORMANCE Financial Performance 2000 was the first year of economic growth in Ukraine. Overall the results correspond well with national statistics on economic growth. The real volume of sales and value added of surveyedenterprises grew on average by 28% and 11% respectively. The three best performing sectors by sales in descending order were trade, telecommunications and public catering (see Table 2.) The general service sector experiencedthe lowest growth rate at 15%. More encouragingwas that overall sales growth was skewed towards smaller firms (38%), compared with medium and large f m s which experiencedan average sales growth rate of 27%. Table 2 Real Sale Growth Rates in 2000 (% weightedyear on year average change) Firm Size Firm Oriain .. Manufacturing 31.6 29.3 28.3 19.2 31.1 42.7 28.5 Construction 35.4 14.4 11.4 -17.8 20.0 39.6 18.6 Transport 39.4 4.4 14.5 21.8 2.2 41.2 17.1 Telecoms 50.8 39.6 20.0 19.5 -6.5 41.9 40.9 Trade 42.9 64.6 32.0 17.5 30.1 59.2 45.8 PublicCatering 48.6 7.7 -10.2 45.4 47.6 38.2 Other Services 40.3 10.7 16.1 12.9 3.7 53.2 15.0 More than 250 Averaae Figure 2 Real Sale Growth Rates in 2000 by Firm Origin (% weighted year on year average change) State-owned Privatized Start-ups An IFC Survey of Ukrainian Business 19 Ukrainian Enter~risesin 2000 Hlowever,results of value added growth differ from the sales picture. Value added provides an assessment of wealth creation in an economy and at the firm level. In terms of value added growth the best three performers were trade, services and telecommunications (see Table 3). The worst in terms of value added growth rates was transport with almost zero. The average rates of growth in value added for each size group of enterprises were approximately at the same level-about 11%. Table 3 Value Added Growth Rates in 2000 (96 weighted year on year average change)' - Firm Size Firm Origin Manufacturing 1.9 -0.9 10.7 13.8 5.0 20.0 8.5 Construction 24.2 13.2 -20.2 -30.1 8.9 36.0 3.5 Transport 4.2 4.5 -2.5 9.0 -8.6 0.5 -0.2 Telecoms 37.8 8.9 20.0 15.4 -24.0 12.6 12.4 Trade 15.3 64.1 27.1 -7.2 21.5 4;7.4 33.4 PublicCatering 12.8 -20.7 -43.3 16.7 8.1 -0.9 Other Services 16.6 24.5 22.4 17.9 20.5 48.2 22.5 51-250 More than 250 Averaae Figure 3 Value Added Growth Rates by Firm Origin (% weighted year on year average change) -5 -1 -3.3 State-Owned Privatized Start-ups On the whole the private sector outperformedthe state sector in sales growtlh in 2000. Sales growth for the private sector was 32% (privatized firms and start-ups) versus 17% for state-owned f m s . However, the state sector did better as a whole in value added terms compared with sales growth. Municipal enterprises did well with value added growth of Value added growth rate was calculated by using the real sales growth data provided by respondents in 2000 compared with 1999 and the shares of material costs in sales in. 1999 and 2000. ENTERPRISE PERFORMANCE 17%.' Late privatized companies that are probably still undergoing more intensive restructuring, fared worse in value added growth than early privatized companies and lowered the average figures for privatizedfirms as a whole. Probably the most appropriate comparison to make is between early privatized firms, who have already had time to undergo some restructuringand national state-owned firms (more direct competition.) Here we find that early privatized f m s as a whole have performed a little bit better than the state-owned f m s . This is encouraging as it shows that on an aggregate level within a particular sector privatization does lead to improved efficiencies, especially if it is borne in mind that in a lot of cases those firms still left in state ownership are more attractive or have a higher degree of market power than firmsthat were privatized earlier. Table 4 ProfitableEnterprisesin 1999 (% of all firms) Firm Size Firm Oriain - State- Privatized Start- Average Up to 50 51-250 thr:T50 Owned ups Manufacturing 67.8 49.1 51.4 51.4 48.3 74.0 56.5 Construction 58.3 58.2 66.7 25.0 53.5 72.9 59.2 Transport 68.8 30.3 17.5 15.2 31.9 76.0 37.1 Telecoms 76.3 100.0 75.0 80.0 50.0 80.6 79.1 Trade 65.9 65.9 63.6 53.3 58.7 70.3 65.8 PublicCatering 55.6 63.6 57.1 46.3 65.0 56.3 Other Services 72.5 69.6 43.9 58.1 59.5 78.6 66.9 Up to50 58.2 53.9 72.8 66.1 51-250 56.1 45.1 73.6 52.9 More than 250 36.2 51.9 78.3 48.5 Average 48.3 50.2 73.1 59.2 Table 5 Profitable enterprisesin 2000 (% of allfirms) thr:r&O Firm Size Firm Origin Start- Average Up to 50 51-250 Owned Privatized uPS Manufacturina" 71.2 51.4 56.3 53.1 52.7 76.6 60.2 Construct~on 65 2 65 5 61 1 29 4 58 3 78 9 64.8 Transport 70 0 25 0 17 5 14 7 31 9 74 2 38.4 ~ e l e d m s 83.3 100.0 100.0 100.0 66.7 84.6 85.1 Trade 72.2 69.0 54.5 58.8 67.4 74.1 71.4 PublicCatering 59.1 90.9 66.7 52.7 67.2 61.5 Other Services 74.8 71.4 53.7 62.9 66.7 78.1 70.6 Upto 50 61.5 61.7 75.6 70.6 51-250 56.1 48.9 75.9 55.9 More than 250 41.7 55.6 82.6 52.8 Average 51.5 55.4 75.8 63.5 Given the sales and value added growth, the proportion of profitable firms has grown by 4% to 64% of all enterprises in 2000. Moreover, more f m s were profitable across all sectors, sizes and irrespectiveof firm origin. The largest proportion of profitable firms were 2 municipal enterprises were excluded from the averages. One a monopolist electricity utility with value added growth of 208% and the other a monopolist fuel utility with value added growth of 164%. An IFC Survey of Ukrainian Business 21 Ukrainian Enter~risesin 2000 in telecoms, small firms and start-ups. Conversely, the largest proportions of loss making enterprises were to be found in transport (62% of all transport f m s ) and state-owned companies(48%). Exporfs The vast majority of surveyed enterprises (80%) did not export their products. The proportion of exporters among large enterprises is five times greater than among small f m s . Less than 10% of small f m s exported any products. The international competitiveness of Ukrainian firms (as measured by the prevalence of non-CIS exports) is still very low (see figure 4). For example, 4 times as many large f m s perceive CIS countries to be their major markets than Europe and the rest of the world, irnplying that f m s still tend to follow more traditional export markets. A n average of almost 14% of the combined sales of all surveyed enterprises is exported (see table below.) As expected, larger f m s export a greater proportion of their output than smaller f m s , by a factor of three. By fm origin, privatized f m s exported imorethan three times more of their output (20%) than either state-owned or start-ups. Figure 4 Distributionof Exports (?Aof all firms) Average 1.2 More than 250 2.2 50% 60% 70% 80% 90% 100% Do Not Export INCIS QEurope Other Countries ENTERPRISE PERFORMANCE Table 6 Volume of Exportsin 2000 (% of total sales of all firms in each group) Firm Size Firm Origin - More State- Start- Average U p to 50 51-250 than 250 Owned Privatized UPS Manufacturina - 8.2 8.5 18.4 8.1 21.9 8.1 16.9 Construction 3.1 1.0 1.0 0.1 2.3 1.3 1.6 Transport 12.2 2.0 7.2 0.9 10.4 23.0 7.2 ~elecoms^ 2.2 14.8 5.0 15.8 0.3 13.0 12.8 Trade 0.7 0.0 9.2 0.0 5.4 0.6 2.5 PublicCatering 12.8 0.0 0.0 19.0 0.0 9.3 Other Services 1.8 0.3 0.0 0.0 0.0 2.0 0.2 Average 5.2 5.7 16.4 U D to 50 2.9 10.4 3.7 5.2 51-250 More than 250 Average 5.7 20.0 6.2 13.6 *High export figures for the telecoms sector may be explained by international data traffic counting - - - as exports, and the diversified natureof telecomscompkies(also-have other lines of business.) Employmentand Labor Productivity Economic growth in 2000 was not accompanied by job growth at existing enterprises. Despite a rosier financial performance outlook most surveyed companies shed employees, though the data is insufficient to determine the direction of the causal link between job creation and enterprise performance. The average downsizing across the whole sample amounted to 3%. The only exceptions were in telecoms, trade and services and private sector start-ups in general (see Table 7). However, only late start-ups experienced positive job growth (see Figure 5). Internet service providers and mobile communication companies in the telecommunications sector were the only ones experiencing positive job growth irrespective of company size. Table 7 EmploymentGrowth Rates in 2000 (% weighted year on year average change) Firm Size Firm Origin Manufacturina - -5.4 -7.1 -2.7 -5.3 -1.9 -4.2 3.2 Construction -11.4 -7.6 -8.2 -14.8 -15.2 20.1 -8.3 Transport -28.9 -16.6 -4.4 -4.5 -10.7 0.8 -6.0 Telecoms 7.7 44.7 4.0 -1.6 0.0 33.4 5.9 Trade -0.5 5.4 -2.9 -5.8 -5.1 9.7 0.4 PublicCatering 0.0 -7.6 -13.4 -4.4 6.5 -2.4 Other Services 1.4 -1.0 0.9 1.1 -1.1 6.7 0.7 Up to 50 51-250 More than 250 Averaae An IFC Survey of Ukrainian Business 23 Ukrainian Enter~risesin 2000 Figure 5 E~mploymentGrowth Rates in 2000 (96weighted year on year average change) - 6 -5.0 State-Owned Privatized Start-ups The survey shows that, as a result of negative net job creation, greater restructuring and increases in sales and value added, labor productivityat Ukrainian enterprises has increased in 2000. Table 8 below shows changes in labor productivity. All surveyed sectors experienced labor productivity growth which averaged 15%. The best performers were trade (33%), services (22%) and construction (13%). Public catering performed the worst with productivity increasing by only 1.5%. Medium sized f m s fared the best with average productivity of 18%,consistent with them proportionally shedding the most employees (by 6'%). Table 8 L.aborProductivity Growth Rates in 2000* (% weighted year on year average change) Firm Size Firm Origin Manufacturing- 7.7 6.7 13.8 20.5 7.1 25.3 12.1 Construction 40.2 22.6 -13.1 -18.0 28.4 13.2 12.9 Transport 46.6 25.4 2.0 14.1 2.4 -0.2 6.1 Telecoms 28.0 -24.8 15.4 17.3 -24.0 -115.6 6.2 Trade 16.0 55.6 30.8 -1.4 27.9 34.4 32.9 Public Catering 12.7 -14.2 -34.6 22.1 1.5 1.5 Other Services 15.1 25.7 21.3 16.6 21.8 38.9 21.7 5i-250 More than 250 Average 18.1 9.5 211.4 14.6 *Calculatedas value added growth ratio (1999-2000)divided by employment growth ratio (1999-2000). At an aggregate level, over 2000 state-owned enterprises improved labor productivity more rapidly than private firms- by 18% compared to the 13% average for all private f m s . This ir; probably due to state-owned enterprises reducing their work forces more so than other companies. However the picture is more interesting if the data is disaggregated(see Figure 6 below). Companies with the highest productivity growth were early start-ups (30%). Followed by municipal enterprises (20%). Early privatized companies performed similarly ENTERPRISE PERFORMANCE to nationally owned state enterprises increasingtheir productivity figures by 17% and 18% respectively. Figure 6 Labor Productivity Growth Rates in 2000 (% weightedyear on year average change) State-Owned Privatized Start-ups Competition Figure 7 Number of Competitors - (% of all firms) 90 State-Owned National 80 lBE&iState-OwnedMunicipal 70 Privatized 60 50 0 -Ups Start % 40 30 20 10 0 No Competitors 1-3 Competitors More than 3 Competitors Start up enterprisesoperate in the most competitiveenvironment- only 2% of new entrants have no competitors (see Figure 7). Further, start-ups experienced the most domestic competitive pressure, compared with privatized and state-owned f m s (see Figure 8.) Privatized enterprises on the other hand faced the most foreign competitive pressure. As expected, municipal enterprises experienced the smallest competitive pressure (32% of the group are monopolists). An IFC Survey of Ukrainian Business 25 Ukrainian Enterprises in 2000 Fiigure 8 Pressure fromDomestic and Foreign Competitors (76of the total of each type of enterprise who stated significant and very significant competition) HPrivatized E lStart-Ups National Municipal ElAverage % 13 Domestic Competition Foreign Competition Softness of Budget Constraints In a fully functioning market environment enterprises are led by market prices, supply and demand, and the relation between revenues and expenditures. Imposition of hard budget constraints on f m s implies that enterprises bear full responsibility for their actions, in par- ticular, they make all of their payments to the state in full and on time, receive no state subsidies or credits on preferential terms to finance operational and capital expenditures, and cannot influence the legislative and regulatory environment exclusive1:y in their favor. In addition enterprises should expect that these conditions will not change in the future. Hard budget constraints are therefore one of the more important mechanisms that a government has in determining a level playing field for all and stimulating enterprise efficiency. The violation of any of the above mentioned principles means that an enterprise operates under conditions of soft budget constraints. For the purposes of our survey soft budget constraints at the enterprise level were defined by the presence of significant tax andlor energy arrears. Table 9 below shows the proportion of enterprises that reported that they were in significant arrears to the state andlor energy suppliers. ENTERPRISE PERFORMANCE Table 9 Firms with SignificantTax andlor Energy ~rrears' (% of all firms) Firm Size Firm Origin - More State- Start- Average Up to 50 51-250 than 250 Owned Privatized UPS 0 Manufacturina- 3.5 12.2 10.9 15.2 10.4 2.2 8.6 -- Construction 3.1 12.7 22.2 11.8 16.4 0.0 8.3 Transport 7.5 14.3 12.5 20.6 10.2 3.1 11.3 ~ e l e w m s 0.0 0.0 25.0 14.3 0.0 0.0 2.0 Trade 1.4 0.0 0.0 17.6 0.0 0.7 1.2 Public Catering 3.0 0.0 9.5 1.8 1.5 2.8 Other Services 3.2 5.2 19.5 15.9 6.0 0.9 6.3 Averaae 2.7 10.3 12.3 More than 250 Average '.In answering the question on presence of tax andfor energy arrears firms were given 4 options: 'none', 'insignificant', 'manageable' and 'hopeless'. For the purposes of the table 'manageable' and 'hopeless' were aggregated. Whilst there is significant variation between sectors, the data shows significantly less small firms have significant arrears to the state than either medium or large f m s . As can be observed more larger state owned enterprises experience soft budget constraints than other types of f m s . In fact almost 12 times as many state owned firms than start-ups are likely to have significant tax and energy arrears. This has very obvious implications for state revenues. The use of non-monetary instruments in transactionscan also be considered to be a type of soft budget constraint especially as it relatesto fiscal discipline of enterprises. Table 10 Volume of Sales Using Barter, Off-sets, Bills of Exchangeand Other Non- monetary Instruments (% of sales, weighfed) Firm Size Firm Oriain Manufacturing 14.7 17.4 22.9 33.8 16.9 11.6 21.9 Constmction 21.3 29.1 21.8 12.7 30.6 18.7 24.4 Transport 23.3 14.7 7.9 9.1 11.0 20.7 11.2 Telecoms 6.0 5.0 58.6 48.2 15.0 5.0 7.4 Trade 6.3 3.0 15.9 12.1 7.7 7.4 7.7 PublicCatering 8.7 2.0 4.4 11.3 1.9 6.9 Other Services 2.6 37.4 38.2 40.2 34.8 1.9 36.0 More than 250 34.2 17.2 16.0 23.8 Average 34.1 17.4 9.0 22.3 Non-monetary instruments, which are by definition more opaque, often allow for transactions at non-market prices and minimizing or even evading taxes. For example, a large enterpriseproducing a non-competitiveproduct and thereby with little cash flow, may use barter or mutual off-sets to cover energy debts at below-market prices which in turn distorts the true financialstate of the fm. An IFC Survey of Ukrainian Business 27 - " -------- ., - , P, Ukrainian Enterprises in 2000 On average state-owned f m s had more non-monetary transactions than privatized f m s , who in turn had more that start up f m s . However, there were significant variations with for example, state owned transport and construction f m s being more cash based than their counterparts in the private sector. Similarly there is tendency for larger f m s to use more non-monetary instrumentsthan smaller ones. Enterprise Restructuring According to the definition of Pohl et al.,'O enterprise restructuring during the transition ftom a planned to a market economy is a complex process of changes at the fm level to silpport profitability under conditions of a continuously changing economic environment, technological progress and competition fiom other market participants. Existing economic literature on enterprise restructuring in transition defines at least two major types of restructuring activities: passive and strategic restructuring:" Passive restructuring is imposed by new market environment on almost all enterprises regardless of fm origin. It includes the following measures influencing the short-term prospects of an enterprise: postponing production not demanded by the market, reducing closts by the sale or lease of idle assets, decreasing real wages and/or reducing the workforce. Strategic restructuring include measures aimed at making an enterprise viable in the long nm. The market value of an enterprise in this case is maximized by the development of new business strategies, organizational changes, investment into new production lines and technologies, new product development, expansion into new markets, etc. Strategic restructuring usually leads to an increase in output and new job creation.'' This survey attempts to reveal the intensity of restructuring, or alternatively firm dynamism (as some of these activities are not purely restructuring activities) at the enterprise level. Respondents were asked questions regarding both strategic and passive kinds of restructuring activity performed by their enterprise over the last three years. Table 11 presents a breakdown of restructuringactivities by firmorigin. 10 Pohl, Gerhard, Robert E. Anderson, Stijn Claessens and Simeon Djankov (1997): Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options. World Bank Technical Paper No. 368, The World Bank. 11 See, for example, Irina Akimova, "Export Orientation and its Influence on Enterprise Flestructuringin Ukraine", pp 209, ed. Hofhann and Moellers, 2001. '' EBRD Transition Report 1999, pp.143-144. ENTERPRISE PERFORMANCE Table 11 Restructuring by Firm Origin (% of the total of each type of enterprise) Firm Origin State-Owned Privatized Start-ups Average National Municipal Early Late Early Late Developed New 36 Products Improved 41 ExistingProducts Changed Sales 27 Channels Attracted New Major Clients .-m -5 c Introduced New 26 30 31 28 34 24 28 Technologies 0 Purchased1 Leased New 7 8 8 10 20 15 12 .- Assets m 2 Changed Major 2 14 5 20 19 22 19 18 Suppliers tj Attracted New Employees Trained Employees in 18 15 27 26 29 24 25 New Technologies Changed Legal Organizational 11 10 8 22 5 8 10 Structure Discontinued - m .-E Production of Old 17 5 23 18 15 9 16 5 Products 2 SoldlLeased Out 26 C 19 32 25 9 6 19 u, Excess Assets B . Shed Excess U) 45 32 50 46 30 25 38 Labor P Development of new products is perceived by many economists as the most important sign of strategic restructuring since it reflects an enterprise's ability to meet changing demand and other market conditions. Early start-ups are clearly the most innovative, with over half developing new products and services. Privatized firms (irrespective of when they were privatized) also performed well in developing new products. State owned enterprises performed worst of all in adapting to changing market conditions though this could also be An IFC Survey of Ukrainian Business 29 Ukrainian Enterprisesin 2000 more of a reflection of the fact that state owned enterprises tend to face less competition in general.'3 On the whole the data shows start ups and privatized enterprises to be most dynamic in response to changing conditions, they were better at finding customers, developing new products, and creating new jobs. Passive types of restructuring, represented by discontinuation of old products and production and a reduction in excess labor, were also plerformed most frequently by privatized enterprises. Across all restructuring parameters silrveyed,more privatized firms were active than state-owned firms, particularly in strategic restructuring. The worst performers across almost all restructuring indicators were munlicipally owned einterprises, an important confirmation of the need to fbrther reduce the role of city governments in local business. Management Turnover Pmother important component of enterprise restructuring (or enterprise dynamism) is the frequency with which key enterprise decision makers are changed, if at all. Company managers take all key operational decisions and are in a position to initiate restructuring. The role of outside professional company management (in the sense of taking key operational decisions) is still novel in Ukraine. Directors could be disciplined in different ways, in particular, by enterprise owners and external factors. Company directors are appointed by enterprise owners who could have different objectives. For instance, the objectives of insider owners (worlcers or existing managers) are quite different from the objectives of the outsiders - direct and portfolio investors or government representatives. Among the major external factors influencing management turnover according to the survey are market structure (i.e. competition) and degree of softness of budget constraints. On average, each fifth enterprise changed its top management over last three years. At the same time 7.7% of surveyed companies attracted new top managers fiom outside. Evidence of the latent state of the managerial talent market is the relatively low influx of new outside managers into privatized enterprises - only 8.4%. The high proportion of management turnover at state-owned enterprises is probably explained by administrative andlor political decisions rather than market pressures. The table below shows by fm size and origin those firms that changed their management, as well as showing whether they were insiders or outsiders. 13For comparisons between the state and private sectors in enterprise restructuring it is better to use only nationally owned enterprises as representative of state enterprises due to the specific market conditions under which municipal enterprises operate (product homogeneity and high degree of market power.) ENTERPRISE PERFORMANCE Figure 9 Management Turnover (% of all firms) New Insider Top Manager New Outsider Top Manager More than 250 employees 23.8 51-250 employees 3.0 Up to 50 employees 1 , 6.9 174 Start-up 13.3 Pr~vat~zed 23 1 State-Owned I * 3 - 30 7 Average The telecomssector experiencedthe highest rate of attracted managerialtalent, however the general manufacturing sector also experienced substantial management turnover (23%), especially so with state owned enterprises (65.5% of all state owned manufacturing companies.) A possible reason for the relatively low level of influx of new outside managers into privatized f m s could be that enterprise ownership is more dispersed, and therefore the chances of a majority owner are reduced. Another possible reason is the dominance of inside owners in an enterprise rather than outside owners, thereby increasing the chances for insider management. Table 12 OwnershipDispersionat PrivatizedEnterprises and Start-ups (% of all privafe firms) Holders of Major Stakes, %* Total One (State) One (Private) Two-Three More than Three Privatized 1.7 13.8 22.0 62.5 100.0 Early Late Start-uos -. .. .. ate' 0.4 48.3 34.5 16.9 100.0 'Refers to holders of the largest relative stakes. The state could very well have the largest single, though minority, share. An IFC Survey of Ukrainian Business 31 Ukrainian Enterprises in 2000 Figure 10 PrivatizedEnterprises and Start-upswith Dominant Inside Owners* (96 of total in each firm origin group) Privatized Start-ups 'Controlling stake with management andl or employees. A. statistical analysis (see Annex 2 for more information) revealed that there are several main factors that increase the probability of the appointment of new outside management. In order of significancethese are: the presence of outside owners, an increase in the number of competitors and the probabilitythat management will change increases with the presence of significant tax andlorenergy arrears. Start-ups change their managers the least fiequently. More than twice as many state-owned firms compared have changed their management as start-ups. Ownership concentration appears to have no significant influence on the probability of management twnover. Factors That Influence Enterprise Performance .4n important objective of the survey was to determine what relationship, uf any, exists in Ukraine between enterprise performance and various internal and external factors influencing enterprises. This follows on fiom similar research carried out by EBRD in 199914where they examined enterprise performance in the medium term (over three years) in 22 transition countries. I4Business Environment and Enterprise Performance Survey. EBRD Transition Rq3ort 1999. ENTERPRISE PERFORMANCE The analysis in this report (see Annex 2for regression analysis) used the same approach as in EBRD's survey and showed that, in the short term (over one year), the following factors are related to enterprise performance: Significant domestic competition is associated with increasing sales. However, significant foreign competitionleads to a slight decrease in real sales volumes; When control is made for other factors, fm origin status does matter for financial performance. Start-ups and privatized enterprises performed better than state-owned companies in terms of sale growth whilst municipal enterprises outperformed nationally owned state enterprisesin terms of value added growth; Strategic restructuring measures have different effects. New product development correlateswith a reduction in sales and value added, whilst improving existing products is associated with increasing sales. Changing sales channels increases the volume of sales and value added. Attracting new clients leads to higher value added volumes. Changing major suppliers correlates with a reduction in value added. Training employees to meet new technologies and attracting new employees is associated with an increase in value added. Changing a f m s organizational structure correlates with a decrease in value added (however, it is not clear why); The consequences of passive types of restructuring are varied as well. Ceasing old production increases a f m ' s value added. Salellease of excessive assets is associated with a reduction in real sales. Reducing the workforce correlates with a reduction in value added. This is a positive sign if accompaniedby productivitygrowth; The short term influence of soft budget constraints on firm financial performance is unclear. Factors That Influence Enterprise Restructuring Some restructuring measures in the short term are associated with increasing sales and value added, others with a decrease. However, other research carried out in this field that uses a more long term approach and simple common sense indicate that restructuring, especially strategic restructuring, is a precondition for improving competitiveness and sustainable growth of an enterprise. Therefore, this report seeks to analyze which factors are the most conducive for restructuringat the fm level. According to the EBRD Business Environment and Enterprise Performance ~ u r v e ~ "the , degree of enterprise restructuringin transition economies in general is positively influenced by the level of competition experienced by firms, hard budget constraints, presence of concentrated outside private owners and quality of the investment climate in the particular country. Studies of the Ukrainian corporate sector have drawn similar conclusions. Research carried out by the London Business school16found that outsider rather than insider fm ownership leads to greater restructuring activity, notably with respect to products (i.e. adjustment to quality, product mix, structure of sales by region and sales outlets) and inputs (reducing waste in material inputs, energy, changing suppliers.) The German Advisory Group on Economic ~ o l i cconcludes that enterprise restructuring is triggered by an increase in ~ ' ~ competitive pressure, especially by exposure to foreign competition, changes in top l 5EBRD Transition Report 1999. l6 Estrin Saul, and Rosevear, Adam, Enterprise Performance and Corporate Governance in Ukraine. Journal of Comparative Economics, 27, 1999, pp. 442-458. 17 See, Irina Akimova, "Export Orientation and its Influence on Enterprise Restructuring in Ukraine", pp 206-232, Ukraine on the Road to Europe, ed. Hoffmannand Moellers, 2001. An IFC Survey of Ukrainian Business 33 Ukrainian Enterorises in 2000 management and training for enterprise staff. At the same time soft budget constraints si,gnificantlyslow down restructuring activity. Our survey generated sufficient data to explore the factors that influence enterprise restructuring. A regression analysis was employed to assess the influence of such variables as competition, firm origin and budget constraints on enterprise restructuring. The detailed results are presented in Annex 2. The analysis confirms that the most important factor associated with enterprise restructuring is competitive pressure. Further, pressure fiom foreign competitors seems to be much more important than pressure fiom domestic rivals. This accords well with previous research. Oligopolistic competition (1-3 competitors) promotes th.e development oiF new products and the improvement of existing products more so than other types of enterprise restructuring. Stronger competition (more than 3 competitors) has a larger influence, not on the development of new products, but on more fiequently changing sales channels - i.e, more dynamic marketing. Facing competitive pressure, enterprises are more likely to look for new customers. Significant foreign competition pushes Ukrainian enterprises to innovate and introduce new technologies. Competition also acts as a strong influence on persuading enterprises to sell off or lease unwanted assets. Competition also seems to be the biggest motivator in reducing excess labor at an enterprise. The stronger the competition the more likely that an enterprise will shed excess labor. Figure I 1 Level of Competition and Strategic Restructuring (% of all firms that performed strategic restructuring) Developed New Products OAttracted Major New Customers % No Competitors 1-3 Competitors More than 3 C:ompetitors - Statistical analysis shows that fm origin status does indeed correlate with enterprise restructuring. Less state-owned firms performed any restructuring measures than either privatized f m s or start-ups. Privatized f m s and start-ups are much more likely to provide training for their employees than state-owned enterprises. In addition, start ups are also the most fiequent buyers of new assets and the major source of new jobs. Across all of the variables tested municipal enterprises introduce restructuring measures least of all. This may be explained by lack of the profit motive, by the higher degree of market power enjoyed by most of them at the city level and the presence of relatively stable local budget financing (e.g.for public transport.) ENTERPRISE PERFORMANCE Figure 12 Softness of Budget Constraints and Restructuring (% of all firms that restructured) ElSignificantTax/ EnerqvArrears -- No SignificantTax1Energy Arrears Developed New AttractedMajor AttractedNew ReducedExcess SoldlLeased Out Products New Customers Labor Labor Excess Assets The analysis shows that soft budget constraints do indeed influence restructuring. The presence of soft budget constraints, approximated by tax and energy arrears, is associated with sluggish change at the enterprise level, except for contraction measures (i.e. passive forms of restructuring.)Soft budget constraints seem to significantly reduce the probability of introducing and improving products. Further the presence of soft budget constraints negatively correlates with improved marketing (i.e. less likely to find new customers.) Companies with arrears are also the least likely to employ new workers. However, they are associated with the shedding of excess labor and excessiveassets. Paternalism One of the more interesting aspects of this research was attempting to get an idea of the degree of 'paternalism', or expectation of state support, still prevalent in company managementin Ukraine. Decentralization of economic decision making lies at the essence of the transition from a planned to a market economy. Market reforms need to transfer the consequences of business decisions, including their benefits and costs, to the enterprise level and away from the state. Only under such conditions will private initiative promote proper restructuring and productivity growth instead of rent seeking activities (search for subsidies, privileges and preferentialtreatment)and other methods of market distortion. The figure below shows the views of firm managers regarding the role of the state in the economy. The figure on the left shows the proportion of enterpriseswho would like to have the state support them should they incur losses (i.e. desire for support.) The second figure reflects the proportion of enterprises that do not actually expect to receive any real support from the governmentand rely on themselvesonly. An IFC Survey of UkrainianBusiness 35 ----- -* Ukrainian Enterprisesin 2000 Figure 13 Expectation of State Support ('36 of positive answers for all firms) Would Like the State to Support Do Not Actually Expect to ReceiveAny My Firm if Losses are Incurred State Support, We Rely on Ourselves Morethan 250 employees 85 51-250 employees Up to 50 employees Start-ups Privatized State-owned Average A.bout three quarters of respondents (74%) would like the government to cover losses incurred by their firms or provide funds for investment. Another startling result is that two thirds of start up businesses would like to receive government support if they incur losses or if their businesses start to fail. These entrepreneurs should be amongst the most progressive supporters of enterprises and the primacy of the private sector. That these figures are so high is a very disappointing finding and demonstrates how much more work needs to be done on promoting market principles in Ukraine. At the same, time 63% of managers do not expect in actual fact to receive any state support at all and rely on their own resources if losses are incurred. This figure may be considered as another indicator of restructuring at enterprise level. Not surprisingly, this independence from the state is the highest for start-ups and the lowest for state-owned companies. Moreover, expectations of government support positively correlate with enterprise size. Based on the above results, it is interesting to see the relationship between the degree of paternalism and intensity of strategic restructuring. Without exception, those enterprises with lower levels of moral hazard experienced more strategic restructuring. The figure below compares those firms given in the second chart of Figure 13 and their corollary, i.e. fiirms who do and do not in actual fact exvect to receive any government support if they incur losses. Strategic restructuring measures for the two different types of f m s were compared and the results presentedin Figure 14. ENTERPRISE PERFORMANCE Figure 14 Intensityof Strategic Restructuringand Expectationof State Support (% of the total of each type of enterprise) HEnterprisesThat Expect State Support Enterprises That Do Not Expect State Support 46.0 Developed New AttractedNew Clients Changed Major AttractedNew Products Suppliers Employees Those f m s with lower levels of moral hazard undertook more strategic restructuring than those who expect state support, or in other words the more independent an enterprise the better it is at adapting to change. This is consistent with the picture with profitability. Analyzing the responses between those who answered yes or no to the question of "We should rely only on ourselves"shows that 64% of those who answered yes were profitable in 1999. In 2000 this figure had increased to 69%. Of those who disagreed with the statement (i.e.&expect state support) 51% were profitablein 1999 and 53% in 2000. The data does show a link between profitability growth and expectations of paternalism, however this information is insufficientto show a causal link. Capital Expenditures and Working Capital A very important factor of the health of an economy is investment. Investments increase production potential,allow for job creation, and establish conditions for sustainable growth. The survey sought to identify the incidence of capital investment into individual f m s and usage of investment funds. Over 2000,41% of surveyed firms experienced capital investment. Table 13 below shows the breakdown of companies who had investment expenditures over 2000 by sector, firm size and fmorigin. An IFC Survey of Ukrainian Business 37 ---- - --. -, - , -----.. --7 Ukrainian Enterprises in 2000 Table 13 Proportionof Enterprises That Experienced Fixed Capital lnvestmentin 2000 (Ohof all firms) Firm Size ;,"Ed Firm Origin . More Privatized Shrt- Average Up to 50 51-250 than 250 ' J P ~ Manufacturing 41.1 41.5 54.6 47.0 40.6 52.4 45.3 Construction- 32.3 45.5 44.4 29.4 35.6 41.8 37.9 Transport 40.0 42.9 42.5 29.4 46.9 46.9 41.7 Telecoms 45.5 50.0 75.0 42.9 33.3 50.0 48.0 Trade 28.8 46.7 45.5 35.3 26.4 33.2 31.2 Public Catering 33.6 45.5 14.3 32.1 42.6 34.5 Other Services 33.1 51.7 48.8 39.7 34.5 44.0 39.8 - - Up to 50 23.7 26.4 40.1 35.0 51-250 37.3 38.0 64.1 43.6 More than 250 53.1 51.1 62.5 52.4 -Average 39.7 37.5 43.8 40.5 There is small variation between f m s of different origin in terms of frequency of investment expenditure. Naturally, start-ups are more fiequent investors (44%) than state- owned firms (40%), and privatized companies (38%). This is also the case with capital- intensive sectors, such as telecoms (48%) and manufacturing (45%) compared with labor- intensive trade (31%) and public catering (34%). Larger enterprises are also more likely to experience capital expenditurethan smaller firms (52% vs.35%.) Table 14 shows what f m s used capital investment for. Purchasing new equipment was the most popular form of investment with 28% of all f m s doing so, whereas new construction projects the least with 9% of all f m s investing into construction. Table 14 lnvestment into Fixed Assetsin 2000 (% of all firms in each firm origin group) National Municipal Privatized Start-Up ~ v e r a ~ e ~ InvestmentTook Place 42.0 36.6 37.5 43.8 40.5 New Equipment 27.8 20.4 24.2 32.9 27.9 Repair of Premises 24.5 19.4 22.2 22.7 22.5 Repair of Equipment 21.2 20.4 19.2 11.2 16.2 TransportAssets 13.2 11.8 12.7 15.4 13.8 New Construction 9.0 7.5 9.3 9.6 9.3 Over 2000, retained earnings and depreciation was the major source of investment into fixed assets (see Table 15). 86% of f m s who had investment expenditures did so fiom internally generated sources. In a very distant second place for sourcing investment capital were bank credits at 15% of those who experienced investment. Other forms of longer term financing were insignificant. ENTERPRISE PERFORMANCE Table 15 Sources of lnvestment into Fixed Assets in 2000 (% of firms who had investmentexpenditures) National Municipal Privatized Start-Up Average Retained Earningsand 81.9 76.5 89.4 79.3 86.4 Depreciation Bank Credit 19.0 6.0 15.7 13.5 15.1 Non-Bank Credit 0.0 0.0 4.5 6.3 4.9 DomesticInvestor 2.1 20.5 6.1 4.9 5.9 State Funds 12.4 23.5 1.3 0.2 3.0 Leasing 2.1 0.0 3.2 1.9 2.5 Direct ForeignInvestor 2.1 3.0 1.9 1.3 1.7 PortfolioInvestor 1.2 3.0 1.3 1.5 1.5 Table 16 presents more detailed data on attractingbank credits for capital investment.More than twice as many large f m s (11%) received bank credit than small f m s (4%.) There is almost no variance within fm origin with around 6% of f m s able to secure bank credit. Over 2000, banks found most attractive telecoms f m s , large trading f m s , transport start- ups and large state-owned manufacturingenterprises. Table 16 Proportionof Firms that Used Bank Creditsfor lnvestment into Fixed Assets in 2000 (% of all firms in each group) Firm Size Firm Origin Manufacturina- 5.3 7.0 11.3 9.3 7.1 7.9 7.7 Construction 2.1 3.6 0.0 0.0 1.4 3.8 2.4 Transport 12.5 8.6 10.0 8.8 10.2 12.5 10.4 Telecoms 2.3 50.0 25.0 0.0 0.0 7.5 6.0 Trade 3.9 13.3 18.2 0.0 4.7 5.9 5.3 Public Catering 1.5 0.0 0.0 1.8 1.5 1.4 Other Services 4.5 3.4 7.3 4.8 3.6 5.5 4.7 Up to 50 4.1 3.0 4.8 4.2 51-250 4.8 4.2 16.2 6.9 More than 250 9.2 11.5 8.3 10.6 Average 6.5 5.8 6.3 6.1 In terms of working capital financing the picture is a little more optimistic, with 13% of all f m s managing to obtain short-term bank credit to fmance working capital in 2000 (see Table 17). Again, obtaining short-term bank credits was easier for larger f m s than for smaller ones: a quarter of all large f m s managed to secure bank credit for working capital compared with only 9% of small f m s . Among larger f m s trading companies did especiallywell with 55% managingto obtain short-term bank credits. An IFC Survey of Ukrainian Business 39 -- -----. . . -- ------ , 1 Ukrainian Enter~rises 2000 in Table 17 Proportion of Firms that Used Bank Credit for WorkingCapital in 2000 (% of all firms in each group) - Firm Size Firm Origin Start- Average Manufacturina 11.7 11.6 27.5 17.2 17.1 14.9 16.4 Construction- 5.2 12.7 5.6 5.9 11.0 5.1 7.7 Transport 10.0 11.4 10.0 11.8 8.2 1:2.5 10.4 Telecoms 2.3 0.0 50.0 14.3 0.0 5.0 6.0 Trade 12.2 35.6 54.5 11.8 20.9 13.6 15.8 Public Catering 2.2 0.0 0.0 0.0 3.6 1.5 2.1 Other Services 4.5 5.2 22.0 7.9 10.7 4.6 7.4 Up to 50 51-250 More than 250 .Averaae Surveyed enterprises have more ambitious investment plans for 2001 compared with actual capital expenditures over 2000 (see Table 18). 58% of all respondents plan investment into fixed assets compared with the 42% in 2000. It remains to be seen whether this will a~ctuallytake place. Privatized enterprises are the most ambitious in terms of investment projections with 60% planningto invest into fixed assets. Table 18 Planned lnvestmentinto Fixed Assets in 2001 by Firm Origin (% of total number of respondentsin each group) National Municipal Privatized Start-Up Average Investment Will Take Place 52.4 50.5 60.2 58.;' 58.4 New Equipment 34.4 29.0 36.1 36.:3 35.7 Repair of Premises 19.3 17.2 29.4 17..I 22.8 Repair of Equipment 24.1 24.7 22.8 10.8 18.1 Transport Assets 12.7 14.0 14.5 17.4 15.5 New Construction 9.0 8.6 11.7 14.0 12.2 Table 19 shows expected sources of investment over 2001. Firms are starting to look more at external sources - obtaining bank credits (19% of firms expecting investment compared with 15% in 2000) and attracting strategic investors - 8% of all firms expect a local investor in 2001 compared with the 6% in 2000, and 5% of all f m s expect a foreign investor compared with 2% in 2000. Table 19 Expected Sources of lnvestment into Fixed Assets in 2001 by FirmOrigin (% of firms who expect investmentexpenditures) National Municipal Privatized Start-up Average Retained Earningsand 84.5 78.8 77.9 84.'7 81.3 Depreciation Bank Credit 19.8 12.9 20.6 18.1 19.2 Non-Bank Credit 0.0 0.0 3.3 4.6 3.4 Leasing 3.6 2.2 7.0 5.5 5.8 Domestic Investor 6.3 17.0 9.3 4.8 7.5 Foreign Investor 6.3 12.9 5.6 3.4 5.1 Portfolio Investor 1.7 4.4 1.8 0.9 1.5 State Funds 11.6 25.5 2.7 0.7 3.6 ENTERPRISE PERFORMANCE Enterprise Performance Conclusions - Official statistic^'^ show that Ukraine's GDP has grown by 6% over 2000 and this is reflected by the surveyed f m s whose value added increased on average by 11%. On the demand side, external demand for Ukrainian goods grew much faster than internal demand. Export growth of goods reached 26% compared with domestic capital investmentgrowth of 11% and growth in household expenditure of lo%.'' Export growth was a result of increased overseas demand for Ukrainian products (particularly CIS markets) and the positive impact of currency devaluation, which took place in late 1998. Internal demand grew due to an expansionary monetary policy in 2000 as well as -fromthe multiplier effect -from export growth. Further, the government reduced wage and pension arrears in 2000 which has had a positive effect on householdincome. This survey offers evidence that on the supply side, the Ukrainian economy has been improving as well. Firms are adapting to market conditions and there is evidence that restructuringefforts are paying off with growth in labor productivity. The survey sought to establish which groups of firms contributed most to economic growth and to determine what factors influencethe pace of restructuringat the firm level. Small f m s experienced the highest sales growth in 2000 (see Table 20Error! Reference source not found..) However, this was not accompanied by a respective increase in value added. Small f m s experienced 11% value added growth, similar to medium sized and large firms. At the same time more small f m s (70%) were profitable than medium sized (56%) and large firms (53%.) Medium sized f m s demonstratedthe highest growth in labor productivity(18%),mainly due to larger lay-offs of 6% on average. Table 20 Summary Table of Changes in Financial Performancein 2000 (% year on year change) Real Sales Value Added Employment Productivity Growth Growth Growth Growth Manufacturing 28.5 8.5 -3.2 12.1 Construction 18.6 3.5 -8.3 12.9 Transport Telecoms Trade PublicCaterina Other services 15.0 22.5 0.7 21.7 UDto 50 37.5 10.5 -4.2 15.4 All State-owned 17.1 12.8 -4.5 18.1 National 15.8 11.7 -5.0 17.6 Municipal 21.2 16.5 -2.9 All Privatized 29.6 6.3 -2.9 EarlyPrivatized(up to 1996) 31.4 13.5 -3.0 Late Privatized(1996 andlater) 23.5 -3.3 -2.8 All Start-ups 47.6 26.5 4.2 Early Start-ups(up to 1995) 48.2 29.7 -0.4 Late Start-ups(after 1995) 46.4 23.3 7.9 Average 27.7 11.0 -3.1 18State Statistics Committee of Ukraine. l9Authors' estimates. An IFC Survey of Ukrainian Business 41 Ukrainian Enterprisesin 2000 Start-ups showed the highest growth in sales, value added, employment and labor piroductivity compared to either privatized or state-owned f m s . Further, significantly more start-ups were profitable (76%) than either privatized(53%) or state-owned f m s (51%.) On average value added and labor productivity grew faster at state-owned enterprises than at privatized enterprises, however it is instructive to disaggregate the data and look value added growth in more detail. The overall results of the state-owned sector were considerably boosted by municipally owned f m s in the survey sample. There is a much higher incidence of monopolists amongst municipal f m s than with either national state-owned f m s or with privatized firms. Further, municipally owned f m s in general have a much higher degree of market power than either types of f m s . T'here is also a large difference amongst firms privatized before and after 1996. This is especially evident in value added growth and labor productivity growth, where early privatized f m s performed very well whereas late privatized f m s actually contracted. A possiblereason is that early privatized f m s have had more time to adjust, find an effective owner and implement strategic changes, whilst late privatized f m s are still in the early stages of restructuring. Comparison of national state-owned firms and early privatized f m s is more appropriate as both groups operate in a similar market environment with similar competitive pressures and early privatized f m s have already gone through the difficult transition to private ownership. Early privatized f m s outperformed national state-owned f m s in terms of real sales growth and value added growth. Labor productivity growth is s:imilar for both privatized and national state-owned f m s , though there was higher laboir contraction at national state-owned f m s of 5% comparedwith only 3% at privatized f m s . Hard budget constraints are imposed on Ukrainian business very uneven1:y. In particular, more state-owned enterprises have significant tax and energy arrears more often than their counterparts in private sector. The proportion of barter, mutual off-sets, bills of exchange and other non-monetary instruments in the transactions of state-owned enterprises is larger tlhan in private companies as well. The survey shows that competition is the most important factor in producing a positive effect on restructuring and enterprise performance. The number of competitors and the origin of competitive pressure are of great importance. The higher the level of competition, the sooner a business will restructure and increase sales. Innovation (i.e, new product clevelopment and introduction of new technology), which demands additional costs, is associated with a more moderate level of competition. Another importaint result is that pressure fiom foreign competitors is a much more powerhl incentive to restructure than pressure fiom domestic rivals. Statistical analysis shows that firm origin correlates with enterprise restructuring. Less s,tate-owned f m s performed any restructuring measures than their counterparts in the private sector. Soft budget constraints also influence enterprise restructuring. Soft budget constraints, approximated by tax and energy arrears, is associated less enterprise dynamism (i.e. less restructuring), except for contraction measures - shedding employees and assets. Soft budget constraints also reducethe chances of introducingand improving products. Over the course of 2000, two fifths of surveyed companies experienced capital expenditures, or in other words invested in their own businesses. Reflecting the poor state of the Ukrainian investment environment, retained earnings and depreciation were the primary sources of investment, used by 86% of f m s who experienced investment. ENTERPRISE PERFORMANCE Investment capital was mostly used for purchase of new assets as reported by 28% of all respondents. Only 6% of all businesses were able to finance capital investment with bank loans, though the figure is higher for working capital. This shows the underdeveloped nature of the banking sector in Ukraine and banks' general reluctance to offer long term credit, prefemng instead to offer short term credit, especially working capital for trade operationsand manufacturing Overall the survey provides good arguments in favor of further privatization. Privatized companies were more dynamic, restructured more frequently and more of them were profitablethan state-owned f m s . If it is also borne in mind that the state still owns some of the more attractive larger firms then this provides even more reason to privatize as they could perform even better in the private sector. The survey also shows that municipalities still retain a wide array of business interests, that should also be transferred to the private sector. An IFC Survey of Ukrainian Business 43 Ukrainian Enterprises in 2000 BARRIERS TO MARKET ENTRY AND EXPANSION BARRIERS TO MARKET ENTRY AND EXPANSION This section of the report analysesmost of the barriers to business development given at the beginning of this report. For ease of reference, the information is again provided below along with firm size and firm origin breakdowns (afull sectoral breakdown is provided in Annex 4.) This section follows the main priorities given the main barriers listed below, in particular taxation, business regulations, unfair competition and issues of administrative corruption. Table 21 Rating of Barriers Hindering Business Developmentin Ukraine (for all tirms) Average Firm Origin Firm Size + ,"t:b Privatized Start-ups Up to 50 51 250 - 250 than -a, - 24 0 C 3: 2 score rank Score rank score rank score rank score rank score Rank Taxation Low Demand Inflation Non-LevelPlaying Field1Anti- Competitive Practices Corruption Regulatory Environment Underdeveloped Infrastructure Sourcing Necessary Inputs Obtaining External Financing pressurefrom 1.6 10 1.4 10 1.6 10 1.6 10 1.6 10 1.5 10 1.4 10 CriminalElements 'Calculated as simple average using the following scale: 1 - no obstacle, 2 - small obstacle, 3- significant obstacle, 4 -major obstacle. Taxation As taxation is consistently cited as one of the biggest obstacles faced by business in Ukraine(rated as the biggest problem in this survey), respondentswere asked more detailed questions on this issue. Figure 15 below shows the distribution and ranking of obstacles related to taxation. The overall scores are given on a four point scale with 1-no obstacleto 4 - major obstacle. An IFC Survey of UkrainianBusiness 45 Ukrainian Enterorises in 2000 Figure 15 Main Issues with Taxation (alistributionof responses for all firms) Instabilityof Tax Legislation(3.3^) r - - - - - I - l - - - + - r - - - . - - - , - q - - - High Tax Rates (3.2) I I I I I Large Number of Taxes (3.1) I I I I I I 8 I I I Tax Reporting &Accounting (2.6) I I I I I I IJnfairCompetition from Untaxed ShadowActivities (2.6) I I I 1 1 , I I Tax inspections(2.6) DifferentTax Treatmentof Competitors(2.5) Maior Obstacle SignificantObstacle Small Obstacle No Obstacle *Figurein bracketsgives the average scoreof the answers on a scale on 1 - no obstacle to 4-major olbstacle for each obstaclelisted. Table 22 Main Issues with Taxation (for all firms) Average ,"$:rd Firm Origin Firm Size Privatized Start-Ups Up to 50 51 250 - than 250 9! x score rank Score rank score rank score rank score lrank score rank lnstabilitYofTax 3.3 I 3.3 1 3.3 2 3.3 1 3.3 I 3.3 2 3.3 I Legislation LargeNumberof 3.1 3 3.1 3 3.2 3 3.0 3 3.1 3 3.2 3 3.2 3 Taxes TaxReporting& 2.6 4 2.8 4 2.7 5 2.6 4 2.6 5 2.7 4 2.7 4 Accounting Unfair Competition from Untaxed 2.6 5 2.5 6 2.7 4 2.6 5 2.6 4 2.7 5 2.5 6 Shadow Activities Taxlnspections 2.6 6 2.7 5 2.5 7 2.5 6 2.5 6 2.5 7 2.7 5 Different Tax Treatmentof 2.5 7 2.5 7 2.6 6 2.4 7 2.5 7 2.5 6 2.5 7 Competitors I l e problems with the tax environment in Ukraine can be broadly split into three main areas: instability of tax legislation; size of tax burden (which refers to tax rates, number of taxes, duties, payments and other tax-like payments and tax reporting procedures); and uneven tax distribution caused by different tax regimes and unrecorded 'shadow' activity. BARRIERS TO MARKET ENTRY AND EXPANSION Instability of Tax Laws and Regulations Frequently changingtax legislation,regulations and reportingrequirementshave often been raised by businesses in Ukraine as one of their biggest taxation concerns. Whilst a detailed analysis of this legislative and regulatory instability is beyond the scope of this report, the authors have counted the number of changes in tax regulations over 2000. Over the last year there have been 110 changes to the tax regulations and laws in Ukraine, including the introduction and amendment of 31 laws, 28 Cabinet of Ministers resolutions, 28 State Tax Administration orders, 15 State Customs Committee orders, and other changes introduced by other state bodies. This number representsthose changesthat were publishedcentrally in Kyiv and does not include internal instructionsof state bodies or any local tax regulations. Tax Burden There are a large number of taxes and duties levied on Ukrainian businesses. Currently there are a total of 24 national taxes (of which 17 are applicableto surveyed f m s ) and 16 local taxes and duties (of which 6 are relevant.) In this report the word 'taxes' is taken to mean all forms of taxes, duties, and obligatory tax-like payments. The table below shows the averagenumber of taxes paid by businesses by fm size and origin over 2000. Table 23 Number of Taxes in 2 0 0 0 ~ ~ Firm Size Firm Origin State- Privatized Start- Average Up to 50 51-250 t h ~ ~ ~ 5owned 0 UPS Manufacturing 10.0 12.6 14.3 12.8 13.0 10.4 12.1 Construction 10.0 11.5 16.8 10.1 12.7 10.1 11.2 Transport 10.3 12.5 12.7 12.9 12.4 9.4 11.8 Telecoms 8.4 17.0 13.0 11.2 9.0 8.8 9.1 Trade 9.7 12.2 14.7 10.2 11.2 9.5 10.0 Public Catering 8.7 12.0 8.4 9.4 8.8 9.0 Other Services 7.5 11.8 13.5 10.7 9.8 8.6 9.5 51-250 11.6 12.6 12.4 12.4 Morethan 250 13.1 14.5 16.6 14.2 Average 11.8 12.2 9.7 11.1 As can been seen for Ukrainian businesses with this number of taxes, issues of accounting and reporting are a major administrative burden. On average Ukrainian businesses paid 11 different taxes. The largest number of taxes on average are levied on manufacturing enterprises with more than 12, the lowest levied on companies in the public catering and telecoms sectors (9). However, the sample contained manufacturing companiesthat paid up to 23 different taxes. According to the EBRDYssurvey of transition economies, Ukraine has the second highest number of principalnational taxes in Eastern Europe and the CIS". The data also shows that there is a tendency for larger f m s to face more taxes and duties, however this is more as a result of smaller f m s electing to move towards simplified sys- tems of taxation, whereby various different taxes are unified. However, small firms in Ukraine still face too many taxes on average around nine. 20The table contains responses to the question, "How many taxes, duties and other obligatory payments into state/ local budgets and non-budgetaryfunds were made by your firm in 2000?" "TransitionReport 1999",EBRD p.157 An IFC Survey of Ukrainian Business 47 -- - ,-------- -- -- .-... -. Ukrainian Enter~ris~esin 2000 Quarterly business surveys conducted by a leading Ukrainian business newspaper show z2 that businesses reckon that the most problematictaxes, in descendingorder are, VAT, profit tax, payroll taxes. It is probable that VAT is ranked in first place due to the fact that it is more difficult to avoid than other taxes and also because of numerous problems that exist with VAT refunds (especially for exporters.) Payroll taxes are problematic due to high rates, however they are more easily evaded by paying employees in cash. In order to assess the effects of a large number of taxes and high tax rates, the tax burden on firms was calculated.Table 24 below shows the proportion of taxes in relation to enterprise sales, weighted by sales volume. It is important to note that the survey did. not attempt to assess tax incidence (distribution of tax burden between producers and consumers.) Table 24 EnterpriseTax Burden (taxes paid as % of gross sales, weighted) Firm Size Firm Origin - Start- Average Up to 50 51-250 t h ~ ~ ~ 5Owned State- 0 Privatized Manufacturing 23.5 29.7 22.5 26.9 22.0 28.7 23.6 Construction 26.1 28.0 28.6 28.8 26.5 29.8 27.6 Transport 34.5 26.9 19.3 27.7 22.2 18.1 23.6 Telecoms 33.2 15.1 15.0 23.9 26.3 16.4 16.6 Trade 23.1 13.7 17.4 18.7 15.0 21.8 18.8 Public Catering 30.1 13.0 15.2 22.5 32.8 24.6 Other services 26.7 36.0 24.4 25.5 34.5 21.2 26.7 Up to 50 33.5 24.8 23.7 24.9 51-250 37.8 26.2 22.5 26.9 More than 250 24.8 21.4 35.0 22.7 Average 26.5 22.2 24.0 23.6 The data shows that enterprises paid taxes of around a quarter of their sales. However, if the tax burden is expressed as a proportion of value added, then the burden is very high indeed at more than half of all value added (see table below.) 22'6Bizness"newspaper, issue 7, 2001, pp. 37-38. BARRIERS TO MARKET ENTRY AND EXPANSION Table 25 Enterprise Tax Burdenz3 (taxes paid as % valued added, weighted) " Firm Size Firm Origin Manufacturina- 43.0 61.7 55.9 47.1 60.2 59.3 56.0 Construction 42.3 49.4 60.0 52.6 49.6 49.2 50.1 Transport 92.9 54.8 44.2 58.1 51.5 56.3 54.7 Telecoms 43.4 21.7 15.8 29.6 32.3 23.4 23.6 Trade 40.6 17.3 30.5 51.4 21.2 37.1 29.5 Public Catering 55.1 17.6 21.7 39.5 57.4 41.3 Other Services 40.4 52.5 66.4 65.8 70.6 26.1 60.3 Averaae 44.0 47.4 56.1 5i-250 More than 250 Average 51.6 57.0 41.6 52.8 Further, larger enterprises tend to pay out more in taxes relative to their value added, than smaller companies. These high tax burdens are unsustainable and are detrimental to investment and sustained economic growth and help to explain why Ukraine has such high levels of shadow economicactivity. Enterprises were then asked to estimate the level of taxation that they felt would not hinder their further development. Obviously, rational entrepreneurs will always seek to minimize their tax burdens and will therefore underestimatethe level of taxation that they are able to bear. Nonetheless, it does provide an insight into what would make companies more comfortable with paying taxes. Respondents felt that it in general the tax burden should be cut in half to around 27% of value added. Table 26 Bearable Taxes and Other Obligatory Payments (bearabletaxes as % of value added, weighted) Firm Size Firm Origin Manufacturina 20.6 27.6 31.3 30.9 30.4 24.9 30.2 - -~.~ ~ Construction 16.5 20.5 23.6 15.5 20.0 24.0 20.0 Transport 17.4 20.8 17.9 17.4 18.2 19.9 18.1 Telecoms 13.7 11.5 8.4 14.1 47.4 11.4 11.8 Trade 17.7 8.8 12.0 16.5 10.1 15.9 13.1 Public Catering 20.0 5.7 6.9 19.8 13.0 15.1 Other Services 13.0 11.1 35.4 30.0 23.9 15.5 26.5 - , ~ - - ~ 51-250 13.0 24.2 16.7 19.8 More than 250 32.3 29.9 25.4 30.9 Average 30.0 28.2 18.4 27.4 23The tax burden was calculated as a weighted average of the responses to the question , "What per cent of gross sales was accounted for by all taxes paid by your firm?" 24Value added was calculated as sales less material costs. Respondents did not give actual sales figures, rather they selected out of various sales bands. The midpoint of each band was used in the above valued added calculations. It is important to note, that the data is that reported by respondents, and not independently verified. An IFC Survey of Ukrainian Business 49 Ukrainian Enter~risesin 2000 Shadow Economic Activity Three quarters of the entire sample responded to questions on concealed turnover. The primary question being"how much do similar enterprises to yours conceal from taxation?' Respondentswere given the option of selecting from different levels of sales, given below. In order to make the data easier to understand the responses have also been combined to give a weighted (by sales) average across all oblast capitals in Lkraine. It is important to note that this information was given in an anonymous questionnaire and represents respondent's opinions of other f m s similar to theirs. Table 27 below gives the breakdown of concealed sales by cities in order to allow the reader to draw comparisons with data given in this report.A weighted (by sales) average was developed for each city showing the overall average proportionof sales in that city concealed. Table 27 Sales Concealed from Taxation (74 of all firms reportingconcealed sales of firms similar to theirs) Concealed Sales Weighted Vinnytsia Dnipropetrovsk Donetsk Zhytomyr Zaporizhya Ivano-Frankivsk Kyiv Kirovograd Lugansk Lutsk Lviv Mykolayiv Odesa Poltava Rivne Simferopol Sumy Ternopil Uzhgorod Kharkiv Kherson Khmelnitsky Cherkasy Chernigiv Chernivtsi Average 37.3 16.5 14.3 9.5 10.3 5.3 6.7 15.8 No fm that answered this question stated that no sales were concealed.On average around 16% of all sales were concealed. What is more important here is not the actual percentage sales concealed but rather the regional and sectoral differences. The following table plrovidesthe same data as above broken down by sector, fm size and origin and shows the average level of concealed sales for each fm group. BARRIERS TO MARKET ENTRY AND EXPANSION Table 28 Firms With Sales Concealed from Taxation (% of concealed sales, weighted by sales) Firm Size Finn Origin Start- Average Manufacturing 18.3 20.9 14.0 10.7 15.7 22.1 15.1 Construction 19.3 28.5 14.3 11.0 22.5 24.8 20.2 Transport 17.7 15.5 17.1 11.6 19.4 23.7 16.9 Telecoms 14.7 5.0 5.0 6.6 25.0 13.4 11.4 Trade 18.8 28.6 18.0 12.6 14.9 25.4 21.4 PublicCatering 22.9 18.8 20.8 20.7 23.4 21.7 Other Services 22.7 9.4 17.6 8.7 26.7 20.3 15.2 51-250 More than 250 Averaae State owned f m s were able to conceal or otherwise misreport the least amount of sales, than private sector f m s . This is probably due to a higher level of scrutiny from state bodies (witness the number of inspections, see Table 41). The highest level of shadow activity is observed in trade, public catering and construction and smaller firms are able to conceal more sales than larger f m s . Simplified Taxation There are two systems of taxation in Lkaine: ordinary and simplified taxation. The ordinary tax system is composed of separate reporting and payment of all the taxes mentioned at the beginning of this section, including principal national taxes (corporate profit tax, value added tax, payroll taxes), numerous local taxes and other duties and tax- like payments. However, firms with up to 50 employees and turnover not exceeding UAHl million can go over to one unified tax that replaces most of the principal taxes, including profit tax and contributionsto the pension fund. Further, there are two unified tax rates; 6% of turnover with VAT payable separately as under the regular system of taxation or 10% of turnover, which exempts businessesfrom VAT. 29% of all respondents reckoned that they were eligible for simplified taxation, however of these only half actually switched. Almost 19% of eligible firms intend to switch in the future. The table and figure below show the eligibility for simplified taxation and the choices made by firms in particular sectors. Table 29 Eligibility and Transfer to Simplified Taxation Firms Who Stated Switchedto Intend to Switch to Do Not Intendto That They Are SimplifiedTaxation SimplifiedTaxation Switch to Simplified Eligible (% of all (% of eligible small (% of eligiblesmall Taxation (% of small firms) firms) fii ns) eligiblesmall firms) * . Manufacturing 48.3 43.1 22.1 34.8 Construction 47.9 50.0 23.9 26.1 Transport 52.5 66.7 28.6 4.8 Telecoms 50.0 40.9 18.2 40.9 Trade 51.7 39.0 19.3 41.7 PublicCatering 61.2 64.6 9.8 25.6 Other Sewices 59.2 64.5 14.0 21.5 Average 52.3 49.1 18.7 32.3 An IFC Survey of Ukrainian Business 51 Ukrainian Enterprises in 2000 Further, enterprises were asked if they had switched to simplified taxation whether they had selected the 6% (excluding VAT) or 10% (including VAT) tax rate. Figure 16 Choice of Simplified Tax Rate (74of firms that switched to simplified taxation) Average Other services Public catering Trade Telecoms Transport Construction Manufacturing .- 0 10 20 30 40 50 60 70 80 06% rate W 10% rate C:onclusions and Recommendations Taxation issues are by far and away the biggest administrative and operat~ionalburden on enterprises in Ukraine. The penalties for full tax compliance in Ukraine are large indeed. Further, the high level of evasion is taken into account, firms that wish to be fully compliant are invariably at a competitive disadvantage with those who evade taxes (who are in effect subsidized.) On average more than half of enterprise value added needs to be paid out in numerous taxes and other obligatory payments. However, the biggest taxation issue in Ukraine is frequently changing tax reporting and accounting requirements that creates very real obstacles for firms. Simply put, Ukraine taxation system contributes to a large unofficial economy, with the corresponding problems of corruption, lack of investment, unfair competition and much llower levels of response to market signals. Based on the results of survey, it is clear that urgent tax reform is required, however this raises several issues. How to introduce taxation stability in an unstable transition economy? How to introduce an equitable and bearable taxation system, with an equal tax burden for all, regardless of sector, business activity, size or ownership? How to minimize the size of the shadow economy, which creates unfair competitionand deprives the state of revenues? BARRIERS TO MARKET ENTRY AND EXPANSION Some steps that would be helpful are: Eliminatetax breaks and privileges,includingspecial economic zones, and move to hard budget constraints for all f m s regardless of ownershipstatus. Eliminate or consolidate a large number of various taxes, duties and tax like payments, which contribute only small amounts to state revenues but which create a large burden on businesses. Drastically reduce the frequency of changes in tax regulationsand tax rates, thresholds and reporting requirements.Adopt the new tax code currently under debate and them implement a freeze on further changes. Reduce marginal rates for principal taxes (VAT, profit tax, personal income tax), thereby fieeing more capital for internal investment. Unify simplified and ordinary tax systems. Simplified taxation for smaller enterprise has generally been effective (rather smaller businesses have faced fewer accounting and reporting problems), but in the medium term, this uneven distribution of tax burden could lead to inefficient use of resources (e.g.large f m s with higher productivity could suffer from a higher tax burden than smaller less efficient f m s ) and abuse (larger firms attempting to become simplified tax payers.) Simplified taxation also creates an income gap whereby small f m s that are growing do not want lose their simplified tax status and move to higher levels of ordinary taxation. Either growth could be curtailed or more probably any extra income above simplified taxationthresholdswill be concealed. As there will be a decrease in state revenues initially if number of taxes and tax rates are reduced, the government should carellly prioritize state expenditure and attempt to broaden the tax base. Introduce pension reform to change perceptions of contributions to the Pension Fund. At the moment pension contributions are perceived as additional income taxes. Personalized pension accounts will allow people to treat their pension contributionsas personal savings and will make availablemore investment capital. Unfair Competition Companies in Ukraine, both foreign and domestic, consistently complain, of competitors using unfair practices. Inour general rating (see Table 21), this problem was ranked fourth, over and above such issues as lack of financing and regulatory environment. Figure 17 below shows the importance assigned by all surveyed f m s to different forms of anti- competitive practice, including privileged access to markets and key inputs, state subsidies and collusionof rivals. An IFC Survey of Ukrainian Business 53 Ukrainian Enter~risesin 2000 Figure 17 Ratisg of Unfair Competitive Practices (distribution of responses for all firms) - Privileged Decisions from City Authorities (2.4') Favored Access to Credit (2.3) Favored Access to Clients (2.2) Subsidies from National Government (2.1) I I I ! I l l I , I I I , , , , I 1 1 ~ ~ I I Market Collusion(2.1) _ I _L _ _ - - - - I I Privileged Access to Land and Premises (2.1) : I I I Subsidies (Direct and Hidden) from Local Authorities I I (2.0) I T - - - - - - - T - - - - I I I Privileged Access to Infrastructure (2.0) I I -100 -80 -60 -40 -20 0 20 40 60 80 100 Yo Major Obstacle Significant Obstacle Small Obstacle No Obstacle - *Figure in brackets gives the average score of the answers on a scale on 1 - no obstacle to 4 -major obstacle for each obstacle listed. The survey revealed that the main anti-competitive practices is local authorities issuing permitslpermissions to rivals on favorable terms. The table below shows, that small businesses are hit hardest when their competitors receive privileged decisions from city authorities. For larger f m s the biggest perceived problem is related to favored access to credit resources by competitors (see Table 82, Annex 4 for more detail.) BARRIERS TO MARKET ENTRY AND EXPANSION Table 30 Rating of Unfair CompetitivePracticesin Ukraineby Firm Size and Origin (for all firms) Average Firm Origin Firm Size Privatized Start-Ups Up to 50 51 250 - than a Owned 250 X u 3 a =2score rank Score rank Score rank score rank score rank score rank Privileged DecisionsfromCity 2.4 1 2.0 1 2.4 2 2.5 1 2.5 1 2.3 2 2.1 3 Authorities Favored Accessto 2.3 2.0 2 2.4 1 2.4 2 2.4 2 2.4 1 2.2 1 Credit FavoredAccess to 2.2 3 2.0 4 2.2 3 2.3 3 2.2 3 2.2 3 2.0 5 Clients Subsidies from National 2.1 4 2.0 3 2.2 4 2.1 6 2.1 7 2.2 4 2.1 2 Government Marketcollusion 2.1 5 1.8 6 2.1 6 2.2 4 2.2 5 2.0 7 2.0 4 PrivilegedAccess to Land and 2.1 6 1.8 8 2.1 7 2.2 5 2.2 4 2.1 6 1.8 8 Premises Subsidies (Direct andHidden)from 2.0 7 1.9 5 2.1 5 2.0 8 2.1 8 2.1 5 2.0 6 Local Authorities PrivilegedAccess 2.0 8 1.8 7 2.0 8 2.1 7 2.1 6 2.0 8 1.9 7 to Infrastructure Regulatory and Administrative Environment As the regulatory climate and the role of the state in 'regulating' private business in Ukraine is often acknowledgedas one the main areas of concern to Ukraine businesses,this survey sought to examine this issue in more detail for issues related to instability of business legislation, customs procedures, licensing, certification, procedures for receiving permits and permissionsand business registrationprocedures. We asked business to rate on a 4 point scale the extent to which various regulatory issues presented obstacles to their operations. An IFC Survey of Ukrainian Business 55 .-------- -z--- -- ---_._ ."-.- .- - - -<----- r -*, I I Ukrainian Enterprises in 2000 -- F~igure18 Mlain Regulatoryand AdministrativeBarriers to BusinessDevelopment (forfirms that particular barrier was relevant) , , , , , , , , , Frequently Changing BusinessLegislation (2.99 ( I I I I , , , , , , , , I I Customs(2.5) I ; ; I 1 , I I I l I 1 I l I Permits1Permissions (2.4) I I I I - - I T - - - - r - - - I - - I Inspections(excluding tax inspections)(2.3) I 1 I I I I I I I / l I I Licensing(2.3) ] ; ; I 1 I I I I I I I I / I Certification(2.3) i - 1 - - - 7 - - - - Requirement to Make 'Voluntary' Payments (2.3) 1 I I Business Registration Procedures(1.9) -100 -80 -60 -40 -20 0 20 40 60 80 100 % Maior Obstacle Sianificant Obstacle Small Obstacle No Obstacle 'Figure in brackets gives the average score of the applicable answers on a scale on 1 - no obstacle to 4 -major obstaclefor each obstaclelisted Table 31 Main Regulatory and AdministrativeBarriers to Business Develolpmentin Llkraine by Firm Size and Origin Average Firm Origin Firm Size :,"Lb Privatized Start-Ups Up to 50 51 2:50 - than g! 250 : score % Score % score % score % Score % score % Freauentlv ~han~ing'~usiness 2.9 94 2.9 92 2.9 94 2.8 96 2.8 95 2.9 94 3.0 94 Legislation Customs 2.5 44 2.5 40 2.5 46 2.4 43 2.4 42 2.6 45 2.4 50 Permits1 2.4 86 2.3 87 2.4 85 2.4 87 2.4 86 2.4 86 2.3 86 Permissions lr~spections (excludingtax 2.3 94 2.3 95 2.4 95 2.3 93 2.3 94 2.4 94 2.4 95 irwpections) Licensing 2.3 72 2.3 70 2.3 71 2.3 73 2.3 73 2.4 70 2.3 72 Certification 2.3 70 2.3 67 2.3 73 2.2 68 2.2 69 2.4 73 2.3 71 Requirementto Make'Voluntary' 2.3 77 2.3 76 2.3 76 2.3 79 2.3 78 2.3 76 2.2 78 Payments Business R:egistration 1.9 70 1.9 70 1.9 68 1.9 71 1.9 71 1.9 67 1.8 71 Procedures 'average score for the respondentsto whom certain regulationis applicable "% of respondents to whom certain typeof regulationis applicable IJnofficialPayments Ftespondents were asked whether or not they had to make unofficial payments in dealing with some of the major regulatory issues (i.e.bribes and other payments not stipulated by BARRIERS TO MARKET ENTRY AND EXPANSION law) over the course of 2000. The table below gives information given not only on those firms who stated that they had made unofficial payments, but also for those who abstained from answering, claiming that this informationwas confidential. Table 32 Proportion of CompaniesWho Made Unofficial Payments by Company Size (% of firms to whom certain type of regulation is applicable) Firm Size Average 51-250 More than 250 Made information Made information Made information Made Information Unofficial Confidential Unofficial Confidential Unofficial Confidential Confidential Payments Payments Payments Permits1 28.4 22.1 18.5 19.4 14.9 15.7 23.3 20.2 Permissions Licensing 17.8 20.2 10.5 14.2 11.1 12.1 14.8 17.2 Business 17.6 18.6 11.7 16.8 4.9 12.7 13.7 17.0 Registration Certification 18.0 19.3 12.2 15.8 10.7 11.0 15.0 16.7 Customs 14.5 17.9 11.0 18.1 13.4 12.4 13.4 16.7 The biggest proportion of f m s (23%) stated that they needed to make unofficial payments in receiving permits and permissions. For all firms for whom a certain regulation was applicable a larger proportion of small f m s had make unofficial payments than either medium sized or large f m s . Instability of Business Legislation As can be seen the biggest regulatory and administrative challenge that the majority of businesses face are rapidly changing rules of the game. Regulatory, and to a lesser extent legislative changes, in Ukraine tend to be arbitrary and non-consultative in nature. The concept of consultation and public awareness in amending regulations is not widely practiced in Ukraine, simply because there are no requirements to do so and there are no well defined feedback mechanisms in any case. Though there have been some attempts by the government in pushing administrative reform and more attempts to make public key policy decisions, a general lack of predictability of the business environment still prevails. This problem is further compounded by three factors; firstly that central state bodies do not face the requirements to make public a lot their decisions below Cabinet of Ministers level (see Box); secondly that new regulations are often taken in isolation and with no consultation with other state bodies - often leading contradicting business legislation. Finally, little control exists over implementationof such decisions at the local level, further increasingthe perceivedarbitrarinessof decisions. An IFC Survey of Ukrainian Business 57 Ukrainian Enterprises in 2000 A.sthe problems with legislative instability are so acute the survey asked managers whether it was easy to obtain information on laws and regulations that impact on their enterprises and whether they thought legislative and regulatory environment was more or less predictable in 2000 compared with 1999. On the whole, two thirds of Ukrainian f m s feel that it is relatively easy to obtain necessary information on the legislative and regulatory environment for their f m s . The bigger problem appears to be not so much with obtaining information (although one third of Ukrainian firms find it difficult to find this information), rather it is the fact that business legislation changes often, creating operational problems for companies and making the planning process more difficult. Table 33 "It is Easy to Obtain Informationon Laws and Regulations that Influencemy Firm" (74 respondentswho agreed with the statement) Firm Size-. ~ More Average Up to 50 51-250 7Rn Construction 60.0 74.5 72.2 66.1 Transport 64.1 80.0 84.6 76.1 Telecoms 83.3 100.0 100.0 85.4 Trade 60.7 62.2 81.8 61.4 PublicCatering 59.7 81.8 61.4 Other Services 66.5 78.9 87.8 72.7 Average 62.6 72.2 76.7 67.7 R4ore companies felt (see Figure 19) that there was less legislative predictability in 2000 compared with 1999 (32% vs. 22%). Further, there were very few optimists, only around one company in 30 felt that the legislative and regulatory environment had gotten much more stable and predictablein 2000 compared with 1999. 25 - - -- 25 Firms were given the choice of 'much less predictable', 'less predictable', 'no change', 'a little more predictable', and 'much more predictable'. For the purposes of Figure 19 the responses were aggregated into 'less predictable', 'no change' and 'more predictable.' BARRIERS TO MARKET ENTRY AND EXPANSION Figure 19 Predictability of Legislative and Regulatory Environmentin 2000 Compared with 1999 (% ofall firms) Less Predictable IJNo Change M o r e Predictable Average 46.2 More than 250 46.7 Following on fiom this twice as many companies felt that the legislative and regulatory environmentwould deteriorate in 2001 compared with 2000 (see Figure20.) Figure 20 Assessmentof Projected Legislative and Regulatory Environmentin 2001 (% of all firms in each size class) 0Improve Remainthe Same Worsen '.a>, 22.0 Average 39.3 193 Morethan 250 42 1 An IFC Survey of Ukrainian Business 59 Ukrainian Enterprises in 2000 Iimportl Export Operations Among regulatory obstacles, customs procedures were rated second only to legislative instability. Around 44% of all surveyed companies were involved in foreign trade to some extent. Border customs checks and certification of imported goods were cited as the most significant barriers, and accreditationprocedures were cited as the least important barrier to foreign trade transactions (see table below.) In dealing with customs procedures in general, 13% of respondents who were involved in export and import, stated they had to make unofficial payments, while 17% refked to answer claiming that this information was confidential (see Table 32.) Table 34 MainBarriersin Import/Export Operations (~brall importers/exporters) Firm Origin Average Firm Size State- Owned Privatized Start-Ups Up to 50 51 2150 - than 2 250 0 r: 2 Score % Score % Score % score % score % score % Bordercustoms 2.1 26 2.2 20 2.1 25 2.1 23 2.1 21 2.2 27 2.0 26 Checks ImportCertification 2.0 19 2.2 14 1.9 18 2.1 18 2.0 16 2.0 20 2.1 19 Customs 2.0 29 2.0 21 2.0 26 2.0 24 2.1 22 2.0 27 2.0 29 Declarations Firm Accreditation 18 15 1.5 18 1.6 17 1.5 16 1.6 19 1.5 18 by Government averageswre for the respondentsto whom certain regulationis applicable "%ofrespondentstowhomcertaintypeofregulationisapplicable Permits and Permissions The problem cited in third place by severity in the rating of regulatory and administrative problems, that of obtaining permits and permissions is very acute in Ukraine. This covers both official permits fiom local bodies and formal and informal 'permissions' from local officials. The importance of this issue correlates well with the importance attached to corruption in general by companies in Ukraine. This issue is even more important than that of government inspections of business and business licensing which are ranked fourth and fifth respectively. This shows that with the exception of the legislative climate (which is mostly influenced by central bodies) most regulatory problems for businesses occur at the l'ocallevel rather than at the national level. ARer registering a company needs to obtain not just the necessary licenses but various permits and formal and informal 'permissions' as well. The procedure for obtaining the necessary permits is not defined in national legislation (neither national lawlsor government resolutions), as for example company registration or licensing, but regula.ted through the internal rules and procedures of the relevant local authorities (city and oblast.) In addition to the necessary permits, enterprises often need to get unofficial permission and agreement fiom various local authorities. The whole procedure of receiving necessary permits and agreements, represents one of the most opaque, problematic and least predictable aspects of business activity in Ukraine, and as such can be associated with a monetary cost to the enterprise. Permits and permissions include permits for advertising, location of shops and other outlets, construction, permit from road police, local health and safety agency, etc. However, almost BARRIERS TO MARKET ENTRY AND EXPANSION all activitieshave to be agreed with various local bodies as well, which typically entails just informingthese bodies of proposed activities. There is no national legislation governing the issue of such permits and typically there are determined by city councils. Further, the bureaucratic nature of the issue of such permits and permissions as well as a lack of effective oversight, greatly adds to arbitrarinessand possibilitiesfor corruption. The survey asked respondents to identify which of the main local permits that they are required to obtain as being a barrier to market entry. 86% of the entire sample faced the need to obtain permits1 permissions over 2000 (itself a powerhl result indicating that over four fifths of all business are constantly engaged in these activities.) Further, the survey asked respondent whether they thought that permits and permissionswere an obstacle to the development of their f m s . The figure below gives the breakdown of responses only for those companies that did face the need to obtain permits and permissions and shows whether they felt that permits and permissions represented a barrier to business development.Note that the survey did not seek to obtain speciJc information on unofJicial 'permissions.' Figure 21 Barriers Presented by Local Permits and Permissions (% of firms that had to obtain permits and permissions) Major Obstacle 12.3% No Obstacle 19.7% Significant Obstacle 31.5% Small Obstacle Of these companies 20% felt that obtaining permits did not present a problem. 44% reckoned that these permits and permissions constitute a significant to major barrier to market entry. The table below shows the breakdown of responses for the ten most important local state bodies that are obliged to provide permits to most firms. The percentagesquoted refer to those companies that faced the need to obtain particular permits and permissions in 2000 listed in the table below, and shows the opinions of f m s on the procedures for obtaining permits. An IFC Survey of Ukrainian Business 61 Ukrainian Enter~risesin 2000 Table 35 Barriers to MarketEntry Presented by Various Local Permits and Permissions (% of all firms who needed to obtain particular permits and permissions) ;:&:: Firms Who Needed to Vety Demand for Type of Permiff Permission Obtain Particular Permiff Satisfactory Difficult Difficult to Obtainto Unofficial Permission (% of all firms) Obtain Payments Permit from State Sanitary EpidemiologicalService Permit from Fire Department Permit from Health, Safety and EnvironmentDepartment Permissionfor Tradeand Customer ServiceOutlet Permissionto Occupy Premises(close agreementfor hire of communalproperty) Permissionto RefurbishPremises Permissionfor Construction Permit for Land Plot Allocation Approval from Housing and Communal Property Department Approval from Road Police A,s can be seen, the more difficult it is to get a permit the greater the number of companies that stated they faced the demand for making unofficial payments (note: this data does not refer to whetherfirms made unofficial payments or not.) It is then interesting to observe the breakdown by cities for those same respondents who had to obtain permits and permissions over 2000. The table below shows the proportion of these companies who felt that permits and permissionsas a whole presented either a significant or major obstacle. Table 36 Proportion of Firms Who Felt That Obtaining Permits and Permissions Presented a Significantor Major Barrier (% of all firms who needed to obtain permits and permissions) Up to 50 51-250 'Ore wal than Average ~ n i ~ ~ o ~ e t r o v s k Donetsk Zhytomyr Zaporizhya Ivano-Frankivsk Kyiv Kirovograd Lugansk Lutsk Lviv Mykolayiv Odesa Poltava Rivne Simferopol Sumy Ternopil Uzhgorod Kharkiv Kherson Khmelnitsky Cherkasy Chernigiv Chernivtsi Average BARRIERS TO MARKET ENTRY AND EXPANSION Business Licensing Licensing, in the opinions of entrepreneurs, takes fifth place in the overall ranking of regulatoryand administrative barriers,though second place amongst just regulatory barriers behind permits1 permissions. Currently there are 58 different types of business activity subject to licensing. A genuine effort has been made over the last several years to ensure that businesslicensing does indeed only apply to activitythat could be detrimentalto public health, environment on national security. In June 2000 a new Law "On Licensing of Some Types of EconomicActivity"was introduced which aims to further streamline and simplify the process of obtaining licenses. However, to date the government has still not introduced new licensing procedures in accordance with the law. Consequently the current situation regarding licensing is unclear. Due to the fact that different types of business activity require different licenses, each with different procedures, this survey sought to examine the perceptions of company management as to whether they thought business licensing represented a barrier to business development. Overall only 28% of surveyed firms did not need to go through licensing procedures in 2000. Of those who did, 76% felt that it presented a barrier to business developmentin Ukraine (33% - small obstacle, 30% - significant obstacle and 13% - major obstacle). The table below shows the breakdown of responses by city for those respondents who stated that licensing was a significantor major obstacle. Table 37 Proportionof Firms Stating that LicensingPresented a Significant or Major Barrier (% of all firms who needed to obtain licenses) Up to 50 51-250 Morethan Average 250 Vinnytsia 51.4 25.0 11.1 40.4 Dnipropetrovsk 61.2 37.5 51.7 52.9 Donetsk 46.3 52.0 52.2 49.4 Zhytomyr 32.0 62.5 30.0 37.2 Zaporizhya 25.7 30.0 44.4 29.6 Ivano-Frankivsk 34.5 64.7 45.5 45.6 Kyiv 38.6 40.4 38.9 39.2 Kirovograd 48.3 0.0 66.7 44.0 Lugansk 52.8 33.3 30.0 45.5 Lutsk 22.2 44.4 25.0 27.5 Lviv 42.6 61.5 36.4 45.1 Mykolayiv 43.8 42.1 20.0 41.1 Odesa 40.0 46.2 61.1 46.8 Poltava 56.3 33.3 54.5 50.9 Rivne 45.8 40.0 42.9 42.9 Simferopol 51.4 62.5 50.0 54.4 Sumy 41.2 81.8 28.6 48.1 Ternopil 35.0 71.4 25.0 40.0 Uzhgorod 27.0 33.3 28.6 27.7 Kharkiv 44.2 55.6 40.0 45.6 Kherson 40.7 33.3 0.0 30.4 Khmelnitsky 39.5 36.4 75.0 43.9 Cherkasy 33.3 20.0 33.3 31.4 Chernigiv 21.2 36.4 28.6 25.9 Chernivtsi 53.6 41.7 28.6 46.8 Average 41.8 44.7 40.9 42.3 Overall the proportions of firms in different firm size classes who stated that licensing presented a serious was roughly the same, however this masks a significant variation among cities. Cities like Chernigiv, Lutsk, Uzhgorod only had a quarter of firms An IFC Survey of Ukrainian Business 63 Ukrainian Enterprises in 2000 complaining about the licensing environment, whereas around half of f m s in cities like Dnipropetrovsk,Dontesk, and Poltava stated that licensing presenteda serious obstacle. Licensing proceduresare given in national legislation,however the issue of licensesis done by local bodies or local governments who have delegated authority fiorn the relevant central authority. Some central bodies have their own local branches who handle licensing. Others delegate this process to oblast governments. Local authorities thereforehave a large influencein establishingthe environment for licensinglocally. Product Certification Certification ranked sixth out of the nine main regulatory and adrninistra~tivebarriers to market entry and growth surveyed in this report. 70% of all respondents had to undergo product or service certificationand their responses on whether they felt certification proved to be an obstacle in their business operationare given in the figure below. - Figure 22 Barriers Presented by CertificationProcedures ('% of firms who undetwent cerlification) Major Obstacle 12.8% NO Obstacle Significant Obstacle 7'4% of all f m s who underwent certification felt that certification procedures were problematic. Of these firms, 19% (or 15% of all f m s who underwent certification)had to make unofficial payments during the certification process. The table below shows the breakdown of firms who stated that product certification presented either a significant or nnajor obstacleto their business operations. BARRIERS TO MARKET ENTRY AND EXPANSION Table 38 Proportionof Firms Who Felt That Product CertificationPresented a Significantor Major Barrier (% of all firms who needed to certiw products) Up to 50 51-250 More than 38n Average Vinnytsia 48.3 22.2 20.0 37.5 Dnipropetrovsk 55.8 52.0 59.3 55.8 Donetsk 44.4 53.6 33.3 44.0 Zhytornyr 32.3 87.5 27.3 40.0 Zaporizhya 24.3 33.3 54.5 31.7 Ivano-Frankivsk 22.2 47.1 54.5 36.4 Kyiv 49.4 47.4 50.0 48.9 Kirovograd 46.2 10.0 50.0 38.1 Lugansk 48.4 44.4 30.0 44.0 Lutsk 20.0 44.4 25.0 26.3 Lviv 35.6 42.9 44.4 38.2 Mykolayiv 46.7 61.5 14.3 46.0 Odesa 43.8 46.4 68.8 50.0 Poltava 56.7 23.1 10.0 39.6 Rivne 54.5 45.8 25.0 48.0 Sirnferopol 40.0 53.3 40.0 44.0 Surny 41.9 80.0 20.0 47.8 Ternopil 17.6 30.0 25.0 22.9 Uzhgorod 32.4 33.3 14.3 29.5 Kharkiv 37.3 73.7 42.1 46.1 Kherson 28.0 14.3 25.0 23.4 Khrnelnitsky 32.4 37.5 71.4 38.8 Cherkasy 36.4 60.0 33.3 39.4 Chernigiv 24.2 50.0 46.2 35.0 Chernivtsi 42.3 38.5 33.3 39.6 Average 39.5 46.5 41.O 41.6 11.3% of all f m s surveyed had to undergo certification of imported goods. Around half (49%) stated that certification of imported goods is problematic for them. Out of all f m s who had to certify imported goods 14 % had to make unofficial payments, 11% stating that information on unofficial payments is 'confidential' and the rest stating that they did not need to make any unofficial payments. There is a relatively large number of classes of goods subject to mandatory certification- 37, which, according to the survey, creates additional obstacles to the business operations of Ukrainian f m s . At present certification is considered to be another mechanism of state interference in businesses operations, a barrier to innovation and occasionally used for punitive purposes. The government should consider a further reduction in the number of goods subject to mandatory certification, adopting international and European certification standards,and simultaneously encouraging systems of voluntary certification of products. In order to check how Ukrainian enterprises meet requirements of quality control, respondents were asked if they used any quality management systems that correspond to IS0 9000 or similar. The data below show the breakdown of responses across the whole sample and across sectors. An IFC Survey of Ukrainian Business 65 - - -- - ---" - -. - - - - p _ _ Z - - . - - . I, Ukrainian Enterprises in 2000 Figure 23 Useof Quality Management Systems (5%ofall firms) Know of Quality Know About Quality Management Management - Systems, But Not Systems and lnterested in Implementation 22.1% Do Not Know of AlreadyHav Quality Management 46.7% System Table 39 llse of Quality ManagementSystems ('% of all firms in each group) Already Have K n o ~ ~ ~Knowof Quality~ ~110~ Knowtofy ~ ~ ~ Not l i Quality Management Any Quality Management Systems and Interested in Systems, But Not Management Manufacturing 8.5 33.5 22.2 35.7 Construction 10.1 24.1 22.8 43.0 Transport 3.7 5.6 36.1 54.6 Telecoms 4.5 11.4 54.5 29.5 Trade 3.8 10.6 25.9 59.7 Public Catering 1.5 4.4 23.0 71.1 Other Services 5.0 14.7 23.9 56.3 Average 6.5 22.1 24.7 46.7 What is surprising from the data is the number of f m s who are ignorant of such systems, plarticularly in manufacturing.This could be as a result of such fums simpljr not needing to introduce such systems or genuinely not having enough information. For exporters (17.8% of the entire sample) the picture with introducing quality system was a little more a~ptimisticthan for the overall sample. BARRIERS TO MARKET ENTRY AND EXPANSION Figure 24 Use of Quality Management Systems by Exporters (% of all exporters) Know of Quality Management Systems, But Not AlreadyHave Any Quality Quality Management Management Systems System 11.2% 26.2% Table 40 Use of Quality Management Systems by Exporters (% of all exporters) Already Have K n O ~ & ~ ~ ~ ~ Knowlofi Quality ~ ~ t y Do Not Know of Quality Management Any Quality Management and Systems, But Not Management lnterested in System Interested Systems Imnlnrnantatinn Construction 0.0 30.0 30.0 40.0 Transport 11.1 5.6 38.9 44.4 Telecoms 0.0 0.0 66.7 33.3 Trade 11.1 38.9 16.7 33.3 Public Catering 0.0 0.0 0.0 100.0 Other Services 0.0 27.3 18.2 54.5 Average 11.2 42.9 19.7 26.2 Registration Company registration in Ukraine is neither straight forward nor entirely predictable at the local level (though all of the procedures are set out in law). As previous IFC surveys have shown, the registration process was a considerable obstacle faced by entrepreneurs. However, the government has scored a notable success in its attempts to simplify the registrationprocess. Business registration procedures were rated last out of the regulatory and administrative barriers presented in this survey (see Figure 18.) Comparing with the previous IFC survey the proportion of entrepreneurslisting registrationas a major obstacle has fallen fi-om6.7% in 1999 to 4.1% in 2000. These figures only refer to the proportionof enterprises registered in each year. An IFC Survey of Ukrainian Business Ukrainian Enterprises in 2000 Figure25 Barriers Presented by Registration Procedures (46 of firms that registered/re-registered in 2000) Major Obstacle 4.1% Significant No Obstacle Only 4.5% (97 firms) of the entire sample underwent registration1re-registration in 2000. C)f these, 25% (24 firms) felt that registration was an significant obstacle to market entry and business start up in Ukraine. 17 of these 24 enterprises were start ups with up to 50 employees. State Business Inspections State regulation of the private sector is excessive in Ukraine, as indeed is official state harassment of private businesses. One of the many forms of harassment is that of official state inspections of business. There are numerous state agencies who have the authority to inspect companies(see Box below) Table 41 AverageNumber and Duration of lnspectionsZ6 (all firms) Firm Size Firm Origin Average Average More Start- ~ ~ $durationof ~ ~ ~) All Up to 50 :,"A:; 51-250 than 250 Privatized UPS ---. -2000 --- ln~~ectionS Manufacturing 10.4 17.3 20.6 17.9 17.4 11.3 15.5 30.3 Construction 7.2 14.2 15.6 14.9 11.9 7.9 10.3 27.0 Transport 10.5 18.1 24.9 21.3 19.6 12.1 17.8 32.0 Telecoms 7.2 14.5 10.0 9.4 24.7 6.2 7.7 15.6 Trade 13.2 19.0 21.6 18.1 18.4 11.7 14.0 20.5 Public Caterina 16.9 23.8 12.0 21.3 15.8 17.4 27.2 Other services 9.8 12.8 16.8 14.9 13.1 8.4 11.4 23.1 UD to50 11.1 14.7 10.1 11.5 19.3 51-250 More than 250 Average Number 16.8 20.4 16.9 17.1 10.9 of Inspections Average Durations of all 19.3 34.1 43.8 32.6 32.9 19.3 26.6 Inspections The average number of inspections across all surveyed companies amounted to 14.4~'over the course of 2000, consuming in total 26.6 days. However there was significant variation 26Results of 5% of the sample that quoted very high figures were excluded. 27A small number of firms reported the number of inspections running as a high 200 over the course of 2000. BARRIERS TO MARKET ENTRY AND EXPANSION throughout the sample. In general the more state ties a fm has the more it is likely to be inspected. Both state-owned and privatized f m s experienced more inspections than start- up f m s . SME Inspections The issue of inspections has lately become very topical in Ukraine. Whilst the average number of inspections by all inspecting bodies has decreased over the last several years, it is still very high. In order to provide a direct comparison with IFC's 1999 SME report (which surveyed only SMEs and only in 12 cities), an analysis of inspections for the same cites and same firm size is provided in the table below. The six cities that are included in both this and the 1999 report are Lugansk, Lutsk, Mykolayiv, Cherkasy, Chemigiv, Simferopol. Further for this analysis we also compared the same number of inspecting bodies. N-: The averages below dzffer from the overall averages given in 1999 and 2000 due to a limited number of inspecting bodies being considered (who do however comprise the bulk of inspections),and limited number of cities. Table 42 Average Number and Average Duration of SME Inspections* (for all firms, 2000 vs. 1999) 2000 1999 Small Firms Medium Firms Small Firms Medium Firms Number of Inspections 10.2 14.9 9.6 12.0 Durationof Inspections 11.O 22.2 13.5 19.3 *Several firms with an extreme number of inpsections were excluded &omthe analysis. As can be seen, in a direct comparison of the same cities there has been a slight increase in the number of inspections, for both small and medium sized firms (the 1999 report did not survey large enterprises). However, the average total duration of inspections for small businessesdecreased over 2000. An IFC Survey of Ukrainian Business Ukrainian Enter~risesin 2000 Table 43 - Average Number and Average Duration of lnspections Privatized - Numberof Durationof Vinnytsia 16.0 17.4 20.2 23.0 17.7 12.1 16.9 27.6 Dnipropetrovsk 13.7 17.5 23.0 15.2 21.3 13.5 17.0 32.9 ~onetsk Zhytornyr Zaporizhya Ivano-Frankivsk Kyiv Kirovograd Lugansk Lutsk Lviv Mykolayiv Odesa Poltava Rivne Sirnferopol Surny Ternopil Uzhgorod Kharkiv Kherson Khrndnitsky Cherkasy Chernigiv Chernivtsi A~verageNumber 04 lnspections A~verageDuration of lnspections BARRIERS TO MARKET ENTRY AND EXPANSION The regional picture regarding inspections is more complex, reflecting local priorities, and shows a wide regional variation, ranging fiom an average of 8.8 inspections in Sumy to over twice as much in Zhytomyr (21.4 inspections per year). This range in responses is an important result as it shows that local and oblast governments do indeed influence the inspection climates locally. As there are more than 30 national agencies that account for the bulk of inspections, it is unrealistic to expect them to coordinate their overall activities that closely, which implies that there is some other factor responsible for the overall level of inspectionsin a particular city. There are two hypothesis for the observed variation in the number of inspections. The first is that businessestend to be city specific and share similar characteristics and regulatory infringements. The second is that local government has a larger influence on the level of inspections in a particular city than regulations governing the conduct of inspecting bodies would suggest. The authors of this survey favor the latter. However, average figures for any particular city disguise a very large variation in responses. For smaller business there is a more than a two-fold difference between Zhytomyr (18.4 inspections) and Donetsk (7.8). A larger variance is observed with large firms, ranging fiom 33.8 inspections in Poltava to 5.1 in Sumy. Those cities that tend to have less inspections for smaller business also tend to have less inspections for larger business. This result does indeed demonstrate that local authorities wield a large degree of influence on the local inspections climate. A very small difference does exist between the number of inspections between state owned f m s and privatized firms, though on average across the country they experience the same number of inspections. There is larger discrepancy between state owned firms and start ups, with state-owned f m s experiencing one and a half times more inspections than start ups. Only in five cities did state owned firms experienceless inspections than start ups. State owned f m s , rather than experiencing fewer state inspections, actually tend to have more than f m s in the private sector, with the exception of Ivano Fraknkivsk, Sumy, Khmelnitsky, Cherkasy, and Chernivtsi where they had fewer inspections than private firms. The big anomaly is Sumy which bucked the trend across all parameters. Small businesses were inspected twice as much as large businesses and state owned firms experiencedtwice as few inspections as start ups. There is a positive correlation between company size and the number of inspections (see Figure 26). The larger the company the more the number of inspections. On average across the whole sample, a 10% increase in the number of employees leads to a 2% increase in the number of inspections. Figure 26 below shows the number of inspections by fm size (expressed in sales) and Figure 28 by number of employees. An IFC Survey of Ukrainian Business 7 1 Ukrainian Enterprises in 2000 Figure 26 A,verageNumber of lnspections per Firm by Sales (all firms) UAH, mln ~Vlorethan 10 22 5 10 15 20 25 Number of lnspections As can be seen there is a positive correlation between firm size, expressed in terms of sales o number of employees, and the number of inspections. This should also logically imply that the more profitable a company the more inspections it should experience. In fact the data shows the exact opposite. Loss making enterprises experienced more inspections than profitable enterprises (though there is no link between different levels of profitability and number of inspections.) This result presumably reflects greater suspicion on the part of state officials of concealed sales and profits at poorer performing enterprises. Figure 27 Average Number of Tax lnspections by Profitability ((allfirms) 6.0 Average for All Firms I d 5 7 "- W Unprof~tableFirms 4.8 Up to 50 ProfitableFirms 13.5 9.5 More than 250 17.0 0 1 2 3 4 5 6 7 8 9 10 Number of lnspections Notwithstanding the fact that the larger the enterprise the more inspections, smaller enterprises tend to experience disproportionally more inspections per employee than larger ones. The inspections burden per employee is higher with smaller companies than with larger companies- by more than 20 times. BARRIERS TO MARKET ENTRY AND EXPANSION Figure 28 Average Number of lnspections ( 6firm size) ~ Per Employee By Firm Size (No. of Employees) More than 22 500 Number of Inspections Number of lnpsections Inspections Perceptions In addition to determining the number and duration of inspections experienced by companies in Ukraine it is also important to assess their perceptions of whether the inspections burden has changed or not as this provides a good indication of whether changes in inspection procedures are having an effect or not. In this context, what is probably more important is not whether there has been any reduction in the level of inspections,but whether company managersreckon that there has been a change or not. Confirmingthe data that shows that there has not been a fall in the number of inspections, at least not for smaller businesses, the majority of businesses felt that number of tax inspections has not changed (57 % of respondents) in 2000. 17 % of all respondents thought that the number of tax inspections have increased during 2000. A similar picture is observed with respect to non-tax related inspections with the same proportion (57%) thinking that the level of inspections had not changed in comparison to 1999, and 21% stating that it had increased. An IFC Survey of Ukra~nianBusiness 73 - ~.. - --- -"a ,-.-- ",- A- ,~~,,~ _ U p Ukrainian Enter~risesin 2000 Table 44 Perceptionsof Changes in the Number of lnspections for All Fimns (% of all firms) Havethe Number of Tax lnspections Changed? Have the Number of Non-Tax Inspections (2000 vs.1999) Changed? (2000 vs. 1999) lncreased Decreased No Change Don't Know lncreased Decreased No Change Don't Know ~nipropetrovsk 18.6 15.5 61.2 4.7 Donetsk 20.8 13.1 59.2 6.9 Zhytornyr 16.7 25.8 53.0 4.5 Zaporizhya 17.7 20.3 53.2 8.9 Ivano- Frankivsk Kyiv Kirovograd Lugansk Lutsk Lviv Mykolayiv Odesa Poltava Rivne Simferopol Surny Ternopil Uzhgorod Kharkiv Kherson Khrnelnitsky Cherkasy Chernigiv Chernivtsi Averaae Ftoughly the same number of companies thought that tax inspections had increased(17.2%) as decreased (16.3%). The survey asked those respondents who felt that inspections had increased to identify what they felt to be the main reasons for this increase. Table 45 below lists some of the more frequently encountered reasons for increase in the number of tax inspections. A quarter (26.3%) did not know why inspections had increased. The two biggest perceived reasons for increases in inspections (according to entrepreneurs themselves) were being caught unawares by changes in tax legislation and regulations and pressure from local government on inspectingbodies. BARRIERS TO MARKET ENTRY AND EXPANSION Table 45 Firm Perceptions for Increasein the Number of Tax lnspections (% firms that reported an increase in tax inspections) Up to 50 F:zd 51 250 - than 250 More Privatized Start-up Average Changes to Legislation and 22.2 16.1 27.5 22.9 23.4 20.7 22.3 Regulations Increased Pressure from Local 17.6 19.5 22.9 27.1 16.8 19.3 19.6 Government EnterpriseLodged Complaints Against 6.8 3.4 10.1 11.4 4.2 8.1 7.0 InspectionBodies Worsened Relationshipwith 4.0 5.7 3.7 1.4 4.2 5.9 4.3 lnspectingBodies Enterprise Switched to Simplified Taxation 6.8 0.0 0.0 1.4 1.2 6.7 3.2 (only applicable for small firms) Don't Know 30.1 25.3 21.1 15.7 27.5 30.4 26.3 Out of the 16.3 % of the entire sample who felt that the number of tax inspections decreased over 2000, 40% were at a loss to explain why. Table 46 below shows the breakdown of the most frequentlyencounteredanswers. Table 46 Firm Perceptions for Decrease in the Number of Tax lnspections (% of firms that reported a decrease in tax inspections) Up to 50 51 250 - than State- Privatized Start-Ups Average 250 Owned Changes to Legislationand 21.1 13.4 26.3 24.2 19.4 20.1 20.2 Regulations Enterprise Use of 7.5 14.6 24.6 21.2 13.7 7.6 11.9 lnspections Journal Enterprise Transferred to Simplified Taxation 18.3 0.0 0.0 3.0 7.4 17.4 11.1 (only applicable for small firms) Improved Relationshipwith 8.0 11.0 8.8 3.0 8.6 10.4 8.8 InspectingBodies Decreased Pressure from Local 7.0 7.3 5.3 6.1 6.3 7.6 6.8 Government Don't Know 40.4 42.7 36.8 30.3 44.0 38.2 40.3 As can be observed, the most significant factor influencing the level of tax inspections, in the opinion of company managers, is the instability of tax legislation and regulations. Simplified taxation offers some measure of relief from this instability, as it is intended to simplify tax reporting requirements. In this context it is interesting to observe that 3% of companies who experienced an increase in the number of tax inspections felt that this was as a direct result of the switch to simplifiedtaxation. An IFC Survey of Ukrainian Business 75 Ukrainian Enterprises in 2000 The picture for non tax related inspections is the following. 9% more respondents felt that non-tax inspections have increased as those that felt they had decreased over 2000 (21% vs. 12%) Employing the same analysis as with tax-related inspections, respondentswere asked to name the main reasons for the change. Overall the same number of f m s felt that there was no change in the level of both tax and non-tax related inspections in 2000 (57%.) The tables below list some of the more ii-equently encountered reasons in our survey for the reasons in the changes to the number of non-tax related inspections. Table 47 Firm Perceptionsfor Increase in Non-Tax Related lnspections (%of firms that reported an increase in non-tax inspections) Firm Size Firm Origin Up to More State- Privatized Start- Average 50 51-250 than 250 Owned uPS Changes to Legislation 31,8 20.2 35.3 29.1 29.1 31.6 30.1 and Regulations IncreasedPressure 22.3 28.4 24.1 27.9 21.6 25.4 24.2 from Local Government EnterpriseLodged complaints Against 5.9 7.3 12.0 11.6 7.0 7.3 8.0 InspectionBodies WorsenedRelationship 5,0 4.6 3.8 2.3 5.0 !5.I 4.5 with InspectingBodies Don't Know 3.2 0.0 2.3 2.3 1.5 2.8 2.2 Table 48 Firm Perceptionsfor Decrease in Non-Tax Related lnspections (% of firms that reported a decrease in non-tax inspections) - Firm Size Firm Origin Up to More State- Start- Average 51-250 than 250 Owned Privatized lJps Changes to Legislation 28,6 24.2 29.3 27.6 27.6 217.6 27.6 and Regulations EnterpriseUse of 13.6 27.4 43.9 41.4 25.2 12.4 21.8 lnspectionsJournal ImprovedRelationship 3,6 21.0 22.0 10.3 19.5 15.2 16.7 with InspectingBodies DecreasedPressure ,0 12.9 12.2 10.3 12.2 111.4 11.7 from Local Government Don't Know 3.2 3.2 0.0 0.0 2.4 3.8 2.7 As far as f m s are concerned the reasons behind changes in both tax and non-tax related inspections is the same. The major reasons for increases were changes in legislation and pressure
Groupe de la Banque mondiale · Working Paper
Ukrainian enterprises in 2000 : an IFC survey of Ukrainian enterprises
Voir le document original
Le texte intégral est hébergé par l’organisation qui le publie. lawenc.com indexe les métadonnées et renvoie vers la source officielle.
Texte intégral
Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Working Paper
Pays
Ukraine
Source
Banque mondiale