Let’s speak honestly. Seven circles of hell for legal business in the Ukrainian style

13-02-2018

Source: epravda.com.ua

Why is it difficult and sometimes impossible to start a business in Ukraine, and why do businesses refuse playing by the state rules? (In Russian)

A Ukrainian should collect 53 documents to start, for example, such a business as a “coffee stand”. For this purpose, the entrepreneur needs to go through 20 procedures and get 19 documents.

In fact, this is even not a full list. The one described will be only in case of registering a land plot lease and installing a cash register by your own.

According to Aleksey Goncharuk, the BRDO Head, it is difficult to open a business in Ukraine legally: sometimes it takes years, and in some cases, it is even impossible to start a business.

“A large number of entrepreneurs do not comply with the state rules, because these rules are not clear. The state simply forgot for whose well-being it exists. It forgot that its function is to provide people with quality services,” Goncharuk emphasizes.

The ‘Economichna Pravda’ offers to discuss several examples to understand how difficult it is to start and conduct a business legally today.

Ukraine has mostly ‘not free’ economy

Today, Ukraine ranks 76th in the Doing Business rating. “This is a rightly low position,” Goncharuk said. “It’s bad for a European country.”

Belarus, Moldova, Georgia, Kazakhstan, Russia, Poland and Estonia outrank Ukraine in this rating. Since 2012, our country has significantly improved its result, but it has performed poorly over the last three years.

Our position is much worse in the Index of Economic Freedom. We rank 150th in 2018 – between Cameroon and Sierra Leone. We are among the countries with mostly not free economy. Our positive progress is poor.

What does a small business think about the business environment?

Evgeniy Elizariev, the co-owner of the Kiev ART Éclair confectionery. “Tax agency is everything.”

In total, Elizariev spent 3-4 months to register his business on paper. He collected most of the documents in the process of conducting a business. In general, all paper procedures took a year. The business co-owner dealt with some procedures personally and gave a special outsourcing company complete control over the rest of procedures. Its services cost 4-5 thousand UAH.

“It would be better for a person who wants to conduct a business to let the professional to do this work, so it will allow to not waste time and not lose the heat in doing your business. A business owner should think about expanding his business and not about getting some bureaucratic pieces of paper,” Elizariev tells us about his experience.

He says that the main thing is to register in a tax agency. Everything else can be done in the process, because business inspections are currently prohibited.

“Honestly speaking, today Ukraine has the most favorable conditions to start a small business since I can remember. There are no problems to register,” the entrepreneur says.

“Most difficulties are related to the tax agency. It requires a lot of paperwork to be done and some outdated accounting report forms, which small businesses do not need at all. Social insurance services take the second place in terms of the difficult interaction. You will face with this problem when hiring people. But the tax agency is everything,” he adds.

Registration of a cash register in Ukraine. Eight circles of bureaucracy.

A private kindergarten co-owner. “Officials should understand what kind of services they provide.”

“I’ll tell you an anecdotal case,” the entrepreneur says asking not to be named. “Today, if you look at the procedure for obtaining a license to open a private kindergarten, there is the State Sanitary and Epidemiological Service, the Main Directorate of the State Emergency Service and the State Labour Service. We call the State Labour Service and ask whether it provides a certain document? They answer that they do not know.

You can call every of 60% of their phone numbers and no one on the other end knows that they should issue this document. The State Labour Service’s website states that they issue documents related to hazardous work, for example, underground, blasting or high-rise operations. In these cases, it is important. But I do not understand what documents the State Labour Service should provide to a kindergarten.

I even had a conversation with them. They said that I should gain insight in the situation and explain that they can not issue any documents for my business. What is this supposed to mean? It seems there should be such types of documents. That is, the department and its employees should understand what services they provide.

So, of course, if we want to develop our business, the entire regulatory framework definitely should be updated, revised and simplified. To my mind, officials should set a task for themselves to remove unnecessary requirements this year.”

Stepan, the owner of a coffee house in the center of Kiev. “Business is working, and it seems that there are no reasons to complain about authorities.”

Stepan’s coffee house

“I opened my first coffee in an apartment house. I rented a premise and employed a worker. This required to collect about 10 documents. But when I decided to open a mobile coffee house, this business was crazy.

Firstly, there were huge prices for renting a corner. If you want to buy a corner near the Golden Gate officially by auction, you need to pay 260 thousand UAH per year. It is nothing less than madness to pay such a price for 3 square meters of land where just one person will work.

Secondly, it is not allowed to buy a place where people may want to drink coffee, since they (Kiev city authorities – Ed.) call it a recreational zone.

A municipal enterprise “Miskyi magazyn” sells these places. If you do not buy their place, you are not allowed to install your stand in the city. Otherwise, tow truck services come. These tow truck services are real raiders. I had a situation when 10 masked men came, beat my seller, put him in their car, and my vehicle, which is my private property, was put on their tow truck and taken away without any court decision. My acquaintance helped me to get my vehicle back from the impound lot. But usually, if they took something, they would never give it back.

The ME “Miskyi magazyn” regularly reports on confiscation of illegally installed mobile shops at night on its Facebook page

In this case, if you call the police, they ask whether it was an ordinary vehicle or a mobile coffee house. If it is a mobile coffee house, they hang up on you. Now I rent a MAF, and I would not say that I have problems. My business is working, and it seems that there are no reasons to complain about authorities.”

Why is difficult to conduct a business legally in Ukraine?

While Ukrainian entrepreneurs see state obstacles to businesses in a fragmented way, the BRDO Head Aleksey Goncharuk analyzes all aspects of the problem.

According to Goncharuk, it is not easy to open a business in Ukraine because we have constantly changing currency exchange rates and there is the war on the territory of our country as well as because our state remains the post-Soviet ideology. Ukraine has a lot of archaic procedures, which should be eliminated.

BRDO. The Better Regulation Delivery Office (BRDO) is a non-governmental organization established on the initiative of the Ministry of Economic Development and Trade and funded by Western institutions. The BRDO’s goal is to improve the effectiveness of legislative regulation in Ukraine.

The EP talked with the BRDO Head and highlighted 10 most important points.

Aleksey Goncharuk, the BRDO Head

  1. A significant number of business owners do not comply with the state rules

Most of business owners do not comply with the rules that the state establishes. For example, only two of all private kindergartens working in Ukraine agreed to speak with the BRDO on condition of anonymity. They shared their experience of going through “7 circles of hell” to open a business related to “private kindergartens”.

Therefore, it is fair to assume that businesses, as rule, mimic, simulate, make arrangements with officials at the local level and do everything possible to avoid participating in all these circles of hell.

  1. Nobody understands the state rules

Business owners make arrangements with local officials, because nobody understands the state rules on conducting various types of business. And this is the main reason why business owners refuse to reveal a real story of its opening and talk publicly how it is currently operating.

  1. A direct task of the Ministry of Economy is to reduce a number of documents required

Reducing a number of documents for doing a business is their direct task. The activity of the Ministry of Economy should be focused on creating a comfortable business environment. And it is a rhetorical question whether we have a comfortable business environment today.

  1. It will not work to ‘burn out’ all documents ‘with napalm’

We regularly participate in special deregulation sessions of the Cabinet of Ministers. About 800 documents have been cancelled in the last two years. The process is on, but it takes time.

It’s easiest way to burn all documents with napalm. But it does not work. The state should have a mechanism that will protect you, for example, from poisoning with bad food in a restaurant.

The second area of ​​our task is to establish automatic data exchange between electronic registries of government entities. Now the State Agency for Electronic Governance is working on resolving this problem.

  1. The state forgot for whose well-being it should work

My main message is that there is no ideology of client-oriented approach in our country. The state forgot for whose well-being it should work. This should be changed. Relationships between the state and businesses, the state and individuals should be based on business and individual needs.

 Businesses and people should be comfortable, so they will happily observe the rules while being proud of it. Because the 21st century is the time of reputational economy.

Today it is advantageous to be a wonderful “white” company publicly. In Western countries, it has long been a matter of survival. A “black” or “grey” company will never get a loan there, and key players will never make contracts with them.

To make a reputation a real value in Ukraine, the state should become a very friendly service organization.

  1. Many procedures can not be simplified without making amendments to laws

Many things can not be changed without making amendments to the law. But to obtain a parliament’s approval is a real piece of work. There are at least several dozens of appropriate draft laws that could greatly simplify business regulation waiting for the Parliament’s consideration.

UNIAN

  1. In Ukraine, every 3rd subordinate document is illegal

According to our preliminary estimates, every third subordinate document in Ukraine is illegal.

  1. Ukraine should develop its entrepreneurship culture

According to my estimates, it is difficult to start a business legally. There is no problem to open a private enterprise or register a legal entity. But it is a significant obstacle when you are going to collect necessary documents. I know more than a dozen people who gave everything up just having started to collect the documents.

Someone began to work illegally, while others decided to be employed. And this is bad, because we need to develop the entrepreneurship culture. We need to stimulate the business development. Now we are far from this ideal.

  1. Sometimes it takes years to collect all documents

Depending on the type of business, it takes years to collect some documents officially. Sometimes it is even impossible to  collect all the “pieces of paper” legally. Very often, we have conditions created accidentally or specially, when it is almost impossible to get a document.

The European Union, which we look up to, has a simple principle. It implies that when creating rules, one should think how easy it would be for small and medium-sized businesses to comply with. Because otherwise large businesses will find lawyers and money and achieve a success, while small and medium-sized businesses will simply refuse to conduct business.

  1. Something positive

The 76th position in the Doing Business ranking for 2018 is bad. But we developed a draft law No.6540 together with the Ministry of Economy in the spring of 2017. It was registered in the parliament. If it is adopted, many targeted changes will make the life of business owners easier. Ukraine have all chances to take the 25th or the 40th position in the rating.

In 2018, our priority is to reform the inspection bodies. We gathered more than 50 inspection bodies in one information system. And soon we will create an exhaustive list of inspectors’ requirements for each type of business.

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