Towards a Modern SME Policy in Ukraine

Event report

On 4th November, Friedrich-Naumann-Foundation for Freedom hosted a panel discussion in Kyiv to introduce and discuss the analysis of a team of Ukrainian and German experts of theGerman Advisory Group Ukraine on small and medium-sized enterprises (SME) “Towards A Modern SME Policy in Ukraine”.

Miriam Kosmehl, Project Director, opened the event, explaining the FNF’s new 2014-2016 project objective to contribute to improved framework conditions for SMEs by facilitating dialogue between policy makers and Ukrainian society, and providing for informed decision-making and civic participation.

Dr. Alexander Knuth, international expert for entrepreneurship and SMEs, who introduced the expert team’s analysis, highlighted that although the Ukrainian SME sector was larger than Germany’s, only about 5 percent of Ukrainian SMEs might potentially contribute to economic growth, higher productivity and employment creation. He added that it is not an aim in itself to have a large SME sector and pointed out that nowhere does the SME sector by itself create innovation. “It is those companies that grow out of the SME stage that create jobs and innovation, according to scientific research. Enhanced competition by potentially successful high-growth companies could moreover disrupt the network between politics and big enterprises dividing business up among themselves in Ukraine to the detriment of SMEs,” said the expert.

Referring to the large number of subsistence businesses and freelancers (57%) and “pseudo self-employed” (38%) Knuth argued that the large amount of subsistence businesses reflects systematic failure in a developed economy like Ukraine and that “pseudo self-employment” was in contrast to the idea of freedom of occupation. “Entrepreneurial career should be a choice!”

Knuth also cleared up with the prejudice that western Ukraine had many SMEs, while the East was dominated by big business. Excluding single entrepreneurs, and according to data gathered from “Ukrstat”, the highest SME concentration is to be found in the Kyiv and southern industrial regions, where economic activity is strongest.

Artur Kovalchuk, research associate with the Kyiv Institute for Economic Analysis and Policy Consulting, gave some background about which entities qualify as SMEs in Ukraine (those with up to EUR 50 million gross income from sales and up to 250 employees), and explained differences of the Ukrainian SME sector versus that of other countries.

According to the experts there can be no “one-fits-all” SME policy for Ukraine. As for “the jewels” (Knuth) – the so-called “stuck-in-the-middle companies” and “innovative and growth-oriented enterprises likely to challenge incumbent industries” – Knuth compared them to “racing cars stuck in a traffic jam”. The expert pleaded for paying particular attention to those two categories of SMEs, because they had the highest potential for enhancing competition. “First and foremost, the most onerous growth barriers for the last decade must be removed, i.e. limited access to finance and a huge administrative burden. This would have an almost immediate impact, is easy to implement and would not require extra public expenditure,” said the expert.

Dr. Ricardo Giucci recommended facilitating access of SMEs to bank credit finance by better coordination of credit bureaus, and the use of international reporting standards by SMEs. Access to finance is crucial, because the Deep and Comprehensive Free-Trade Agreement between the EU and Ukraine, even though not yet in force, will lead to reduced trade barriers. However, to be able to export to the EU, companies need to invest to be able to fulfill EU standards. The expert called current interest rates of 30% or even more “prohibitive”. “You do not make that kind of money with food production.” As far as bookkeeping and reporting in accordance with international standards are concerned, the expert pointed out that such adjustments were a requirement laid down in the DCFTA. He recommended for Ukrainian decision-makers to put international reporting standards in place without further delay, as Ukrainian standards stood in the way not only of lending, but also of desperately needed foreign investment.

Thomas Otten, taxation expert, described the inefficient system of “primary documentation”, and called for urgent reforms, as well as pertaining to the system of business supervision and taxation. Regarding “pseudo self-employment”, he highlighted the huge difference in the tax burden (5% versus 67%), and described how the construct was frequently used to launder black money or avoid employment. Alexander Knuth added how the arrangement being used by some business entities can have a distortive effect for others operating socially responsible.

To questions and remarks from the audience about the prospects of a national innovation system, or cooperation between SMEs and educational institutions, the experts replied that any subsidization of SMEs, or donor money for SME development programmes, was futile until the framework for SMEs was transformed, and identified obstacles removed.

Moderator Liubomyr Chornii concluded that state services needed to change their attitude and regard SMEs as places where value is created. More informed decision-making and civic participation were needed to change resistance in public administration, where many civil servants are still in “control mode” as a Soviet remnant.