Small businesses stripped off the dignity

Dnipropetrovsk tax police found a clandestine mini-factory of toilet paper in a suburban storehouse. The enterprise, which worked at nighttime only, employed ten workers. The production line included reeling, cutting, pre-packing and packing toilet paper, and could produce about 10,000 rolls a night. The factory owners mostly sold their goods in towns and villages far from Dnipropetrovsk. According to the tax police, 150,000 hryvnias worth of finished products were seized during the search. Now the two entrepreneurs who set up the illegal business are facing criminal liability charges for making counterfeit goods.

The news of an underground toilet paper enterprise caused quite a stir in the media — mainly because of the nature of the products. However, such illegal production sites are no rarity in recent times. Dnipropetrovsk oblast is mainly known for its heavy industries, such as steel mills, or chemical and mechanical engineering plants. These enterprises have formed the basis of large industrial corporations and holding companies, which are the main source of revenue for the state and local budgets. Small-scale business is playing a far more modest role in producing local budget revenues, their share being a mere 16 percent. Yet there are about 13,000 small businesses in Dnipropetrovsk, employing some 80,000 people. Out of this number, 42 percent of small businesses work in the field of trade and repairs of cars, home appliances and personal items. Real estate and services account for 25 percent of enterprises, up to 10 percent are involved in civil construction, almost seven percent are in the sphere of transport and communications, and four percent work in the hotel and restaurant sector. Yet these figures only show part of the overall picture of small business development in Dnipropetrovsk because, according to statistics, this business is associated, in one way or another, with the wellbeing of about 200,000 people. These figures indicate that small business should be highly-prized, both in Dnipropetrovsk and in Ukraine as a whole. Meanwhile, entrepreneurs themselves say that things are not quite so rosy.

“There are no changes for the better so far,” says Oleksandr Malyk, head of the Business Partnership Association which embraces small and medium industrial enterprises. “On the contrary, we are worried about the current trends in taxation. I can give you an example: we had a small business that manufactured power cables and employed around twenty people. The owner first had to suspend production and then sold all the equipment. It is not that there was no demand, it is just that the economic conditions are not conducive to the development of small business.”

Meanwhile, small businesses could fill the economic niches where big business cannot work effectively. “There are 107 enterprises on our association’s list, which are engaged in all kinds of production and implementation of scientific designs,” Malyk says. “One of the small factories produces components for railway equipment repairs. Nobody else is producing this kind of product today, so partners are holding on to us. Another entrepreneur has designed a small airplane which can be used for training and other purposes. Negotiations are now underway with Iraq on the plane’s joint production. One other small business is offering an effective technique for clearing the Dnieper of blue and green algae. There are entrepreneurs who could produce high-precision maps of Dnipropetrovsk, as they are not yet on sale.”

The Business Partnership Association head notes that it would be wrong to say that local authorities do not see the problems. A memorandum on the further development of entrepreneurship was recently signed by the regional, municipal and district administrative bodies on the initiative of Governor Vilkul. The document has a number of clauses that are supposed to inspire hope in small businesses, including a commitment to refrain from adopting “economically inviable and ineffective regulatory acts” at the local level, to improve “the procedure of settling disputes that arise between economic entities,” and to work out a program of small business development, which will involve entrepreneurial circles and their associations. The memorandum also demands that local administrative bodies should set differential land tax rates, and a fee for the renting of land and the public utilities by small businesses and farms.

Volodymyr Don, former representative of Ukraine’s State Committee for Regulatory Policy and Entrepreneurship in Dinipropetrovsk oblast, believes that the root of the evil is the attitude of the government to business as such. The state committee’s new management abolished his office and its local representations two months ago, which is in itself symbolic. In Don’s view, the bureaucrats’ attitude to business is caused by a simple logic: as big business accounts for the main share of budget revenues, small- and medium-scale businesses play no major role. The mistake is, he says, that the main purpose of small-scale entrepreneurship is to create jobs rather than lavish revenues for the treasury. This would provide millions of people with a means of subsistence for themselves and their families without demanding anything from the state apart from transparent and easy-to-understand “rules of the game.” Meanwhile, a wise attitude to small-scale business is producing a noticeable effect in European countries, where it accounts for almost a half of all budget revenues. In Ukraine, things are different. Don notes that small business is absolutely unprotected in this country. Parliament and the Cabinet tend to the interests of big business because it is unreal for a small or medium business-owner to lobby the Verkhovna Rada, as they do not have the money for it. For the same reason, laws are made in such a way that small and medium businesses have to pay taxes at least twice as high as those paid by the large corporations. The Ukrainian government only turns its face to small business during the elections, when it becomes an electoral base. But then it is used like a cow, on the principle of “feed less and milk more.” More often then not, one has to resort to corruption to launch a business and keep it working. As a result, Don says, it is easier for a small-scale entrepreneur to work without registration and fiscal oversight. Although this involves a certain risk, it is sometimes easier to fill an envelope than to undergo never-ending inspections. A simplified system was until now quite a legitimate way to avoid this kind of inspections, but lately this system has also been under attack. Instead of studying and making use of the experience of West European countries, the Baltic countries, or Georgia, Ukraine is walking the well-trodden path again.

“Georgia once was a true cradle of corruption in the Soviet Union,” Don recalls. “Now, in just a few years, the situation has radically changed for the better and entrepreneurs operate freely in that country.” In his view, the problem in Ukraine is that there is no political will to actually reform the country. Besides, it is true professionals, not corrupt bureaucrats, who should deal with the development of entrepreneurship.