39545 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Business Environment in Belarus

The survey of the Belarusian SME sector

Мinsк 2005 © 2005 The content of the report is protected by copyright. References to the 2005 Belarus Business Environment survey are mandatory when reproducing, duplicating or distributing the report or any portion contained herein.

Opinions expressed herein do not necessarily reflect those of the International Finance Corporation (IFC), the Swedish International Development Cooperation Agency (Sida) or the World Bank Group (WBG). The information in the report is published in good faith and the International Finance Corporation (IFC), the Swedish International Development Cooperation Agency (Sida) and the World Bank Group (WBG) shall not be liable for any omission, costs or/and other possible consequences arising out of publication or use of the information contained herein. All information and materials used in the preparation of the report are IFC property and shall be regarded as its archive. CONTENT

FORWARDS ...... 4

EXECUTIVE SUMMARY ...... 5

OVERVIEW OF THE SMALL AND MEDIUMSIZED BUSINESS SECTOR IN BELARUS ...... 12

REGISTRATION ...... 15

LICENSING ...... 19

PERMITS ...... 25

CERTIFICATION...... 29

INSPECTIONS ...... 33

TAX ADMINISTRATION ...... 37

PRICING REGULATION ...... 41

METHODOLOGY ...... 46

APPENDIXES ...... 49

3 4 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 T www.ifc.org/europe/belarus Fax: +375172227440 Tel: +375172281838 220033 Minsk,Belarus 6 A,PartizanskiAvenue 4thfloor International FinanceCorporation form canbeprocuredfromthefollowingaddresses: The surveyispublishedinRussianandEnglish.Additionalcopiesprintorelectronic preparation. as welltoallthosewhorenderedinvaluableassistanceduringthesurvey’s Social Security,Emergencies,StatisticsandAnalysis,regionalexecutivecommittees to theCouncilforPrivateEnterprisePromotion,MinistriesofJustice,Labourand IFC BelarusBusinessEnablingEnvironmentProjectwouldliketoexpressitsgratitude regarding theremovalofadministrativebarriersholdingbackSMEdevelopment. consulted togaintheirassessmentofthesurveyresultsandrecommendations In thecourseofpreparingsurvey,representativesfromstateagencieswere perceptions ofBelarusianentrepreneursregardingthecurrentbusinessenvironment. groups meetingsinvolvingentrepreneurs.Consequently,thesurveymirrors administrative procedures.Thesurveyfindingswereverifiedinthecourseoffocus in theSMEsector.Therespondentsanswered130questionsdealingwith The surveypolled1,200Belarusiancompaniesandindividualentrepreneursoperating businessrelated legislation. regarding waystocreatefavourableconditionsforentrepreneursandimprove community. Thesesurveyfindingswillsetthestageforadialoguewithstateagencies singles outthemostproblematicadministrativeproceduresidentifiedbybusiness those garneredfromothercountries.ThepolltracksthedynamicsofSMEreformand drawing upontheperceptionsofpolledentrepreneursandcomparefindingswith Belarus, evaluatetheadministrativeburdenonsmallandmediumsizedbusiness environmentforconductingbusinessin The surveyaimstoanalysetheregulatory framework oftheIFCBelarusBusinessEnablingEnvironmentProject. from theSwedishInternationalDevelopmentCooperationAgency(Sida)within he InternationalFinanceCorporation(IFC)unveilsthesecondannualsurveyofsmall and mediumsizedenterprises(SMEs)inBelarus.Itwasconductedwithsupport International FinanceCorporation 2121 PennsylvaniaAvenue, NW Private EnterprisesPartnership FORWARDS Washington, DC20433,USA Fax. +12029744312 Tel. +12024580917 www.ifc.org/pep E x e c u t i v S m a r y EXECUTIVE SUMMARY

The International Finance Corporation’s Office in Belarus unveils the second annual survey of business environment in Belarus. It draws upon the perceptions of Belarusian small and mediumsized enterprises (SMEs) regarding the current business climate. The poll analyses seven administrative procedures encountered by SMEs throughout their lifespan. Aware of the importance of SME development for social and economic stability, the Belarusian government has adopted a range of measures aimed at creating favourable business conditions1 and continues to keep this issue in its sights. The survey findings can be used as a database for the preparation and finetuning of such government policy that seeks to shape favourable conditions for the sustainable development of SMEs. A truly effective business regulation system should take account of the SMEs’ perceptions regarding the entrepreneurial environment. The measures instituted by the Government in 2004 spanned licensing, certification, and financial operational inspections and brought in the following positive developments: The average number of licenses per company fell from three in 2003 to two in 2004 The share of companies subject to licensing fell from 88% to 73% The cost of an average license fell from 260 to 217 USD The portion of inspected companies tumbled from 90% to 66% An average duration of an inspection fell from 60 to 24 days and The cost of certification dropped by 25% and its duration by 15% Business Environment as Perceived by SMEs

Despite the measures unveiled, more than half of entrepreneurs believe that business conditions in 2004 deteriorated in comparison with 2003 (See Chart 1). More than twothirds of SMEs undergoing each of these administrative procedures regarded them as difficult (Chart 2).

Chart 1. Most entrepreneurs believe that business conditions in 2004 worsened, % of respondents

Chart 2. More than two thirds of SMEs regard administrative procedures as complex, % of respondents subject to these administrative procedures in 2004

1 The Cabinet of Ministers’ Ordinance N1685 On Measures to Stimulate the Development of Private Enterprise, Presidential Decree N148 On Urgent Measures to Support Private Entrepreneurship. 5 6 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 procedures. taken intoaccount While assessingthecostsofadministrativeprocedures,bothofficialfeesandunofficialpaymentswere for resolvingdisputeswithstateagenciesregulatingbusinessactivities(Chart4). and timeconsuming.Thepolldemonstratedthatentrepreneursregardedconnectionsasthebesttool These problemsforceentrepreneurstolookforwaysmakeadministrativeprocedureslessexpensive and longduration(Chart3). complexity ofadministrativeproceduresstemfromnumerousdocuments,ambiguousrequirements factors: complexityofadministrativeproceduresandtheirhighcost.Thesurveyfindingsshowthatthe The negativeperceptionofthebusinessenvironmentbySMEscanbeascribedtofollowingtwo 2 of reformsimplementedintheCISandEurope. recommendations forimprovingtheseprocedureshaveincorporatedthebestpracticesandanalysis The surveyedadministrativeproceduresareanalysedindetailthefollowingsectionsofpoll. procedures. In2004,suchpaymentsreached665USDoralmost28%ofpercapitaGDP. 17% ofrespondentsnotedthattheyhadmadeunofficialpaymentstonegotiateadministrative Moredetailedinformationabout thecostofadministrativeproceduresissetforthinreport chaptersdealingwithspecific documents, %ofrespondentsmentioningthesedifficulties* Chart 3.Complexityofadministrativeproceduresstemfromdurationandnumerous % ofrespondents Chart 4.Connectionsarethebestwaytosettledisputesinbusiness, for eachoftheproceduresreflectedinsurvey. *Percentage ofrespondentsundergoingregistration,licensingandpermitissuancein2004.Theresultshavebeenweighed and reducingitsduration and cost. In early2005,thegovernment adoptedanumberofmeasuresaimedatsimplifying registration state agencies,isafurther deterrent. companies. Thesystemofpenalties,from35to1,700 USDforuntimelyregistrationwithsome Lengthy andexpensiveregistrationinBelarusdiscourages entrepreneursfromsettingupnew costsaccountforfourfifthsofregistrationexpenses. Notary As manyas80%ofSMEsregardregistrationcosts, whichaverageoutat746USD,asonerous. visit aminimumof10agenciesandprepare13sets ofdocuments. might takeanaverageofthreemonths.To register a smallcompany,anentrepreneurisobligedto Two thirdsofSMEsundergoingregistration in2004describeditascomplex.Thewholeprocess CONCLUSIONS ANDRECOMMENDATIONS 2 . In2004SMEsspentanaverageof3,840USDonpermits,licensingandcertification. REGISTRATION E x e c u t i v S m a r y Recommendations

Stage 1 The following amendments should be made to Presidential Decree N 11, dated 16th March 19993: 1. The list of registration documents should be reduced. The list should be exhaustive. 2. Requirement for notarisation of foundation documents should be rescinded. 3. The need to include lines of business in foundation documents should be abolished. 4. Some grounds for declining registration should be abolished as they are not relevant. 5. Applicants should be held liable for the accuracy of the data provided and registration authorities should not be obliged to verify or request such data. 6. The onestop shop principle should be introduced for registration. 7. The decision to register an economic entity should be adopted by a state registration body rather than by an executive committee’s collegial organ. 8. A silenceisconsent principle should be employed for the registration of amendments to foundation documents regarding an economic entity (changes in its location, management routines and composition of founders). 9. A pilot project to test a silenceisconsent registration method should be launched in one of the regions Stage 2 1. A draft registration law should be developed and passed. 2. A silenceisconsent registration method should be introduced. 3. A registration onestop shop should be set up. LICENSING

The Presidential Decree On Licensing of Certain Lines of Business 4 and the facilitating legislation adopted by the Belarusian Government reduced the number of economic entities subject to licensing from 88% in 2003 to 73% in 2004. However, the list of licensed activities still remains lengthy and contains 49 types and 350 subtypes. 70% of applicants find licensing procedures complex. This is due to the excessive number of documents demanded, unclear requirements and lengthy processing periods. The average cost of a license fell from 260 USD to 213 USD in 2004. This is still almost double the official licensing fee of 120 USD 5 for any line of business. 53% of applicants found these costs onerous. Recommendations

1. Activities posing no threat to public health, the environment or national security should not be subject to licensing. (For example, retail trade in goods presenting no potential danger). 2. An exhaustive list of licensing documents should be developed. 3. Companies should not be obliged to submit a full set of documents to extend the validity of their licenses. 4. Licensing requirements should be limited to the confirmation of a company’s ability to pursue the licensed activity; this would nullify such obligations as selling a certain proportion of Belarusian manufactured goods in the turnover of a trade company.

3 Detailed recommendations are set forth in the “Registration” section. 4 Presidential Decree N17, dated 14th July 2003, On Licensing of Certain Lines of Business. 5 Presidential Decree N17, dated 14th July 2003, On Licensing of Certain Lines of Business mandates that a license fee has two parts: a license issue fee of 90 euros and an application processing fee of 10 euros. 7 8 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Recommendations inspectorate. inspectorate,localgovernments andthelabour most prolificpermitissuers,namely thefiresafetyauthority,sanitary of stateauthorisation,exceptfor registration,licensingandcertification,whichwillbedealtwith in separatechapters. report, anassessment,evaluation, anexpertreportorinspectionact.Inthischapter,bypermits system,wemeanallfo certain actionsoractivities.Permits cantakedifferentforms,includingapermitperse,aninscription, astampofapproval 7 6 Apermitisanauthorisationissued byastateagencyorlocalgoverningbodyallowinganentrepreneur oracompanytopursu Only thelegalactsincludedin NationalRegisterofLegalActsweretakenintoaccount.Thecalculations includedonlythe .Awiderangingreviewand systematisationofpermitrelatedlegislation,includingtechnicallegal 7. Adraft lawshouldbedevelopedtoregulatecommonconditionsandprinciplesforthepermitsystem. 6. Prior tolegislativereviews,aformulashouldbedevelopedgoverntheissuanceofpermitsbased 5. Questionablepermitsshouldbeannulled. 4. Adraftprogramofpermitsystemreform shouldbepreparedbythecommission. 3. Thecommissionshouldbeempoweredtoreviewlegislationregulatingbusinesspermitsand 2. Aninteragencycommission(council)onmodificationoflegislationrelatingtothepermitsysteminBelarus 1. regulate thisarea More than50stateagenciesareempoweredtoissuelicensesandmore200legalacts and theplethoraofstateagenciesinvolved(61%). respondents: absenceofasingleinformationsource(66%),excessivenumbersdocuments(66%) agencies andlimitedaccesstoinformation.Thefollowingkeyproblemshavebeenflaggedupby Permit issuancecanbehaphazardduetounclearregulations,lackofcoordinationbetweenstate average of2.5monthsforacompanytoobtainpermit.Afirmspent1,400USDonallitspermits. In 2004,45%ofrespondentswereobligedtosecureanaverage6differentpermits.Ittook for acompanytobeginoperating. The Belarusianpermitsystemencompasses90%ofSMEs.Onaverage,5permitsarerequired needing permitsin2004describedthisprocessaseithercomplexorexceedinglycomplex. acts. Securing ofpermits with the general principles and conditions of the regulatory system. with thegeneralprinciplesandconditionsofregulatory acts shouldbelaunchedtosimplifythepermitissuance legalframeworkandcreatecompliance Procedures anddeadlinesforbringinglegislationinto compliancewiththelaw. environment; Application ofa“silenceisconsent”principletoactivities posingnothreattopublichealthorthe Extension oftheonestopshopmodeltopermitissuance; permits; Remits ofstateagenciesandlocalauthoritiesintherealmsregulationextensionbusiness Uniform conditionsandproceduresforissuingpermits; Prohibition ofpermitsnotsetforthinlaw; Creation ofauniformregisterpermits; List ofpermitsandagenciesauthorisedtoissuethem; Criteria fortheimpositionofrestrictionsonbusinessactivitiesinshapepermits; This documentshouldsetforththefollowing: on applicablelegislation. establish adatabaseonallpermitsandpermitissuingagencies. representatives ofbusinessassociationsandindependentexperts. should becreatedundertheauspicesofCabinetMinisters.Itcomprisecivilservants, 7 . Itisimpossibletocalculatetheexactnumberofpermitsandapplicablelegal 6 is one of the most unwieldy regulatory procedures.Two thirdsofrespondents isoneofthemostunwieldyregulatory PERMITS four rms , a e E x e c u t i v S m a r y CERTIFICATION

As many as 70% of companies undergoing certification regard this procedure as complex due to the large number of required documents, lengthy processing periods and numerous stages. The most difficult is certification of domestically mass produced goods, imported equipment and quality control systems. At the same time, efforts being undertaken by the Government to streamline certification legislation have led to simplification of these procedures. In comparison with the previous year, certification costs in 2004 fell by 25% and its duration by about 15%. For example, the cost of a certificate for a batch of goods declined from an average of 214 USD in 2003 to 157 USD in 2004 and the processing time was reduced from 22 to 19 days. Recommendations:

1. Economic entities should be better informed about the advantages of the declaration of conformity as a simplified form of mandatory certification. 2. The list of goods which can be certified by means of a declaration of conformity should be extended. 3. Certification should be further simplified by applying less complex procedures to a broader range of economic entities. Certification of domestic manufacturing should also be made less onerous. One stopshop method should be extended to all stages of certification. INSPECTIONS

The realm of inspections saw the following positive changes in 2004: the number of inspected SMEs fell and inspections became less frequent (an average of 10 inspections per company annually). Their duration was also reduced. Despite these welcome developments, inspection statistics in Belarus are still one of the worst in the CIS. Two thirds of SMEs were inspected in 2004 by control agencies. Of these, 80% hosted inspections by fire safety authorities, 77% by a tax inspectorate, 67% by sanitaryepidemiological inspectors and 44% by the Social Security Fund. As many as 70% of companies found inspection procedures exceedingly complex. Among the problems identified were excessive remits (48%), sanctions out of line with transgressions committed (40%) and the absence of comprehensive inspection procedures (37%). Inspections in Belarus are more fiscal than preventative in nature. Inspections of 61% of SMEs resulted in sanctions. Fines are by far the most frequently applied penalty – accounting for 96% of sanctions. Nearly a third of inspected respondents disagreed with control agencies’ actions yet only a quarter appealed to a court of law. However, more than half of these appeals were successful. Recommendations

1. Inspections should be carried out in line with risk assessments; this allows control agencies to better utilise their resources and more efficiently attain objectives. Inspections should be focused either on high risk areas or on economic entities likely to violate legislation. 2. Overlapping functions of control agencies should be rescinded. 3. The following extrajudicial powers of control agencies should be curbed: expropriation of property, suspension and closure of companies and imposition of fines. 4. A legal mechanism ensuring that penalties accurately reflect the seriousness of transgressions and the degree of guilt should be put in place. 5. A procedure for holding state agencies liable for damage caused by their illegal actions should be introduced. 9 10 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 inspections: only financialoperationalbutalsooperationalinspections.TheCouncil couldperformthefollowingfunctionsinrelationtoo 9 Recommendations 8 SeApni 15Brief AnalysisoftheLawRussian FederationandUzbekDecree. SeeAppendixN Forexample,theremitofCouncilforCoordinationControl Activitiesshouldbeexpandedtoincludecoordinationofn   Organisecomplexinspections; and  Developmeasurestopersuade economicentitiestoabidebyofficialregulations; on theriskmanagementprinciple andintroduceinspectionchecklists;  Prepareproposalstostandardise inspectiondocumentsandprocedures,coordinatetransition toaninspectionregimebased  Policetheimplementationoflegal actsregulatingtheactivitiesofallcontrolagencies; Alawlayingdownthebasisforcontrolactivitiesshould beadoptedtostreamlineinspectionprocedures. 7. Theimplementationofbothfinancialoperationalandoperationalinspections shouldbebetterco 6. Penaltiesforviolatingtaxlegislationshouldbereducedandpreventivemeasuresoffending 6. Thestaffandrevenuethresholdsforusingthesimplifiedtaxationsystemshouldberaised 5. Tax filingdatabasesshouldbesetupandtaxfilings shouldbeabletosignedwiththeelectronic 4. Tax statementsshouldonlybefiledquarterly. 3. Contradictionsintaxrelatedlegalacts,adoptedbytheMinistriesofFinanceandTaxation, should 2. ofthenext year.Alternatively,a6 Amendments totaxlegislationshouldbeenactedon1January 1.

Coordinate informationgathering anddataexchangebetweencontrolagencieswhileestablishing asingledatabase. disproportionately severe. Almost twothirdsofSMEdirectorssaidthatthesanctionsimposedfortaxviolationsare unpopular:only4%ofSMEsinBelarususedthissystem2004. system very Staffing andturnoverrequirementstheapplicationproceduremakesimplifiedtaxation to theBelarusianSMEsectorcouldexceed3.5millionUSD. obliged tofile12taxreportsandoneformforexemptionsmonthly.Theresultingmonthlylosses existing paperworkaburden;thisraisesnonproductioncostsforcompanies.Anaveragefirmis Complex taxlegislationandinaccessibilityofclarification(notedby56%respondents)makethe Belarus in2004. of taxlegislation.Forexample,24legalactsgoverningVAT and13onprofittaxeswereadoptedin as complicated.Thisperceptionbycompanydirectorsisbeingfedtheinstabilityandcomplexity Three quartersofpolledcompaniesregardthecurrentsystemcalculationandpaymenttaxes into account. Experience accumulatedintheRussianFederation,Uzbekistanandothercountriesshouldbetaken ordinated. This, inturn,hasanadverseeffectontheimageof Belarus amonginvestors. Sanctions forviolationsofthepricingprocedurecan leadtotheliquidationofaneconomicentity. consumers asgoodsandservicesarerarelydiscounted. up to50%ofcompanies’turnoverintotheshade. Administrativeregulationofpricesalsohurts Administrative regulationofpriceshasanadverseimpact ontheinterestsofstateasitdrives of companies. of pricesundulycomplicatesthepursuiteconomicactivities andnegativelyaffectsthedevelopment Four outoffivedirectorssmallandmediumsizedcompanies believethatadministrativeregulation set thepricesforgoodsthattheysellormanufacture. The principleoffreepricinghasalimitedapplicationinBelarusasabout60%companiescannot companies shouldbeintroduced. transfer tothissystemshouldbemadepossibleupondeclaration. signature ofacompanydirector. be removed. month graceperiodshouldbeenvisaged. 8 9 TAX ADMINISTRATION PRICING REGULATION perational ot E x e c u t i v S m a r y Recommendations

1. Direct (administrative) pricing regulation should be abolished for all goods with the exception of products made by natural monopolies. 2. Targeted support should be introduced for socially vulnerable groups of the population. 3. The number of state agencies empowered to control pricing should be limited. The twenty recommendations set forth herein are aimed at attaining shortterm goals of regulatory reform in Belarus and should produce results within one year (See Table 1).

Table 1. Steps which could improve business conditions within a year

It should be noted that many governments regard simplification of a business regulation system and reduction of administrative burden borne by SMEs as their preeminent objective. There exists extensive international experience in this field. The International Finance Corporation’s Office in Belarus is prepared to render assistance to the Belarusian Government to develop decisions aimed at creating a favourable business environment drawing upon international best practices.

11 12 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 employment forabout430,000people.Ifindividualentrepreneursandmediumsizedenterprises ubro uhette t9%ofthetotalnumberSMEs. number ofsuchentitiesat9 adopted between 20032004mighthaveforced individualentrepreneurstoeither registerasalegalentityorgo outofbusiness individual entrepreneurscouldhave potentiallyextendedtheirbusinessandbecomelegalentities. Ontheother,certainlegal 3 2 1 State SupportofSmallBusinessfor2005. businesses. ThenumberofSMEsin2004fallsshortthe35,000projectedbyConceptfor The lastfewyearshavewitnessedasteady,albeitslowincreaseinthenumberofregisteredsmall a 6%increaseinthenumberofsmallcompanieswhileindividualentrepreneursdeclinedby1%. 2005.2004sawjust small companiesand184,000individualentrepreneursinBelarusasof1January ofStatistics,therewere32,824 Belarusian Ministry growth. Accordingtodatafurnishedbythe slowpaceof recognised role,thissectorhasavery Despite itsunassailablyimportantandofficially into account,thisfigurereachesonemillionpeopleor25%oftheemployablepopulation. The SMEsectoremploysmostoftheablebodiedpopulationBelarus.Smallcompanies new jobsamelioratingunemploymentwhilebeingmoreadaptabletochangingmarketconditions. significant duetovariousobjectivereasons.Thissectorshapesthecompetitiveenvironmentandcreates The roleplayedbysmallandmediumsizedbusinessesinthedevelopmentofnationaleconomyis stability, itsexpansionrateinBelarusremainsslow Although theSMEsectorisacornerstoneofsocial as individualentrepreneurswhodonothavethestatusofalegalentity orlegalentitiesemployingthefollowingnumberofpe LawN685ХІІdated16thOctober1996,OntheStateSupportofSmall BusinessesintheRepublicofBelarusdefinessmallbusin Thedecliningnumberofindividual entrepreneurscanbeputdowntocertainobjectiveandsubjective factors.Ontheonehand, Thesurveycategorisescompanies withupto250peopleonthebooksasmediumsized.The 2005officialstatisticssetthe  othernonmanufacturingspheres –upto25people.  retailtradeandconsumerservices –upto50people;  constructionandwholesaletrade –upto50people; andtransport–upto100people;  industry Republic ofBelarus. ofStatisticsandAnalysisthe Source: Key PerformanceIndicatorsofSmallBusinessesinBelarus2004theMinistry Chart 1.Thenumberofsmallbusinessescontinuestogrow,albeitslowly is overlycomplexadministrativeprocedure. A keyfactorholdingbackqualitativeandquantitativegrowthoftheSMEsectorinBelarus Russia hasseven. also CISmemberstates.JustthreeSMEsexistper1,000residentsinBelarus,whereas In termsofSMEdevelopment,Belaruslagsbehindnotonlyindustrialisedcountries,but segment oftheBelarusianeconomyexpandedbyonly6%in2004. significant contribution,itsgrowthhasbeenunimpressiveoverthelastfewyears.This The SMEsectorinBelarusemploysabout25%oftheablebodiedpopulation.Despitethis Small andmediumsizedbusinessesplayanimportantroleinmaintainingsocialstability. AND MEDIUMSIZEDBUSINESS OVERVIEW OFTHESMALL SECTOR INBELARUS receipts andprofitability. The smallbusinesssectorleadsthewayintermsofbudget euyMnse fEooyA Tur Deputy MinisterofEconomyA. 1 aloneprovide 2 aretaken 3 ople: some esses acts . O v e r i w o f t h s m a l n d u z b c B The key economic indicators of the SME sector exceed nationwide averages. In 2004, industrial output by small businesses grew by 32%, while the nationwide average stood at 16%. The same is true for retail trade turnover, which grew by 32%, far surpassing the nationwide average of 12%. Belarus lags behind other countries in terms of SME development

Despite the steady growth registered by the SME sector, Belarus trails behind other CIS countries in terms of SME sector development. For example, the number of SMEs per 1,000 residents varies widely from 3 in Belarus to 6 in Russia and up to 15 in Tajikistan.

Chart 2. Belarus has the lowest number of SMEs per 1,000 residents in comparison with other CIS countries

Source: The Russian Agency for the Support of SMEs, the Statistical Agency of the Republic of Kazakhstan, the State Statistical Committee of the Republic of Uzbekistan, the State Statistical Committee of the Republic of Tajikistan and the Ministry of Statistics and Analysis of the Republic of Belarus.

Belarus comes bottom of the list in terms of other SME development indicators. The share of GDP generated by SMEs in Belarus stands at 9%, which is significantly lower than in Uzbekistan (36%) or Russia (12%) or in developed countries (France  50% and Sweden  54%).

Chart 3. Belarusian SMEs generate a much lower percentage of GDP than SMEs in other countries

Source: The Russian Agency for the Support of SMEs, the Statistical Agency of the Republic of Kazakhstan, the State Statistical Committee of the Republic of Uzbekistan, the State Statistical Committee of the Republic of Tajikistan and the Ministry of Statistics and Analysis of the Republic of Belarus s Complex administrative procedures hold back SME growth Reforms of SMErelated administrative procedures enjoy special emphasis internationally. It has been proven that administrative barriers hinder the creation of new companies and obstruct the operation of existing entities, which in turn hinders the development of the national economy. Surveys conducted in developed countries set the administrative burden per employee of a small or mediumsized company at an average of 3,500 or 600 euros per annum, respectively. In EU countries, the funds spent by SMEs on negotiating administrative procedures range from 2.2% to 4% of the GDP4. In view of the negative

4 OECD, 2001; Bug, 1999 13 14 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 between theState andthePrivateSectorProject jointly implementedbytheBelarusian GovernmentandUNDevelopment Programs. governing privateenterprise. reducing theiradministrativeburden.Differentstudies Belarus givesusaclearexampleofthenecessityshapingstatepolicytowardsentrepreneursby production costspresentedbyadministrativebarriers. outreformstoreduceornullifynon impact ofoverregulation,EUcountriesarecurrentlycarrying 5 6 on thebusinessclimateinBelarus organisational restrictionsandbarriersdirectlyorindirectlyhobbleSMEs;thisthenhasanegativeimpact economies. AnalysisofthecurrentsituationinBelarusrevealsthatnumerouslegal,administrativeand by Belarusiansmallandmediumsizedcompaniesisoneoftheheaviestamongcountrieswithtransition encountered by SMEs in their everyday activities. encountered bySMEsintheireveryday to reducetherestrictionshamperingSMEs.ThisIFCsurveyexploreshowsurmountbarriers practical steponthepartofstateagencies.To thisend,stateagenciesshouldcooperateextensively urgency ofreform.Privateenterprisesupportshouldceasetobeadeclarativepolicyandbecome The factthatBelarushastheworstSMEdevelopmentindicatorsspeaksvolumesinadvocacyof budget andviewsadministrativeproceduresasatooltoextractthismoney. administrative procedures.Thestateseemstoregardentrepreneursasasourceoffundsboostthe SMEs astheyentailsignificantcosts.ABelarusiancompanyannuallyspendsthousandsofdollarson safeguards andtheexcessivenumberofpermitsapprovalsrequiredaremajordisincentivesfor World BankReports, “CostofDoingBusiness”Surveys;PromotionPrivateEnterprise byMeansofFurtheringPartnership In2004sawtheadoptionofmore than1,000SMErelatedlegalactsand2,000amendmentswere introducedinthelegislation 6 . Thecomplexityandinconsistencyoflegislation,thelowlevel 5 suggestthattheadministrativeburdenborne R e g i s t r a o n REGISTRATION

Two thirds of SMEs undergoing registration in 2004 described it as complex. The whole process might take an average of three months. To register a small company, an entrepreneur is obliged to visit a minimum of 10 agencies and prepare 13 sets of documents. As many as 80% of SMEs regard registration costs, which average out at 746 USD, as onerous. Notary costs account for four fifths of registration expenses. Lengthy and expensive registration in Belarus discourages entrepreneurs from setting up new companies. The system of penalties from 35 to 1,700 USD, for untimely registration with some state agencies, is a further deterrent. In early 2005, the government adopted a number of measures aimed at reducing the duration and cost of registration and making it simpler.

Belarus has a permissive principle of registration1, which entails huge costs in time and money for startup entrepreneurs

In 2004, 66% of those willing to start a business found state registration of a legal entity or individual entrepreneur2 fairly complex. These included applicants who hired legal experts to perform the procedure.

Chart 1. Most entrepreneurs in 2004 regarded registration as complex

This is largely due to the large number of state Numerous problems  rooted in the complexity of agencies involved (at least 10). Applicants should registration, the abundance of reference provisions and the lack of a single procedure for registration bodies to follow  also prepare at least 13 sets of documents, need to be addressed. elongating the registration period3. A state official Belarus lacks a onestop shop registration and a single procedure for the application of the law. Half of the companies applying for registration in 2004 were asked to submit additional documents in the course of registration.

It takes a small company about three months (66 Recommendations are either always oral or veiled in a refusal. working days) to prepare the documents and Noone will lodge a complaint against the authorities in a undergo registration and postregistration region where he hopes to work. A focus group participant procedures. It should be noted that the hiring of outside consultants or lawyers does little to reduce the period of registration. In most cases, legal firms cannot carry out all the necessary registration procedures for their customers; founders of companies or individual entrepreneurs are expected to appear in person at many state agencies.4

1 The permissive principle of state registration means that an economic entity can operate only after it is registered by a state agency. 2 The registration process comprises the following three stages: 1) preparation of required documents (preregistration period); 2) submission of registration documents and securing of a registration certificate (registration per se); 3) registration with state agencies before operations begin (postregistration procedures). 3 See Appendix N 1The Procedure for the Registration of Economic Entities in Belarus, Appendix N 2 Behavioral Algorithm and the List of Documents Required to Start Work after the Receipt of a Registration Certificate. 4 For example, a company founder is expected to appear in person when (a) submitting foundation documents for notarisation, (b) presenting documents to the registration authority and (c) registering with the tax authority. 15 16 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 been provided byalegalfirm. companies setupbytwofounders. Thefigureshave registration costsincurred bylimitedliability consultants. Thetable1 (p. 17)breaksdownthe These expensesexclude fees chargedbyoutside individual entrepreneur102USDonregistration. 2004, alegalentityspent746USDandan costs asonerous.Thesurveyrevealedthat,in Two thirdsofrespondentsdescribedregistration costs Notary costsaccountforfour fifthsofallregistration specified. entrepreneur becomeregisteredwithinthetime lawyers aresometimesunabletohelpastartup are socomplexandinscrutablethatevenqualified documents andregistrationwithstateagencies This illustratesthatthepreparationofregistration agencies involvedandinthenumerousdocumentsrequired Chart 2.Mostregistrationproblemsarerootedinthelargenumberofstate entrepreneur isvirtuallyidentical Chart 3.Thenumberofworkingdaysneededtoregisteralegalentityoranindividual such controlsbutforeignersfindthis procedureshocking. Embattled Belarusianentrepreneurs havelearnedtoputupwith is notlaiddownbyanylegalact. effect, anadditionalstageofthe registrationprocesswhich up companyaresummonedtoa commission session.Itis,in founders, thedirectorandchief accountantofastart provisions ofstateregistrationandtaxationlegislation,the tothe commission tomakeregistrationdecisions.Contrary Many Minskdistricttaxauthoritieshavearegistration complex thanstateregistration. procedure intoaritual,whichissometimesevenmore Tax authoritieshave turnedapurelytechnicalregistration the officialinanyway. constitutional righttolegalrepresentationdidnotimpress mentioned herepleaseleave,”hetoldme.Referralstothe be submittedbycompanyfounders.“Alawyerisnot a provisionofDecreeN11,whichsaidthatdocumentsshould An officialwiththeMinskCityExecutiveCommitteeinvoked office ofaregistrationofficial.Ithashappenedtomeonce. A lawyercansometimesbebarredfromcomingintothe A lawyerandfocusgroupparticipant A focusgroupparticipant R e g i s t r a o n Apart from hefty registration costs, a startup entrepreneur might also have to bear stinging fines ranging from 35 to 1,700 USD for untimely registration with other state agencies.5

Table 1. Notary fees account for 80% of registration costs

Consequently, registration in Belarus is one of the most timeconsuming, complex and costly procedures within the CIS.

Chart 4. The period required to negotiate registration and postregistration procedures is at least three times as long as that in other CIS countries6

The state has already embarked on a process of registration simplification but a huge number of legal and technical issues have yet to be addressed

In early 2005, the Government adopted a host of measures to simplify state registration of economic entities: An action plan for the introduction of a onestop A cadastre agency in a regional capital has adopted the one shop registration principle was passed. Under stop shop principle rather too literally. Now only one official this principle, an applicant submits all accepts documents and huge queues are resulting. The registration documents to a state agency, officials are able to report, however, that they have fulfilled the presidential requirement ahead of schedule. which handles all subsequent registration and A focus group participant postregistration procedures for him. Amendments to Presidential Decree N 11, dated 16th March 1999, On the Streamlining of State Registration and Liquidation of Economic Entities were drawn up. These amendments envisage the introduction of the onestop shop principle; this will reduce the number of registration documents, rescind some reasons for declining registration, hold applicants liable for the accuracy of their data and state that registration authorities are no longer empowered to request such data. The Ministry of Justice was tasked with the preparation of methodological guidelines for state registration and state registration functions were devolved to legal directorates of regional executive committees. The latter step introduced some uniformity and rendered the procedures marginally less complex. The following measures7 should be implemented to further simplify registration procedures, remove administrative barriers and cut the amount of time and money spent by economic entities on state registration.

5 See Appendix N 3 Types and Sizes of Penalties for Late Registration with State Agencies. 6 IFC surveys conducted between 20042005. 7 Some of the recommendations listed below have been incorporated in a draft Presidential Decree. However, we have included the recommendations in their entirety as the document has yet to be passed. 17 18 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 h olwn mnmnssol emd oPeieta ereN11,dated16thMarch1999: The followingamendmentsshouldbemadetoPresidentialDecreeN 2. Forindividualentrepreneurs: 1. Forlegalentities: Recommendations 8 The following documents should be removed from the list of mandatory registrationdocuments: Thefollowingdocumentsshouldberemovedfromthelistofmandatory agency oracertificate issuedbyaplaceofemployment). the mostrecentplaceofemployment oracopyofthepensioner’scertificateauthenticatedby anappropriatesocialsecurity  Documentscontaininginformation aboutlabourrecords(acopyoftheregistrationbook, authenticatedbyasealfrom  Anapplicationofanestablished form; founder ofcommercialornonprofit entities.  Notarisedcopiesoffoundation documentsandanotarisedcopyconfirmingthestateregistration ofthelegalentityactingas  Aguaranteeletteroranyother documentconfirmingtherighttositecompanyatspecified location; social securityagencyoracertificateissuedbyanemployment agency; by asealfromthemostrecentplaceofemploymentorcopy ofthepensioner’scertificateauthenticatedbyanappropriate  Documentscontaininginformationaboutowners(founders)of a company:copyofthelabourregistrationbookauthenticated  Anapplicationfromanindividualactingasfounder; 3. Aregistrationonestopshopshouldbesetup. 2. Asilenceisconsentregistrationmethodshould beintroduced. 1. Adraftregistrationlawshouldbedevelopedand passed. 9. Apilotprojecttotestasilenceisconsentregistrationmethodshouldbelaunchedinoneofthe 8. Asilenceisconsentprincipleshouldbeemployedfortheregistrationofamendmentstofoundation 7. Adecisiontoregisteraneconomicentityshouldbeadoptedbyastateregistrationbodyrather 6. Theonestopshopprincipleshouldbeintroducedforregistration. 5. Applicantsshouldbeheldliablefortheaccuracyofdataprovidedandregistrationauthorities 4. ThefollowinggroundsfordecliningregistrationsetforthinItems40.3,40.4,and40.8ofthe 3. Theneedtoincludelinesofbusinessinfoundationdocumentsshouldbeabolished. 2. Requirementfornotarisationoffoundationdocumentsshouldberescinded. 1. Thelistofregistrationdocumentsshouldbereducedfrom9to5forlegalentitiesand3 regions. composition offounders). documents regardinganeconomicentity(changesinitslocation,managementroutinesand than byasessionofanexecutivecommittee’scollegialorgan. should notbeobligedtoverifyorrequestsuchdata. and thussuchaprohibitioncouldnegativelyimpactonoveralleconomicactivity. Thirdly, undercurrenteconomicconditions,manycompaniesfindthemselvesinsuchasituation for recoupingthesedebtsaresetforthinBelarusianlegislation(tax,labourandbankruptcylaws). by settingupanewcompanyorregisteringasanindividualentrepreneur.Secondly,measures apply tocompaniesundergoingreorganisation.Firstly,thisindividualmightresolvetheseproblems (founder orparticipant)ofacommercialentitywhichhassucharrears.Thisprovisiondoesnot payments tothestatebudgetortargetedoffbudgetfundsifanindividualisowner person seekingregistrationasanindividualentrepreneurhaswagearrearsorisoverdueinmaking If, asofthedatestateregistration,anowner(founderorparticipant)acommercialentity handed downbyacourtoflawalongwithsentence); conviction forpropertycrimesorviolationsofeconomicregulations(suchalimitationcanonlybe If anowner(founderorparticipant)ofacommercialnonprofitorganisationhasvalidcriminal competition); (suchapracticecouldfosterabuseandbeusedtolimit participation inthissubsidiary. an overdueloanorinterestpayments,ifnotallcreditorshavegiventheirconsenttohis hasfailed toabidebyhiscivillawliabilities,including If afounderofaneconomicentityorsubsidiary Regulation adoptedbyDecreeN11–shouldbeabolishedastheyarenotrelevant: for individualentrepreneurs 8 . Thelistshouldbeexhaustive. Stage 2 Stage 1 a L i c e n s g LICENSING

The Presidential Decree On Licensing of Certain Lines of Business1 and the facilitating legislation adopted by the Belarusian Government reduced the number of economic entities subject to licensing from 88% in 2003 to 73% in 2004. However, the list of licensed activities still remains lengthy and contains 49 types and 350 subtypes. 70% of applicants find licensing procedures complex. This is due to the excessive number of documents demanded, unclear requirements and lengthy processing periods. The average cost of a license fell from 260 USD to 213 USD in 2004. This is still almost twice as much as the official licensing fee (120 USD2 for any line of business). 53% of applicants found these costs onerous. Although the number of licensed lines of business fell in 2004, this could be cut further

The steps taken by the Government in 2004 brought some positive developments in the field of licensing. The number of lines of business requiring licensing was reduced and, as a result, the number of economic entities obliged to apply for licensing fell from 88% in 2003 to 73% in 2004. On average, the number of licenses per company fell from 3 in 2003 to 1.9. These positive developments flowed from the enactment of the Presidential Decree On Licensing of Certain Lines of Business3 which cut the number of licensed business activities to 49. The list of licensed lines of business could be further shortened; it currently includes business endeavours posing no threat to public health, the environment or national security. Specifically, retail trade licenses were most frequently sought by small and medium sized companies in 2004 (See Chart 1).

Chart 1. Retail trade licenses were the most frequently sought in 2004, % of economic entities taking out licenses in 2004

Licensing is not designed to ensure the safety of retail trade and public catering. This function is performed by certification, hygiene registration and regulation of goods and services. The experience of the Russian Federation and Ukraine proves that the absence of retail trade licenses does not adversely affect public and private interests. For example, in accordance with the Federal Law On Licensing Certain Lines of Business4 and the Ukrainian Law On Licensing Certain Economic Activities5,public catering is not subject to licensing and retail trade companies are only obliged to secure a license if they are dealing in weapons, military hardware, armaments and related components, ammunition, pyrotechnics, jewellery, medication, veterinary drugs and preparations, seeds, pesticides and agricultural chemicals, equipment for covert gathering of information, encryption systems or production of forgeryproof printed materials. 1 Presidential Decree N17, dated 14th July 2003, On Licensing of Certain Lines of Business. 2 Presidential Decree N17, dated 14th July 2003, On Licensing of Certain Lines of Business mandates that a license fee has two parts: a license issue fee of 90 euros and an application processing fee of 10 euros. 3 Presidential Decree N17, dated 14th July 2003, On Licensing of Certain Lines of Business. 4 Federal Law N 128, dated 8th August 2001, On Licensing Certain Lines of Business. 5 Law of Ukraine N 1775III, dated 1st June 2000, On Licensing Certain Economic Activities. 19 20 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 is obligedtosubmitthefollowingdocuments(runningmorethan To extendthe validityofalicense,companyinvolvedinpassengertransportationemploying30drivers identified askeyproblemsbyentrepreneurs(Chart3.) The excessivenumberofdocuments,lengthyprocessingperiodsandunclearrequirementswere complex (SeeChart2). More thantwothirdsofentrepreneurswhoobtainedlicensesin2004assessedthisprocedureas licensing proceduresdifficultfor70%ofapplicants processing periodsandunclearrequirementsmake The excessivenumberofdocuments,lengthy complex, %ofrespondents,whoobtainedlicenses Chart 2.Morethantwothirdsofentrepreneursregardedlicensingproceduresas problem, %ofrespondentswhosecuredlicenses Chart 3.Theexcessivenumberofdocumentsrequiredisthemostvexinglicensing employmentcontract.  contractforgratuitoususe ofvehicle  

certificate confirminggraduation fromdrivingcourses The followinginformation on drivers: List ofvehicles List ofdrivers Copies ofuniversitydiplomasheldbycompanymanagers Order appointingindividualsresponsibleforsafetyarrangements foreachlineofbusinesspursued Document fortachograph(onlylorries) Document forcashregister Technical passportandtechnicalinspectioncertificateforeachvehicle List ofvehicles Application Receipt confirmingpaymentofprocessingfee(10euro) Copy oftaxpayeridentificationnumber Copy ofregistrationcertificate Copy ofcompanycharter 350 pages) toalicensingbody: 350 pages) L i c e n s g Another problem complicating the licensing procedure is the unclear requirements imposed on a license seeker. For example, Item 9.1. of the Cabinet of Ministers’ Ordinance N 13506 mandates that an applicant wanting to obtain a retail trade license should submit ‘a list of trade outlets belonging to him in line with a property right or in accordance with any other statutory basis’. It is unclear which document might be regarded as confirmation of the entrepreneur’s legal right to operate a specific retail trade outlet. In practice, a licensing body may require an applicant to submit not only a lease contract but also a copy of the agreement between the premises owner and the lessee and copies of registration certificates for all buildings belonging to the property owner on this territory. This might extend the licensing process by up to 3 months. While the licensing process grinds on, the company is unable to operate and pay taxes into the state budget.

An example of how a retail trade license in Minsk can be obtained (supplied by a focus group participant)

Every so often, a licensing body can refuse to accept documents just because the copy of a company Each bureaucrat has his own approach. Every civil servant charter has not been bound properly (no legal accepting documents can find different faults to pick on. One civil servant can accept the documents, while the other might document provides for this) or is not in a folder (for decline to do so. There is no universal approach. better storage). As a result, the company has to Focus group participant waste at least one more day meeting all the formalities. Numerous documents and unclear requirements unduly lengthen the whole procedure. Processing periods increased from an average of 39 days in 2003 to 45 days in 2004. The longest processing period on record was in the Minsk Region (Chart 4.) It took longest for companies involved in the design and construction of buildings to obtain licenses (Chart 5.) The increase in duration of licensing procedures from 39 to 45 days can be ascribed to the inability of licensing organs to handle relicensing (substitution of old licensing forms with new ones) launched in

6 The Cabinet of Ministers’ Ordinance N 1350, dated 17th October 2003, On Approving the Regulation on Licensing Retail Trade (Including Trade in Alcoholic Beverages and Tobacco) and Public Catering. 21 22 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 of timeneededtosecurealicense. been incorporatedbyentrepreneursintheamount changes infoundationdocumentscouldalsohave Adopted bytheCabinet ofMinisters. of PresidentialDecreeN17,dated 14thJuly2003,andOntheIntroductionofAmendmentsModifications toCertainOrdinances obtain orexchangelicenses.Thismighthavedrawnoutprocessingperiods. 2004. Licensingbodieslackedthecapacitytodealwithlargenumbersofeconomicentitiesneeding 8 7 processing periods. in foundationdocumentsmayalsohavelengthened The needtoincludethenameoflicensedactivity TheCabinetofMinisters’Ordinance N1666,dated19thDecember2003,OnCertainMeasure to FacilitatetheImplementation Thisisexemplifiedbythefollowingchangesinlegislation: 1st November 2003 were supposed to expire after 30th April 2004 but were extended to 1st January 2005. 1st November2003weresupposed toexpireafter30thApril2004butwereextended1st January fire safetymeasures),theMinsk CityExecutiveCommittee,cityexecutivecommitteesanddistrict executivecommitteespriorto ofEmergencies(except forpermitstoexecute ofArchitectureandConstruction,theMinistry 3) PermitsissuedbytheMinistry 2005; was subsequentlyextendeduntil 1stJanuary individual entrepreneurs.1stMay 2004wasoriginallysetasadeadlineforindividualentrepreneurs tosecurealicense,buti 2) Thepresidentialdecreeonlicensingexpandedthelistoflicensed activitiestoincludetradeincitymarketscarriedoutb license formsby1stMarch2004andsubsequentlyApril 2004; N1666 andOrdinancesN3/43passedbytheMinistriesofJustice andEconomy)obligedlicenseholderstoexchangetheir 1) Thedocumentsadoptedtofacilitatetheexecutionofpresidential decreeonlicensing(CabinetofMinisters’Ordinance Chart 4.Durationoflicensingroceduresincreasedin2004,days obtaining licensesbrokendownbylineofbusiness Chart 5.Anaveragelicensetook45workingdaystosecure,numberof 8 Thetimeneededtoregister activity havetobenotarised.Allthistakestimeandmoney. appointing anindividualresponsiblefortheexecutionofalicensed Copies ofacharter,foundationdocumentsandanorder 7 A focusgroupparticipant y t L i c e n s g As many as 53% of applicants found licensing costs onerous

The average cost of a license fell from 260 USD in 2003 to 217 USD9 in 2004. The Minsk Region saw a 66% fall in licensing costs (Chart 6).

Chart 6. The average cost of a license fell in 2004, broken down by region in USD

Nevertheless, 53% of respondents believe overall licensing costs remained burdensome. Licenses dealing with industrial safety proved to be the most costly (342 USD), followed by design and construction of buildings and structures (250 USD) and healthcare (244 USD). This study defines the license costs as the sum of all expenses borne by a company or an individual entrepreneur while obtaining a license. Licensing costs comprise official payments (license and processing fees), additional official payments (fees charged by notaries, evaluators and certification bodies and payments for expert assessments set forth in applicable legislation), ‘voluntary’ payments to state bodies and services rendered by state organs (payments and services acquired to speed up the procedure) and unofficial payments (gifts and remunerations). 75% of respondents said that they had not resorted to unofficial payments while going through licensing procedures; 11% noted that they had made unofficial payments and a further 14% declined to answer. It may be assumed that almost a quarter of those subject to licensing in 2004 felt obliged to resort to unofficial payments10. This can be ascribed to the fact that licensing regulation and requirements imposed on the abovementioned activities are the most cumbersome. Another factor driving this trend is applicants’ eagerness to speed up licensing procedures; the We have been seeing less bribery and ‘voluntary’ payments lack of a license effectively paralyzes the company. over the last five years but they still exist. Those seeking the most timeconsuming licenses, A focus group participant namely those for design and construction of buildings and structures and provision of healthcare services (Chart 5) were most likely to make unofficial payments. (Chart 7). The simpler the licensing procedure is, the lower the licensing costs will be.

9 Lower license fees for the extension of valid licenses and issuance of new ones introduced by the Cabinet of Ministers’ Ordinance N1666 and Ordinances N3/43  passed by the Ministries of Justice and Economy  can be regarded as key factors contributing to the overall reduction in licensing costs. These documents halved the fees charged for the issuance or extension of some types of license as set forth in the presidential decree on licensing. 10 The following unofficial payments were made while obtaining the following licenses: 277 USD for a design and construction license; 139 USD for a healthcare license; 83 USD for a forwarding and transportation license and 50 USD for a fire safety license. 23 24 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Recommendations licenses (Chart8). outlicensedactivitiesaftersecuringtheir carrying 17% ofrespondentsranintoproblemswhile pursuing alicensedactivity Nearly afifthoflicenseesencountereddifficultieswhile after securingtheirlicenses,%ofrespondentswhoranintoproblems Chart 8.17%ofrespondentsranintoproblemswhilecarryingoutlicensedactivities making unofficialpaymentswhilesecuringalicensebrokendownbylineofbusiness Chart 7.Licenseapplicantshadtoresortunofficialpayments,%ofrespondents .Licensingrequirements shouldbelimitedtotheconfirmationofacompany’sabilitypursue 4. Companiesshouldnot be obligedtosubmitafullsetofdocumentsextendthevaliditytheir 3. Anexhaustivelistoflicensing documentsshouldbedeveloped. 2. Activitiesposingnothreattopublichealth,theenvironmentornationalsecurityshouldnotbesubject 1. manufactured goodsintheturnoverofatradecompany. licensed activity;thiswouldnullifysuchobligations assellingacertainproportionofBelarusian licenses. to licensing.(Forexample,retailtradeingoodspresentingnopotentialdanger). you mayloseyourlicense. license categorisesitasakioskwherealcoholcannotbesold, space of40squaremeters,whichisineffectastore,butthe requirements. Ifyousellvodkainaretailoutletwithfloor withdrawn forsellinggoodsnotnamedinthelicense easytoloseyourlicense.Forexample,itcanbe It isvery A focusgroupparticipant P e r m i t s PERMITS

Securing of permits1 is one of the most unwieldy regulatory procedures. Two thirds of respondents needing permits in 2004 described this process as either complex or exceedingly complex. The Belarusian permit system encompasses 90% of SMEs. On average, 5 permits are required for a company to begin operating. In 2004, 45% of respondents were obliged to secure an average of 6 different permits. It took an average of 2.5 months for a company to obtain a permit. A firm spent 1,400 USD on all its permits. Permit issuance can be haphazard due to unclear regulations, lack of coordination between state agencies and limited access to information. The following key problems have been flagged up by respondents: absence of a single information source (66%), excessive numbers of documents (66%) and the plethora of state agencies involved (61%). More than 50 state agencies are empowered to issue licenses and more than 200 legal acts regulate this area2. It is impossible to calculate the exact number of permits and applicable legal acts. It takes a Belarusian small business from six months to one and a half years to secure all the permits required for operation The imperfection of the permit system is primarily manifested in the fact that state agencies are entrusted with functions well exceeding the objectives of the permit system3. For example, to secure a fire safety or sanitaryepidemiological permit, an economic entity must abide by a huge number of norms and rules. However, compliance with all these requirements does not achieve the primary goal of averting danger. This practice also applies undue pressure on the state agencies involved, needlessly reduces I am paying an employee to queue up at the numerous permit their efficiency and makes it difficult for economic issuing bodies. A focus group participant entities to comply with all the rules. The Belarusian permit system encompasses 90% of SMEs. On average, 5 permits are required for a company to begin operating. It should be noted that no new company can be aware how many permits it might require. In 2004, 45% of respondents sought permits from various state agencies. The chart below shows the most prolific permit issuers among state agencies in 2004. Chart 1. Sanitaryepidemiological services and fire safety authorities lead the way in terms of permits issued

1 A permit is an authorisation issued by a state agency or a local governing body allowing an entrepreneur or a company to pursue certain actions or activities. Permits can take different forms, including a permit per se, an inscription, a stamp of approval, a report, an assessment, an evaluation, an expert report or an inspection act. In this chapter, by permits system, we mean all forms of state authorisation, except for registration, licensing and certification, which will be dealt with in separate chapters. 2 Only the legal acts included in the National Register of Legal Acts were taken into account. The calculations included only the four most prolific permit issuers, namely the fire safety authority, the health inspectorate, local governments and the labour inspectorate. 3 See Appendix N 5 Goals and Objectives of Permits. 25 26 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 legal acts are hardpressedtospecifythenumberofpermits, proceduresfortheirallocationandtheappropriate an extensiveremitintherealmofpermitissuance. However,evenspecialistswithlocalauthorities Local governancebodiesplayaspecialroleinthepermit systemasapplicablelegislationgrantsthem tax payers. production costs–allofwhicharepassedonto of unearnedprofits,forgonerevenuesandnon incurred byentrepreneursandthestateasaresult At thesametime,itishardtoassessindirectcosts permits, describedthesecostsashefty. Therefore, itishardlysurprisingthat90%ofpolledentrepreneurs,whohadtosecurethreeormore Infrastructure. This causesentrepreneurs numerousproblems(SeeChart3). Entrepreneurs soughtpermitsfromtheseagenciesforthefollowingpurposes: 6 5 4 agencies risks. To becomeinvolvedinsomelinesofbusiness,anentrepreneurmustdealwithabout20state forecast futureadministrativecostsorlimitthescope ofplanningandtherebycausesunnecessary of permitsneededforabusinesstooperate.Thismakes itvirtuallyimpossibleforaneconomicentityto absence ofadedicatedlegalactsettingforthanexhaustive listofpermits.Alsoabsentisasingleregister The numberofpermitsneededforeconomicactivities isvirtuallyimpossibletocalculateduethe sure whichandhowmanypermitsitmightrequire When venturingintobusiness,notasingleSMEcanbe virtually stifling.1,400USDisaheftysumandamountsto60%ofthepercapitaGDP As manyas46%ofrespondentsobtainingpermitsin2004ratedtheassociatedcostsonerousand average companyspent1,400USDonallpermits. It tookabouttwoandahalfmonthsforanaverageeconomicentitytoobtainpermitin2004.An SeeAppendixN 7PermitsIssuedbyLocalGovernment. 6ASchemeforSecuringaPermit forOpeningaCafйonRentedPremiseswithFullyOperatingEngineering SeeAppendixN ThepercapitaGDPinBelaruscurrently standsat2,327USD. longer thanamonth Chart 2.Theprocessofsecuringapermitwithjustonestateagencycouldtake To pursuesomelinesofbusiness. To userealestate;and To outmanufacturingactivities; carry To locateproductionfacilities; To siteretailtradeandconsumerservicescompanies; To startentrepreneurialactivities; 5 . Somestatebodiesareatalosswhenitcomesto explaining someprocedures. 6 . operational, theseexpensesshouldbecountedaslosses. on rentingthepremisesbut,ascompanywasnotyet state agencyaskedforalease.Thus,Ispentconsiderablesum connections reducedtheprocessingtimetoeightmonths.Every I havehadtodealwithabout20stateagencies.Mymoneyand A focusgroupparticipantinvolvedinthepublic catering andretailtrade 4 inBelarus. P e r m i t s Chart 3. Complexity and excessive paperwork are identified as key problems within the permit system

About 20% of respondents obliged to obtain permits in 2004 had to make unofficial payments to smooth the issuing procedure. Analysis of permitrelated problems reveals that they are primarily rooted in legislation. More than 50 state agencies are entrusted with issuing permits. Every so often, they can also develop their own permit issuance conditions and procedures. In addition, some state agencies allow the extension of a permit on the availability of socalled subpermits issued by other bodies. For example, the executive committee’s permit on the location of retail trade and public catering outlets is conditional on 10 subpermits (issued by more than 10 other state agencies). If a public catering outlet is constructed, the number of subpermits could reach 30. The review, systematisation and unification of legislation are the corner stones of regulatory reform

A comprehensive list of business permits is not set forth in law or in the numerous legal acts or documents defining technical standards relating to health and fire safety and construction rules and norms. There are an estimated 200 or more permits; simple arithmetic shows that, to obtain the average six permits needed by a small business, an entrepreneur will have to study no fewer than 24 legal acts and abide by the requirements they contain. Obtaining all these documents is no easy task. Legal experts estimate that about 20% of documents are not in the National Register of Legal Acts. As Permitissuing bodies are a state within a state. They devise many as 40% of polled entrepreneurs note that their own powers. they find it hard to locate information on permit A focus group participant related procedures and requirements. In addition, permitrelated legislation does not contain: An exhaustive list of documents needed to obtain a permit; Special conditions and goals of permits; Conditions for suspending or annulling permits; An exhaustive list of reasons to decline a permit; Processing periods and validity of permits; Procedures for setting permit issuance fees; and Procedures for appealing against refusals to grant permits7. Consequently, the absence of systematised and detailed permit issuance provisions makes it difficult, both for entrepreneurs and state agencies, to use this tool efficiently. Such a situation also leaves a great deal to the discretion of individual civil servants and negates a uniform permitrelated procedure.

7 See Appendix N 8 Overview of Legal Regulation of the Most Frequently Sought Permits. 27 28 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 issuance ofthesamepermit,andupdatedhealth,construction,fireothernorms. the reductionofnumberpermitsrequired,reducednumbersstateagenciesinvolvedin objectives: thedevelopmentandintroductionofsimpletransparentpermitissuanceprocedures, The implementationofpermitreformrecommendationsshouldmakeitpossibletoattainthefollowing Recommendations Table 1.Tasks andExpectedResultsofPermitSystemReform 6. Adraftlawshouldbedevelopedtoregulatecommonconditionsandprinciplesforthepermitsystem. 5. Priortolegislativereviews,aformulashouldbedevelopedgoverntheissuanceofpermitsbased 4. Questionablepermitsshouldbeannulled. 3. Adraftprogramofpermitsystemreformshouldbepreparedbythecommission. 2. Thecommissionshouldbeempoweredtoreviewlegislationregulatingbusinesspermitsand 1. Aninteragencycommission(council)onmodificationoflegislationrelatingtothepermitsystemin Remits ofstateagenciesandlocalauthoritiesinthe realms ofregulationandextensionbusiness. Uniform conditionsandproceduresforissuingpermits; Prohibition ofpermitsnotsetforthinlaw; Creation ofauniformregisterpermits; List ofpermitsandagenciesauthorisedtoissuethem; Criteria fortheimpositionofrestrictionsonbusinessactivitiesinshapepermits; This documentshouldsetforththefollowing: on applicablelegislation. establish adatabaseonallpermitsandpermitissuingagencies. servants, representativesofbusinessassociationsandindependentexperts. Belarus shouldbecreatedundertheauspicesofCabinetMinisters.Itcomprisecivil S e r t i f c a o n CERTIFICATION

As many as 70% of companies undergoing certification regard this procedure as complex due to the large number of required documents, lengthy processing periods and numerous stages. The most difficult is certification of domestically mass produced goods, imported equipment and quality control systems. At the same time, efforts being undertaken by the Government to streamline certification legislation have led to simplification of these procedures. In comparison with the previous year, certification costs in 2004 fell by 25% and its duration by about 15%. For example, the cost of a certificate for a batch of goods declined from an average of 214 USD in 2003 to 157 USD in 2004 and the processing time was reduced from 22 to 19 days.

Two thirds of SMEs obliged to secure certificates believe that numerous documents and multistage procedures make this process more complex

In 2004, mandatory certification applied to 32% of Belarusian SMEs. An average company was obliged to secure six certificates. The most common certificates in 2004 were for batches of goods and for Belarusian mass produced goods (Chart 1).

Chart 1.Those for batches of goods and for Belarusian mass produced goods were the certificates most frequently sought by small businesses in 2004, % of companies subject to certification

As many as 70% of companies acquiring certificates regard the certification procedure as complex (Chart 2) due to the large number of required documents, lengthy processing periods and numerous stages (Chart 3). The certification of mass produced goods of Belarusian manufacture, imported equipment and quality control systems was flagged up as the most difficult (Chart 4)1. To secure a certificate for mass produced goods of Belarusian manufacture, a company should submit the following documentation, along with an application: technical specification, drawings, design documentation and technical documents. It might take the company up to two months to prepare these documents. The applicable legislation does not specify an exhaustive list of documents to be submitted. Consequently, it is up to a certification body to determine the documents required for each certificate. Technical specification should be registered with the State Standardisation Committee within two months.

If slight changes are introduced to manufacturing A slight modification in the ratio of concentrates in a juice technology, the company is obliged to repeat the forces us to reapply for certification. It would make more certification procedure. sense to get the new recipe approved. We believe that this procedure has been made unjustifiably complex. One of the factors informing a negative assessment A focus group participant of certification procedures in 2004 could be the cancellation of the ordinance jointly issued by the Healthcare Ministry and the State Committee for

1 See Appendix 11 for details. 29 30 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 affected onlyindividualentrepreneurstradingatmarkets.Adocument simplified certificationprocedureforthisgroupofbusinesspeople.However,developmentnegatively resorted tounofficialpayments. To speedupthecertificationprocedure,18%ofrespondentsobliged tosecurecertificatesin2004 the abolitionofaforementionedordinancewasenactedin2005. State Standard Committee’s OrderN72,dated 28th April2005. NonFood GoodsSoldbyIndividual EntrepreneursThroughRetailOutletsatNonFoodMarkets toStandards,adoptedbythe Through RetailOutletsatNonFood MarketsandfollowupMethodologicalRecommendations onConfirmingtheConformityof the SaleofNonFoodGoodsbyIndividual EntrepreneursatMarketsandRetailOutletsN314/21, dated4thOctober1999. Entrepreneurs atMarketsandRetailOutlets Standardisation, MetrologyandCertification 3 2 TheStateStandardCommittee’s OrderN43,dated18thMarch2005,OnCertificationofGoods Sold byIndividualEntrepreneurs andtheStateCommitteeforStandardisation,Metrology andCertificationO OrdinancejointlyissuedbytheHealthcare Ministry to certification Chart 2.70%ofSMEsregardedcertificationascomplex,%respondentssubject difficulties Chart 4.Certificatesrelatedtomanufacturingarethemostdifficultsecurethese time, %oftherespondentssubjecttocertification Chart 3.Certificationrequiresagreatnumberofdocumentsanddeal On theSaleofNonFoodGoodsbyIndividual 2 on 9thDecember2004Thisdocumentenvisioneda 3 resolvingtheproblemscreatedby n S e r t i f c a o n Chart 5. SMEs made unofficial payments while going through certification, % of those required to obtain a certificate

Efforts to improve the legal framework of certification will lead to the simplification of this process

2004 saw a reduction in the cost and duration of certification in comparison with the previous year. For example, the cost of the most frequently sought certificate, namely, a certificate for a batch of goods, fell from 214 USD in 2003 to 157 USD in 2004. To obtain a better idea as to why certification has become less costly, one should examine the elements of this process (Appendix 9). The certification procedure can be broken down into two parts: Execution of certification by a state agency (consideration of an application, identification of a certification scheme, selection of samples and issuance and registration of a certificate); Testing of selected samples in authorised laboratories and analysis of manufacturing facilities by auditors. Certification costs fell as the amount of work necessary for this process was capped (See Appendix 10). Prior to this, the period of consideration for an application (and all relevant documentation) was limited to five days by legislation (Belarusian Technical Standard 5.1.04964). Once the cap was put in place, time limits were introduced for other types of certificationrelated work paid for by the applicant. As a result, certification became much less time consuming and costly. The average time needed to secure a certificate for a batch of goods went down from 22 to 19 days. This could be ascribed to a change in the criteria employed by certification agencies to analyse submitted documents. The Belarusian Technical Standard 5.1.0220045 says that certification bodies no longer need to verify whether the documents submitted with an application have been properly approved and registered by other state agencies. In addition, the document also reduces the number of analysis areas to be presented by an applicant to a certification body by excluding the following: а) referenced normative documents; б) standardised testing methods (Item 5.4. of the Belarusian Technical Standard 5.1.0496). These changes could also have shortened the time spent on certification.

4 State Standard of Belarus Procedure for the Certification of Goods. General Guidelines, adopted by the Belarusian Standard Authority’s Order N236, dated 31st December 1996 5 Technical Code of Established Practices National Conformity Confirmation System. Goods Certification. General Guidelines, adopted by the State Standard Committee N28, dated 28th June 2004 31 32 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Russian Government dated29April2002N287. in Technical LegalActsintheAreasofTechnical NormsandStandards. This partlyexplainswhythisprocedureisnotoftenusedinBelarus. entities tomakeuseoftheonestopshopprincipleforjustonestagethisproceduresampletesting. toconductcertificationtests.Theapplicablelegislationallows economic sign acontractwithlaboratory provision doesnotspecifyclearconditionsforusingthemethod;itonlysaysthatacertificationbodycan for certification(Item5.6.2.Technical Code ofEstablishedPractices5.1.022004).However,this Belarusian legislationalsoprovidesfortheapplicationofsomeelementsonestopshopmethod manufacturers orentities. enter intoforce,evidenceprovidedbythecertificateseekercanonlybeallowedincasesofforeign and horticulturalgoods.TheaforementionedLawmandatesthat,untilappropriatetechnicalregulations Technical LegalActsintheAreasofTechnical NormsandStandards The LawoftheRepublicBelarusOnAssessmentConformitywithRequirementsSetforthin 7 6 Recommendations: For thefirsttime,Lawlaiddownfollowingprinciplesforascertainingconformity: 2004, canberegardedasafirststeptowardssimplificationofcertification. of conformity.SuchalistintheRussianFederation To compareRussiaandBelarus,wecanviewlistsofgoodswhichbeauthenticatedbyadeclaration of conformity. should benotedthatonly7%ofthecompaniessubjecttocertificationin2004madeusedeclaration or selltotherequirementssetforthintechnicallegalactsbypresentingtheirownevidence.However,it The Lawalsomandatesthateconomicentitiescanauthenticatetheconformityofgoodstheymake ThelistwasadoptedbytheOrdinance oftheRussianGovernmentdated7July1999N766asamended bytheOrdinanceof 2004OntheAssessmentof Conformity totheRequirementsSetforth LawoftheRepublicBelarusN269, dated5thJanuary .Certificationshouldbefurthersimplifiedbyapplyinglesscomplexprocedurestoabroaderrangeof 3. Thelistofgoodswhichcanbecertifiedbymeansadeclarationconformityshouldexpanded. 2. Economicentitiesshouldbebetterinformedabouttheadvantagesofdeclarationconformity 1. stopshop methodshouldbeextendedtoallstagesofcertification. economic entities.Certificationofdomesticmanufacturingshouldalsobemadelessonerous.One certification. as asimplifiedformofmandatory confirming theconformityofgoodstostandardsandtechnicalrequirements. impermissibility oflimitingcompetitionintheperformanceservicesandtestingrelatedto standards; and minimisation oftimeandfundsspentbyapplicantsonconfirmingtheconformitygoodsto transparency andaccessibilityofrulesprocedures; 7 containsabout20varietiesoffoodaswellforestry 6 , whichwasenactedon20thJuly I n s p e c t i o INSPECTIONS

The realm of inspections saw the following positive changes in 2004: the number of inspected SMEs fell and inspections became less frequent (an average of 10 inspections per company annually). Their duration was also reduced. Despite these welcome developments, inspection statistics in Belarus are still one of the worst in the CIS. Two thirds of SMEs were inspected in 2004 by control agencies. Of these, 80% hosted inspections by fire safety authorities, 77% by a tax inspectorate, 67% by sanitary epidemiological services inspectors and 44% by the Social Security Fund. As many as 70% of companies found inspection procedures exceedingly complex. Among the problems identified were excessive remits (48%), sanctions out of line with the transgressions committed (40%) and the absence of comprehensive inspection procedures (37%). Inspections in Belarus are more fiscal than preventative in nature. Inspections of 61% of SMEs resulted in sanctions. Fines are by far the most frequently applied penalty – accounting for 96% of sanctions. Nearly a third of inspected respondents disagreed with control agencies’ actions yet only a quarter appealed to a court of law. However, more than half of these appeals were successful.

The scope, duration and frequency of inspections of Belarusian SMEs fell

In 2004, inspections changed positively in comparison with the previous year. The number of inspected SMEs fell from 90% in 2003 to 66% in 2004. The average duration and frequency of inspections per company also declined in 2004 (Chart 1).

Chart 1. The average duration of inspections hosted by small businesses in 2005 more than halved

Officials from state control agencies ascribe these developments to better coordination between the different bodies involved  councils on coordination of control activities have been established in regional and district capitals. Positive changes also stem from the fact that 96% of respondents keep inspection logbooks. This instils discipline in control officials and helps deter unnecessary inspections. Nevertheless, compared with counterparts in other countries, Belarusian entrepreneurs still endure more frequent and lengthy inspections. The experience of countries, which introduced more progressive control measures1, shows that a reduction in the number of inspections and their duration does not result in an increase in the number of violations or occupational accidents.

1 For a detailed description of progressive inspection methods see Appendix N 14 Review of Inspection Reforms in CIS, Western Europe and Canada. 33 34 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 inspections. (Informationprovided byfocusgroupparticipantswasusedtodevisetheschemes). how thesetwotypesofinspections areconductedbytaxandfiresafetyauthorities.Theseagencies mountthelargestnumberof legislation doesnotstipulatethe numberofunscheduledandotherinspections. operational and operational atthattime. for coordinationofcontrolactivities inspections canbeascribedtotheestablishmentofcouncils believe thatareductioninthenumberanddurationof As hasbeennotedabove,officialsofstatecontrolagencies only operationalissues. operational inspections financialperational and Despite differencesbetween 5 4 3 2 dealt withbothfinancialandoperationalissuessix Of alltheinspectionshostedbyanaveragecompany,four legislation. bodies,isnotstipulatedin including firesafetyandsanitary The numberofinspectionsmountedby‘technicalagencies’, such councilsrunsonlytofinancialoperationalinspections. than halfresultinfines rcdrsfrisetosaebte euae yapial eilto.(e pedxN12). procedures forinspectionsarebetter regulatedbyapplicablelegislation.(SeeAppendixN as firesafetyauthorities,healthinspectorsandenvironmental bodies). Theactivitiesofcontrolagenciesinthefirstgroup operational aspects(suchasthetaxinspectorate).Thesecondincludes thoseauthorisedtomountoperationalinspections(such Itisimpossibletobacktheseconclusions withfindingsfromtheprevioussurveyasinspections werenotdividedintofinanci 13setsforthschemeson Proceduresfortheexecutionof financialoperationalandoperationalinspectionsdiffer.Appendix N PresidentialDecreeN673limits thenumberofscheduledfinancialoperationalinspectionsto oneperannum.However,the Applicablelegislationdividescontrolagenciesintotwogroups.The firstcomprisesagenciesempoweredtoinspectfinanciala than businesspeopleinothercountries Chart 2.Belarusianentrepreneursenduremorefrequentandlongerinspections conducted Chart 3.Firesafetyandtaxauthoritiesleadthewayintermsofinspections 5 . However,theremitof 2 , more 4 with 3 I conducted bythefollowing7statebodies: In 2004,mostoperationalinspectionswere were carriedoutbythefollowing10statebodies: n 2004,mostfinancialoperationalinspections
















Consumer protectionagencies. ofTrade; and The Ministry Certification organs; Standardisation bodies; Environmental bodies; authorities; Sanitary Fire safetybodies; The CustomsCommittee. ofFinance;and The Ministry The NationalBank; Statistical bodies; Commercial banks; The Pricingregulationbodies; The StateControlCommittee; The InteriorMinistry; The SocialSecurityFund; The Tax inspectorate; and al nd I n s p e c t i o The survey demonstrated that, in about 50% of all cases, entrepreneurs were notified in advance of the inspection.

Table 1. Despite differences between financialoperational and operational inspections, more than half of them result in fines

Thus, operational inspections do not perform their key function, namely prevention of hazards to public health and life. Rather, they are a punitive tool. Such a high incidence of fines can be explained by the instability of taxation legislation and the imperfection of the legal framework for operational inspections (outmoded, contradictory and with convoluted rules) rather than by the unwillingness of entrepreneurs to abide by the requirements of state agencies. Two thirds of inspected SMEs described inspection procedures as complex

Chart 4. The most serious inspection problems flagged up by SMEs

The excessive power wielded by inspectors can be ascribed to a lack of clear apportioning of The subjectivity of inspectors stems from their lack of liability inspections between control agencies. As a result, A focus group participant pricing can be controlled by at least 10 state agencies and licensing can be policed by virtually any control body. The severity of penalties is sometimes out of line Some fiscal agencies adopt a formal approach to identifying violations committed by economic entities and resort to with the gravity of the offence and this is yet another overly harsh sanctions in relation to minor transgressions. problem identified by respondents. This drawback They do so to reach their targets for the number of crimes is most likely rooted in legislation rather than to be solved. Such indiscriminate sanctions push economic entities to the brink of bankruptcy. inspection procedures. The applicable legislation Deputy ProsecutorGeneral of Belarus allows for: Imposition of penalties too severe for the damage incurred; Levying of fines for violations of formal procedures which have not resulted in any damage to the state; Application of sanctions taking no account of the degree of guilt; and Significant bands within which fines can vary, allowing a subjective approach by control agencies. 35 36 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 system following recommendationsincorporateinternationalexperienceofimprovingtheSMEinspection extent, inothercountries.The These problemsarehardlylimitedtoBelarusandevident,avarying bodies oftensubsequentlyoverruledecisionstakenbyfieldinspectors. The factthatmorethanhalfofappealsaresuccessfulindicatesshortcomingsatalocallevel;superior Almost onethirdofrespondents(30%)wereillegallysanctionedbycontrolagencies. in sanctions.Finesaccountfor96%of Inspections inBelarusaremorefiscalthanpreventativenature.of61%SMEsresulted 8 7 6 Recommendations financialoperational butalsooperational inspections.TheCouncilcouldperformthefollowingfunctionsin relationtooperat Forexample,theremitofCouncilforCoordinationControl Activitiesshouldbeexpandedtoincludecoordinationofn SeApni 15Brief Analysisof theLawofRussianFederation andUzbekDecree. SeeAppendixN 14 ReviewofInspectionReformsinCIS,Western EuropeandCanada. SeeAppendixN 7. Alawlayingdownthebasisforcontrolactivitiesshould beadoptedtostreamlineinspectionprocedures. control agencies Chart 5.MorethanhalfofSMEshadsuccessfulappealsagainstsuchsanctionsby 6. Theimplementationofbothfinancialoperational andoperationalinspections 5. Aprocedureforholdingstateagenciesliabledamagecausedbytheirillegalactionsshouldbe 4. Alegalmechanismensuringthatpenaltiesaccuratelyreflecttheseriousnessoftransgressions 3. Thefollowingextrajudicialpowersofcontrolagenciesshouldbecurbed:expropriationproperty, 2. Overlappingfunctionsofcontrolagenciesshouldberescinded. 1. Inspectionsshouldbecarriedoutinlinewithriskassessments;thisallowscontrolagenciesto  Coordinateinformationgatheringanddataexchange betweencontrolagencieswhileestablishingasingledatabase. Organise complexinspections;and   Developmeasurestopersuadeeconomic entitiestoabidebyofficialregulations; on theriskmanagementprinciple andintroduceinspectionchecklists; Prepare proposalstostandardiseinspectiondocumentsandprocedures, coordinatetransitiontoaninspectionregimebased  Police theimplementationoflegal actsregulatingtheactivitiesofallcontrolagencies; into account. Experience accumulatedintheRussianFederation,Uzbekistan andothercountriesshouldbetaken coordinated. introduced. and thedegreeofguiltshouldbeputinplace. suspension andclosureofcompaniesimpositionfines. either onhighriskareasoreconomicentitieslikelytoviolatelegislation. better utilisetheirresourcesandmoreefficientlyattainobjectives.Inspectionsshouldbefocused 6 . 8 7 shouldbebetter ional inspections: ot only T a x d m i n s t r o TAX ADMINISTRATION

Three quarters of polled companies regard the current system of calculation and payment of taxes as complicated. This perception by company directors is being fed by the instability and complexity of tax legislation. For example, 24 legal acts governing VAT and 13 on profit taxes were adopted in Belarus in 2004. Complex tax legislation and inaccessibility of clarification (noted by 56% of respondents) make the existing paperwork a burden; this raises nonproduction costs for companies. An average firm is obliged to file 12 tax reports and one form for tax exemptions monthly. The resulting monthly losses of the Belarusian SME sector could exceed 3.5 million USD. Staffing and turnover requirements and the application procedure make the simplified taxation system very unpopular: only 4% of SMEs in Belarus used this system in 2004. Almost two thirds of SME directors said that the sanctions imposed for tax violations are disproportionately severe.

Three quarters of polled SME directors rate the current tax administration system as complex – due to the instability and complexity of tax legislation

The calculation and payment of taxes are a primary link between the state and businesses. A comprehensive tax system is vital to enable taxpayers to conscientiously honour their tax obligations. On the contrary, a convoluted system breeds mistakes and can make companies migrate into a shadow economy. The World Bank’s 2005 Doing Business Survey set the volume of grey economy in Belarus at 48.1% of gross national income or 7.6 billion USD.1

Chart 1. Three quarters of polled SME directors rated the current tax administration system as complex, % of respondents

Belarus currently uses the following three tax administration systems: a usual system, a simplified taxation system for SMEs and a flat tax for individual entrepreneurs. Under the usual system, SMEs pay an average of 12 taxes and duties. Belarus has about 40 national and local taxes and duties. The survey revealed that 74% of SME directors found the system for calculating and paying taxes in Belarus to be complex. (Chart 1)2. The complexity, inconsistency and instability of tax legislation were flagged as the main drawbacks of the existing tax administration system (Chart 2).

The complexity of tax legislation is exemplified by Each tax inspectorate has its own rules. Some simplify the numerous acts governing the same economic procedures while others make them more complex and relations, inconsistent legal acts, numerous pieces intractable. It gives rise to a great deal of problems as one explanation says of facilitating legislation, reference provisions and one thing and a totally different instruction is set forth in the other. a mismatch between lower and higher level legal When you send a query to a local tax office, all you get is a acts. This results in a situation where even tax formal reply recommending you to look up this or that legal authorities interpret the same provision in different act. It seems that they are only dimly aware of how to apply these regulations. ways. Focus group findings reveal that, every so Focus group participants often, companies registered in different regions

1 http://www.doingbusiness.org 2 See Appendix 16 for details. 37 38 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 passed in2004. 2002 and2in2004.Asmanyas24documentsregulatingVAT and13actsgoverningprofittaxwere From 1991to2004,theVAT Lawsaw23amendmentsandmodifications,including3in2000, NewsDoc.asp) were preparedinhousewhilethe restweredrawnupincooperationwithotherstateagencies’. (http://www.bpc.by/Search/ of theremaininggoodsasmarketing costs. fiscalmonth,transportationcostsandinterest paymentsshouldbeincludedinthec instruction saysthat,attheend ofevery 2004, should beused.The OrdinanceN19,dated31st January income andprofittaxes,adopted bytheTaxation Ministry’s and othercosts.TheTaxation however,insiststhatitsinstructionontheprocedurefor thecalculationandpayment Ministry, mandates thatthevalueofacquired propertyshouldbeincreasedbytheamountofinterestpayments aswelltransportation ofFinance recommendsusingtheprovisionsofAccountingandBookkeepingLawtocalculategrossrevenue.The Ministry calculation offinancialindicators,whichreflecttheperformance of acompanyandaffectthecalculationtaxes.Forexampl the same issue of tax calculation and payment in a contradictory way. the sameissueoftaxcalculationandpaymentinacontradictory believe notonetaxrelatedlegalactcanbeinterpretedunequivocally.Manyofthesedocumentstreat Inconstancy oftaxationlegislationisyetanotherproblemidentifiedbyentrepreneurs.Mostaccountants calculating andpayingtaxes. send thesamequeriestotheirtaxauthoritiesandgetdifferentexplanationsonproceduresfor 4 3 company: 850,000Belarusianroubles(400USD) overtime annually.Thiscanbeexpensiveforthe house accountantsclockupatleastfivedaysof should employanaverageoftwoaccountants.In To handle the calculationandpaymentoftaxes,asmallbusinesswithupto50peopleonitsbooks file taxdocumentsonceamonthonlyforVAT, whilepaperworkforothertaxesissubmittedannually. threemonths.InSweden,companies Companies inRussiaareexpectedtosubmittaxreturnsonceevery monthly reportsonitstaxexemptions. Inaddition,acompanyisexpectedtosubmit 17). about 12taxreportsonamonthlybasis(AppendixN taxes (forexample,realestatetax).Consequently,eachsmallormediumsizedcompanyhastolodge Companies operatinginBelarusareobligedtofiletaxesmonthly.Quarterlyfilingsallowedforsome manufacturing costsofcompanies Existing paperworkconsiderablyincreasesthenon and paymentoftaxes The instabilityoftaxlegislationcanbeseeninthehugenumberlegalactsregulatingcalculation TheTaxation developedmorethan200legalacts.Ofthese,about150documents Minister saidthat‘In2004alone,theministry Onesuchcontentiousissue,variouslyinterpretedbytheMinistries ofFinanceandTaxation in2004,wastheprocedurefor encountered thesedifficulties problems oftaxadministrationforSMEsinBelarus,%respondentswho Chart 2.Thecomplexityandinstabilityoftaxlegislationwereidentifiedasthemain 4 . Forexample,profittaxisgovernedby126actsandVAT by165documents. everything right! everything todo Sometimes wespendnightsintheofficetrying Chief accountantandafocusgroupparticipant 3 e, the ost of T a x d m i n s t r o (an average monthly salary for an accountant) * 0.25 (monthly overtime pay) = 100 USD (additional costs per accountant). Monthly costs incurred by the SME sector might exceed 3.5 million USD. Requirements for the application of the simplified taxation system make its use increasingly rare The simplified taxation system envisages a single tax equalling 10% of gross revenue. To make a switch to the simplified system, a company should employ up to 15 people and have quarterly revenues of up to 60,000 USD. The flat tax is payable by individual entrepreneurs (without the status of legal entities) pursuing activities set forth in applicable legislation and at rates stipulated by local authorities. The Law of the Republic of Belarus On the Simplified Taxation System for Small Businesses5 says that small companies can switch to the simplified taxation system. This regards a company’s gross revenue as taxable; tax equals 10% of gross revenue. Companies using this system are subject to excise duties, profit tax (for companies), customs duties, environmental tax (for exceeding the limits placed on the use of natural resources and the release of pollutants), stamp duties, licensing and registration fees, mandatory state and social insurance deductions and a vehicle acquisition tax. To transfer to the simplified system, a company must submit an application to a local tax authority. The right to apply the simplified system is documented by a patent. However, the survey findings reveal that the simplified taxation system is not popular among SMEs. A mere 4% of companies (excluding individual entrepreneurs) said that they were using this system. This trend can be explained by the conditions governing the use of this system (Chart 3).

Chart 3. The simplified taxation system is not very popular with SMEs, % of respondents giving reasons for not using the system

In 2004, 37% of Ukrainian small companies employing up to 50 people and with revenues of up to 1 million hryvnyas a year (200,000 USD) paid taxes using a simplified taxation system. The liability for loosing the patent, the procedure for its renewal and the impossibility of reapplying for the simplified system within the calendar year after a transfer back to the normal system are factors that deter entrepreneurs. The loss of a patent is punishable by a fine set by a regional council of deputies or the Minsk City Council of Deputies or a state agency authorised by the council. Focus group findings reveal that the simplified taxation system is uneconomic. This is largely due to the fact that, under the usual system, a tax burden directly borne by a company may not exceed 3 or 5% of gross revenue and the rest is passed on to the consumer. The simplified taxation system envisages a tax load which is twice as high. Two thirds of SME directors said that the sanctions imposed for tax violations are disproportionately severe The instability and complexity of tax legislation leads to numerous violations by companies. In 2004, 70% of legal entities and 60% of individual entrepreneurs were found to have committed such violations. This was indirectly confirmed by the Belarusian Taxation Minister, who said that the consistently high level of violations can be ascribed to the fact that taxpayers are ignorant of the legal framework6. It is indeed difficult to keep track of the everchanging legislation.

5 The Law of the Republic of Belarus of 31st December 1997, On the Simplified Taxation System for Small Businesses. 6 http://www.bpc.by/Search/NewsDoc.asp 39 40 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Recommendations suffered anydamage. are leviedregardlessofwhetherthestatehas mechanisms foroffendingcompanies.Sanctions payment oftaxesalmostneverusepreventive agencies verifyingthecalculationand Expert groupmembersbelievethatcontrol 18. for taxviolationsaresetforthinAppendixN As manyas64%ofSMEssaidthatsanctionsleviedfortaxviolationsareexcessivelysevere.Penalties State ControlCommitteeinspected36%ofrespondentstoverifytheircalculationandpaymenttaxes. As manyas77%ofrespondentssaidthattheyhadbeeninspectedbytaxauthorities.Inaddition,the .Penaltiesforviolatingtaxlegislationshouldbereducedandpreventivemeasuresoffending 6. Thestaffandrevenuethresholdsforusingthesimplifiedtaxationsystemshouldberaised 5. Tax filingdatabasesshouldbesetupandtaxfilingsabletosignedwiththeelectronic 4. Tax statementsshouldonlybefiledquarterly. 3. Contradictionsintaxrelatedlegalacts,adoptedbytheMinistriesofFinance andTaxation, should 2. Amendmentstothetaxlegislationshouldbeenactedatstartofnewfiscalyear.Alternatively, 1. companies shouldbeintroduced. transfer tothissystemshouldbemadepossibleupondeclaration. signature ofacompanydirector. be removed. a 6monthgraceperiodshouldbeenvisaged. and dissuadethemfromlookingforloopholes. attractive. We shouldmakeitprofitableforpeopletopaytaxes tomakeanyshadydealingsless easy touseandshouldtry schemes arecurrentlyinuse.Thetaxationsystemshouldbe system isoverlybureaucraticandcomplextaxpayment I viewthesimplificationoftaxationsystemasapriority.The his 2005stateofthenationaddress: stressed theimportanceofsimplifyingtaxationsystemin It shouldbenotedthatthePresidentofRepublicBelarus P r i c n g R e u l a t o PRICING REGULATION

The principle of free pricing has a limited application in Belarus as over 60% of companies cannot freely set the prices for the goods that they sell or manufacture. Four out of five directors of small and mediumsized companies believe that administrative regulation of prices unduly complicates the pursuit of economic activities and negatively affects the development of companies. Administrative regulation of prices has an adverse impact on the interests of the state as it drives up to 50% of companies’ turnover into the shade. Administrative regulation of prices also hurts consumers as goods and services are rarely discounted. Sanctions for violations of the pricing procedure can lead to the liquidation of an economic entity. This, in turn, has an adverse effect on the image of Belarus among investors.

Prices of most goods and services sold in Belarus are regulated by the state

Almost all goods and services sold or produced in Belarus are subject to state price regulation to some extent. 60% of directors of small and mediumsized companies and 31% of individual entrepreneurs say that the prices of their goods and services are regulated by the state. This indicates that the free pricing principle, set forth in the Civil Code of Belarus, is being severely constrained. Paragraph 1 of Section 1 of Article 394 of the Civil Code of the Republic of Belarus states that ‘settlements under contracts shall be made at prices agreed upon by parties in accordance with applicable legislation’. At the same time, Paragraph 2 of Section 1 of Article 394 of the Civil Code of the Republic of Belarus mandates ‘in cases set forth in applicable legislation, prices (tariffs) may be set or regulated by authorised state agencies’. In line with Article 6 of the Law of the Republic of Belarus On Pricing1, free pricing is applied to all goods and services in Belarus with the exception of cases outlined in applicable legislation. Regulated prices (tariffs) are imposed on goods (services) manufactured by monopolists and certain socially sensitive goods (services) which are stipulated by the president or by the Cabinet of Ministers if commissioned by the President. Pricing regulation is applied to goods (services) manufactured in Belarus for the domestic market. In addition, 59% of respondents say that 100% of the goods manufactured or sold by their companies are subject to pricing regulation (Chart 1).

Chart 1. Most goods sold or manufactured in Belarus are subject to state pricing regulation, % of respondents broken down by sector

1 The Law of the Republic of Belarus N 255, dated 10th May 1999 On Pricing. 41 42 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 2004 isanexampleofthistendency(Chart2). price growth Pricing regulationisaninefficienttoolforcontaining that thisismostcommoninconstruction,tradeandpubliccatering(Chart1). Almost allsectorsoftheeconomyaresubjecttopricingregulation.Thesurveyfindingsdemonstrate at all. regulation hasremainedunchanged.Thisindicatesthatthestatepricingpolicyin2004sawnochange of respondentshadtheirpricesregulated.Since2003,thepercentagecompaniesaffectedbypricing The InternationalFinanceCorporation’s2003businessenvironmentsurveydemonstratedthat60% it candeclineregistrationofthecompanyandpricerisewillbeconsideredillegal. price witharegionalpricingregulationauthority.Ifthisbodyconcludesthattheincreaseisunjustified, monthly projectedinflationrate.Ifthepriceriseexceedsthis,manufacturershouldregisterthis gatepriceswithintheindexoffluctuationssetby CabinetofMinisters.Thisindexreflectsthe factory products arenotsubjecttopricingregulationbytheaforementionedmeans,haverightincrease price caps,markupceilings,rateofreturnceilingsanddeclarations.Manufacturers,whose The followingfivepricingregulationmechanismsarecurrentlybeingemployedinBelarus:fixedprices, 4 3 2 inflation andnonmanufacturingoverheadsstemming fromadditionalpaperwork(Chart3). limits theabilityofcompaniestofinanceinvestment projectsindependently.Companiesarealsohurtby difficult forthemtooperate.Thisisbecausepricingregulationimpedesaccumulationofcapitalandthus directors ofsmallandmediumsizedcompaniessaythatadministrativepricingregulationmakesitmore Pricing regulationexertsanegativeinfluenceoneconomicentities’development.Asmanyas79%of companies Pricing regulationnegativelyaffectstheactivitiesof have beenfallingforthelastthreeyears. Statistics, pricesoffoodandnonfoodproductsfeeschargedforservicesarerisingwhilerealincomes of regulation ishardlyaneffectivetoolforcontainingprices.AccordingtotheBelarusianMinistry thrustofthestatepricingpolicyistopreventunjustifiedpricerises.However, The primary Belarus in Figures. Statistical Reference Book. Ministry ofStatisticsandAnalysis,Minsk –2004,pp.80,81,13. BelarusinFigures. StatisticalReferenceBook.Ministry BusinessEnvironmentinBelarus, InternationalFinanceCorporation,2004,p.41 PresidentialDecreeN285,dated 19thMay1999,OnCertainMeasurestoStabilisePrices(Tariffs) intheRepublicofBelarus. prices, inUSDpersquaremeter Chart 2.Administrativepricingregulationcannotcontainthegrowthofhousing respondents subjecttopricingregulation Chart 3.Whypricingregulationmakesitdifficult forcompaniestooperate,%of 3 4 ThehugeriseinhousingpricesMinskbetween2002and 2 P r i c n g R e u l a t o Any company needs funds to grow. As there is almost no securities market in Belarus and companies have limited access to affordable long term funding, Belarusian enterprises, especially SMEs, have to rely on their own resources. Retained profits are one of the key sources of investment funds for SMEs. If a company is limited in its ability to accumulate capital, it becomes virtually impossible for it to If pricing conditions were changed, many small companies launch new products, master new technology and could be transformed into promising large ventures. A focus group participant create new jobs. Applicable legislation obliges companies to justify factory gate prices and submit to state agencies economic calculations breaking down costs incurred. These calculations are presented in hard copy and are signed by a company officer responsible for pricing. Consequently, administrative pricing regulation significantly increases indirect costs by obliging companies to prepare calculations and constantly review prices. For example, the Healthcare Ministry’s Ordinance N51, dated 22nd December 2003, On the Adoption of the Instruction on the Procedure for Setting and Applying Tariffs for Paid Healthcare Services mandates that ‘tariffs charged for healthcare services shall be justified by economic calculations and the following documents: Calculation of costs incurred during the provision of each service; Norms of expenditure of primary and secondary materials adopted in line with the established procedure; Amount of time spent on each service in accordance with the established procedure; Description of work performed to render each service on the price list; and Certificate regarding the size of overheads. If tariffs are reviewed, legal entities and individual entrepreneurs are obliged to submit information on the new tariffs along with the documents and calculations mentioned above for the previous Highlypaid employees have to deal with these issues. Instead periods and all services to the Healthcare of growing, we are obliged to develop settlement schemes Ministry. The new tariffs can be introduced only for each transaction to avoid possible pitfalls. We are having after the Healthcare Ministry grants a permit, to deal with these minor issues and risk sanctions as we don’t want to lose our customers. which should be issued within 10 days of the receipt A focus group participant of documents. Pricing regulation negatively affects consumers

Pricing regulation is not in the interests of The discounts we can offer to a customer range from 0% to consumers as it makes discounting exceedingly 30% depending on the goods. If you stock 20,000 items it is difficult and thus deprives consumers of the ability impossible to comply with all regulations. We should always to buy goods at lower prices. Discounting, which is have discounts approved! How can this be done? A focus group participant a universally used tool to attract buyers and speed up capital turnover, is rarely applied in Belarus. Discounts allow vulnerable segments of the population to buy goods at significantly lower prices Will price liberalisation result in price rises? Competition in and make top quality goods affordable for all. In the our sector is cutthroat. I think that prices should be lowered. I can decide for myself which goods need to be discounted or absence of pricing controls, the same goods can made more expensive. We plan our activities one year ahead. be sold with a mark up of 500% or at a discount to Regardless of legislation, the company reacts to customers, accelerate capital turnover. Premium goods can market conditions and competitors. We are not doing this thereby be bought by both the wealthy and those to abide by official instructions. Our policy is shaped by demand. No matter what conditions are, we have to find a on medium incomes. The only restriction placed on scheme which will allow us to work. However, it is exceedingly purchasing ability is the time of the purchase  costly. either when the goods first appear on the market We should sell both expensive and cheap goods to cover the or later. Pricing regulation makes this impossible. whole market. We are driven by incomes and demand. Prices in our sector won’t rise, but state revenues will. The Economy Ministry’s Ordinance N433, dated We are trying to save money on staffing and paper as well 22nd April 1999, Regulation on the Procedure for as cut other costs. We have to prepare a pile of documents. If we can manage to cut overheads, we can then lower prices. 5 Setting and Applying Prices and Tariffs governs A focus group participant the procedure for offering discounts in Belarus.

5 The Economy Ministry’s Ordinance N433, dated 22nd April 1999, Regulation on the Procedure for Setting and Applying Prices and Tariffs. 43 44 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 2004 (Chart5). As manyas10controlagencieswereauthorisedtopolicetheimplementationofpricingregulationsin Setting andApplyingPricesTariffs OrdinanceN433,dated22nd April1999,RegulationontheProcedurefor and theEconomyMinistry’s and Tariffs. of theGrossNationalIncomeor7.6billionUSD. the shadoweconomyinBelarus2003at48.1% conducted bytheWorld Bank,setthevolumeof for thestate.The2005DoingBusinessSurvey, into ashadoweconomyresultinginlossoftaxes higher profittax.Secondly,acompanycouldmove for goods.Higherprofitsthenmaterialiseinto aware ofcustomers’readinesstopayhigherprices 2003 consolidatedbudget. amount ofprofittaxespaidintothebudget.Incomeandgenerated11%revenuein Administrative pricingregulationalsonegativelyimpactsthestate.Firstly,profitabilitycapsreduce Pricing regulationisdetrimentaltothestate what theyarewillingtopay. amount ofcompaniesofferingsimilargoodswillbe.Competitioncontainpricesasbuyersdecide is,thelarger that thisisnotthecase.Pricesaregovernedbysupply.Theeasiermarketentry Would theabolitionofsuchregulationtriggeranunjustifiedriseinprices?Polledcompany directorssay procedure shallstipulatethesizeofdiscountsandconditionstheiroffering”. documentmandatesthat“economicentitiesshalldevelopaprocedureforofferingdiscounts.The The 9 8 7 6 amendments introducedinthesedocuments(PresidentialDecreeN285 (for example,theprocedureforincludingexpensesinunitcostsisgovernedby63legalacts)andfrequent The needforinformationcanbeascribedtoalargenumberoflegalactsdealingwithpricingregulation receiving informationonpricingregulationsfromstateagencies(Chart4). More thanhalfofrespondentssubjecttopricingregulationnotedthattheyhadencountereddifficultyin companies Pricing regulationcreatesadditionaldifficultiesfor The Economy Ministry’s OrdinanceN433,dated 22nd April1999,RegulationontheProcedureforSettingand Applying Prices TheEconomyMinistry’s http://www.doingbusiness.org. Presidential DecreeN285,dated 19thMay1999. Belarus. StatisticalYearbook. Minsk,2004,p.496. were inspectedbystateagencies inspections, %ofrespondentswhosegoods aresubjecttopricingcontrolsandwho Chart 5.Thefollowingfouragencieshavemounted thelargestnumberofpricing % oftherespondentssubjecttopricingregulation agencies in2004 Chart 4.Howdifficultitwastoobtaininformationonpricingregulationfromstate 6 Thisisindicativeofhowsignificantthesetaxesare.Companiesareacutely 9 –hasbeenamendedon18occasions). 7 confident thatiftheylimitsomething,priceswillnotgrow. rules theyhavewritten,aresadlymistaken.They If bureaucratsthinkthatbusinessoperatesinlinewiththe work honestly! taken outoflegalcirculation.We wouldliketoavoidthisand while goodsarestillsoldatmarketprices.Moneyisbeing Companies arebeingforcedtodobusinessoffthebooks, 8 hasbeenamended10times Focus groupparticipants M e t h o d l g y The survey revealed that the following organs performed pricing inspections in 2004: The State Control Committee The Taxation Ministry The Ministry of Economy’s pricing control bodies The Ministry of Finance The Labour Ministry’s Social Security Fund The Ministry of Statistics The State Customs Committee The National Bank Commercial banks The Interior Ministry In certain cases, compliance with pricing regulations was inspected by the Ministry of Finance, the Labour Ministry’s Social Security Fund, the Ministry of Statistics, the State Customs Committee and the National Bank. Of the companies hosting unscheduled pricing inspections, 63% reported not having been informed beforehand on the start or the reason for the inspection. Violations of pricing procedures attract fairly steep penalties: confiscation of excess earnings plus a fine equal to this amount (in the Russian Federation, just excess earnings are confiscated). A repeat violation is punishable by confiscation of excess earnings generated as a result of illegally high prices or the funds not received by the state budget as a result of the price being set lower than the level stipulated by pricing control state agencies and by a fine of twice the amount of these funds. A repeat violation can Excessive penalties have a horrible effect on companies. They drive firms to the brink of bankruptcy. If a wellknown be considered grounds for the liquidation of a legal company closes down, not a single investor will come to this entity (or termination of activities by an individual country. The investor we work with studied the situation for entrepreneur) by a registration authority in five years before committing himself. A focus group participant compliance with applicable legislation.

Administrative pricing regulation and steep An investor cannot make sense of the situation. Firms in his sanctions for violations have an adverse effect on country work with competitors and customers rather than the image of Belarus as an investment destination. dealing with paperwork all day. Upstanding investors are unwilling to come to Belarus. Only those who do not do things Consequently, the pricing control system adversely above board come here. affects everyone working in Belarus. A focus group participant Recommendations

1. Direct (administrative) pricing regulation should be abolished for all goods with the exception of products made by natural monopolies. 2. Targeted support should be introduced for socially vulnerable groups of the population. 3. The number of state agencies empowered to control pricing should be limited.

45 46 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 in thesurveyedsegments ofthenationaleconomyandbasedinpolledregions isreflectiveofthe by theirsize,namelysmall andmediumsized.Theratioofsmalltomediumsized companiesoperating respondents, isaquotabased modelofthepopulationandincludesgroups companiesbrokendown The populationcomprises amastersampleandsubsample.Thesample, consistingof1,000 Sized CompaniesBrokendownbySectorandIncluded intheStatisticalRegister. ofStatisticsandAnalysis’ReportSmall Medium The samplewasbasedontheBelarusianMinistry 2 1 SME sectorinBelarus. The surveysampleisrepresentativeofthekeycontrol indicatorsandfullyreflectsthestructureof Sample the respondents.Theseinclude: procedures andadministrativebarriersmostfrequentlyencounteredby questions aboutregulatory and individualentrepreneurswereconductedbymeansofaquestionnairecontaining129complex and29thMarch2005.InterviewswithSMEmanagers Belarusian StateUniversitybetween7thFebruary dataselectionwasperformedbytheCentreforSocialandPoliticalStudiesof The preliminary were incorporatedinthesurvey. meetings withcorrespondingstateagencies.Allcommentsandopinionsvoicedbyinterestedparties The surveyresultswereverifiedduringmeetingsofthematicfocusgroupsinvolvingentrepreneursand According to data as of 25th January 2005,provided bytheStatisticalMinistry. Accordingtodata asof25thJanuary companies accountforabout1%ofthetotalnumberenterprises. Accordingtoofficialstatistics,agricultural andforestry Tax administration. Pricing regulation,and Financialoperational andotherinspections, Certification; Permits, Licensing, Registration, company size;and line ofbusiness; company location. permissible toextrapolatethesurveyresultsSMEsectorinBelarus. of thesampleintermskeyindicators(segment/companysize/region)makesit respondents (1,000SMEsand200individualentrepreneurs).Therepresentativenature –ismultistaged,quotabased andrandom.Thesurveypolled1,200 The surveysample groups involvingbothentrepreneursandcivilservants. consistsoffacetofaceinterviewsatworkplacesandthematicfocus The surveymethod the nationaleconomyexceptforagricultureandforestry The objectofthesurveyisperceptionsSMEdirectorsoperatinginallsegments environment inBelarus. which causemostproblemsforentrepreneursandhamperthedevelopmentofbusiness procedures The objectiveofthesurveyisanalysisthoseadministrativeandregulatory entrepreneurs in2004. in BelarusdrawingupontheanalysisofperformanceSMEsandindividual istodeveloprecommendations forimprovingbusinessenvironment The aimofthesurvey and thecityofMinsk. accountants aswellindividualentrepreneursworkinginallregionsthroughoutBelarus 2 Thecontrolindicatorsinclude: METHODOLOGY 1 , theirdeputiesandchief M e t h o d l g y population. The respondents were classified as small or mediumsized businesses in accordance with applicable legislation in the Republic of Belarus3 and European Commission criteria (in terms of the number of people employed)4, respectively. Individual entrepreneurs were grouped as a subsample, numbering 200 respondents. The subsample reflects the even distribution of this category of economic entities throughout the administrativeterritorial units (25 respondents per region and 50 per the City of Minsk). As the sample does not reflect the population of individual entrepreneurs in Belarus, a weighing procedure has been used to calculate general indicators. The survey polled company directors, their deputies and chief accountants. An incidental reselection method was used to choose respondents. The survey results are fully representative of the population of SMEs in Belarus.

TheTable sample 1. Distribution error stands ofat companies3%. in certain sectors of the national economy5 by size

Table 2. Regional distribution of small and mediumsized companies

Table 3. Sectoral and regional distribution of small and medium companies

3 Law N 685ХІІ, dated 16th October 1996, On the State Support of Small Business in the Republic of Belarus defines small businesses as individual entrepreneurs who do not have the status of legal entity or legal entities employing the following number of people:  industry and transport – up to 100 people;  construction and wholesale trade – up to 50 people;  retail trade and consumer services – up to 50 people;  other nonmanufacturing spheres – up to 25 people. 4 EU Recommendation 2003/361 was enacted on 1st January 2005. It mandates that companies with up to 250 employees and annual turnover of up to 50 million euros shall be classified as mediumsized. 5 Sectors of the national economy: – Industry: heavy industry  machine building, machinetool industry; light industry – garment and footwear manufacturing; food – dairy, bread and meat processing; – Transport and communications: railway, road transport – passenger and cargo transportation, postal services, telephony and other types of communication services; – Construction: construction, installation and repair companies; – Trade and public catering: retail and wholesale trade outlets and public catering companies – restaurants, cafes and bars; – Other sectors: research and development, healthcare, education, financial services, nonproduction consumer services, supply and marketing services, tourism, advertising, real estate transactions, information services, housing and utility services, culture and arts. 47 48 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 The surveywasconductedinthefollowingregions: Mogilev Region:Mogilev,Bobruysk. Ostroshitski Gorodok,Pleshchenitsy,Pukhovichi,Slutsk,Smolevichi,Soligorsk,Fannipol; Minsk Region:Borisov,Vileyka,Dzerzhynsk,Zhodino,Zaslavl,Logoysk,Molodechno,Naroch,Nesvizh, Minsk; Svisloch, Smorgon,Shchuchin,Yuratishki; Grodno Region:Grodno,Berestovitsa,Volkovysk, Voronovo, Ivye,Lida,Novogrudok,Ostrovets,Ross, Gomel Region:Gomel,Kalinkovichi, Mozyr,Rechitsa,Khoyniki; Ruba; Vitebsk Region:Vitebsk,Beshenkovichi,Bolbasovo,Novopolotsk,Orsha,Polotsk,Postavy,Rossony, Pinsk; Brest Region:Brest,Baranovichi,Bereza,Vysokoye,Drogichin,Zhabinka,Ivanovo,Kamenets, Kobrin, A p e n d i x s APPENDIXES

Appendix 1. Procedure for the registration of economic entities in Belarus

49 50 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Documents Required Appendix 2.PostRegistrationProceduresand (The totalnumberofdocumentsstandsat80) 17 stagesandsetsofdocuments A p e n d i x s

51 52 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 A p e n d i x s

53 54 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 A p e n d i x s Appendix 3. Types and sizes of penalties for late registration with state agencies at the start of entrepreneurial activities

55 56 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 documents –drawingoutthelicensingprocedure. documents canberegardedasconfirmation.This allowsalicensingbodytodemandadditional drivers andpropertechnicalinspectionofvehicles’.Applicablelegislationdoesnotspecifywhat devices (acashregisterandtachometer)’aswell‘copiesconfirmingthepretravelmedicalsfor an applicantshouldsubmit‘documentsconfirmingthatallvehicleshavebeenequippedwithcontrol requirements. Themostfrequentlyusedtoolistheverificationofdocuments(Chart1). 47% ofrespondentswereinspectedbyalicensingagencytoensurecompliancewith the PresidentialDecreeOnLicensing. 2004 duetorepeatedreschedulingofrelicensingandadoptionfacilitatinglegislationimplement Although thisprovisionwasenactedinlate2003,itsconsequenceswerenotfullyapparentuntil can bevagueandirrelevant. licensingrequirementsorconditionswhich out suchinspections,noraretheyguidedbystatutory examination ofthedocumentssubmitted.Applicablelegislationdoesnotlaydowncriteriaforcarrying processingperiodcanbeunjustifiablyextendedtoconductaspecial Consequently, thestatutory eurmnsstfrhi plcbelgsain(aie fMnses riac 1382 requirements setforthinapplicablelegislation(CabinetofMinisters’OrdinanceN documents presentedbytheapplicantareverifiedtoensuretheircompliancewithlicensing extend the30dayprocessingperiodforupto15days.Aspartofabovementionedinspection, the RegulationadoptedbyPresidentialDecreeOnLicensing).Thisallowsalicensingauthorityto outthelicensedactivity(Items10–11of licensing agenciestoinspecttheapplicant’sabilitycarry rightof Another factorwhichcouldhavelengthenedlicenseprocessingin2004wasthestatutory requirements inspections toconfirmtheirabilitymeetlicensing Appendix 4.Halfoflicenseapplicantshostedadditional of Transportation ofPassengersandCargo To securealicensefortransportingpassengersandcargo(Appendix2oftheRegulation outretailtradesafelyandshouldthusberegulatedseparately. to thelicensee’sabilitycarry outlets issignificant(Items8and12oftheCabinetMinisters’OrdinanceN1350).Ithasnorelevance The needtomaintainastipulatedshareofBelarusianmadegoodsintheturnoverretailtrade compliance withrequirementswaschecked compliance withlicensingrequirementsin2004,%oflicenseapplicantswhose Chart 1.Documentsverificationwasthemostfrequentlyusedtooltoconfirm of Transportation andForwarding Activities entrepreneurs tomeettheirown needs)byroadtransport,inlandwaterwaysandseatransport theRegulation Transportation ofPassengersandCargo the ExecutionofInspectionsand/ orExpertAssessmentstoVerify theCapabilityof An ApplicanttoMeetLicensingRequirement 2 1 TeCbnto iitr’OdnneN1388,dated20thOctober 2003, TheCabinetofMinisters’Ordinance N TheCabinetofMinisters’Ordinance N1382,dated20thOctober2003, (excludinginternaltransportation ofpassengersandcargobylegalentitiesorindividual . dpe yteCbnto iitr’OdnneN1388 , adoptedbytheCabinetofMinisters’OrdinanceN On theAdoptionofRegulation theProcedurefor On theAdoptionofRegulation onLicensing On Licensing On Licensing 1 1 ). ), s A p e n d i x s Appendix 5. Goals and Objectives of Permits

The key difference between administrativepreventive and notification permits lies in the fact that in the latter case state agencies adopt a decision to issue or decline a permit before an economic entity begins operating while in the former, an entrepreneur submits notification and state agencies then execute followup control and supervision.

1 The key function of such permits is to avert uncontrolled use and depletion of limited resources (for example, construction permits make sure that land available for construction is used efficiently). 57 58 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 engineering infrastructure open acafeinMinskonpremisesequippedwith 6. Obtainconsentfromthelocalwatercompanytouseavailableinfrastructure. 5. Securefiresafetypermits. authoritytodevelopthe layout(ahealthinspectormustvisitthesite). 4. Receiveapermitfromsanitary 3. Obtainapermitfromtheexecutivecommitteetooperateonpremises. 2. Secureapermitfromtheexecutivecommitteetorenovatepremises. 1. Concludealeasewiththepremises’owner. however). assuming thatittakeseightmonthstoacquirethepermit(itcantakefromsixtwoyears (an averageof50USDforeachstagebelow)and1,500eurosper1,000squaremetersmonth– It costsanaverageof12,500USDtosecureapermitsetupcafe.Thissumincludes500 Appendix 6.Theschemeforsecuringapermit 2 1 land plot,gainapprovalforthesiteanddevelopa allocationproject. contains morethan30stages.Anapplicantisobliged tosubmitnumerousproceduressecurea It shouldbesaidthattheprocedureforsecuringa permit tobuildandsetupapubliccateringoutlet money needed. applicable legislationtonavigatethepermit–issuance procedureorforecasttheamountoftimeand deadlines, permitissuanceprocedure,fees,etc.It doesnotallowaneconomicentityeithertouse separate stateagenciesandfailtodescribeindetail suchimportantelementsoftheprocessas they regulateonlysomeofitsstages.Inaddition,these documentsfailtoelaboratetheinvolvementof of thesedocumentsdonotgivethefullpictureand notexplainhowtonegotiatethisprocedureas RuleN578191.However,the provisions 2005,andSanitary Ordinance N53,dated13thJanuary 1991,OnLocalGovernanceandSelfRule,theMinskCityExecutiveCommittee’s dated 20thFebruary It shouldbenotedthatthisprocedureisregulatedbytheLawofRepublicBelarusN617XII, 18. Obtainapermitfromtheexecutivecommittee’stradedepartmenttoopencafe. 17. Havethefinisheddesignapprovedbypolice. 16. Havethefinisheddesignapprovedbyfiresafetyauthorities. 15. Havethefinisheddesignapprovedbyhealthauthorities. 14. Submitdocumentstoadesignbureaudeveloprenovationplan. 13. Obtainapermitfromtheexecutivecommitteetolocateentityonpremises(SeeItem3). design project. 12. Receiveapprovalfromtheexecutivecommittee’sarchitecturaldepartmenttodevelop agency. 11.1. Obtainadditionalapprovalfromanotherinteriorministry 11. Receiveconsentfromthepolicetouseanantiburglaralarmsystem. 10. Haveentertainmentprogrammeapprovedbytheexecutivecommittee’sculturaldepartment. 8. Receiveconsentfromtheroadpolicestatingthatcafeisaccessibleforvehicles 7. Receiveconsentfromtheenergycompanytohookupelectricitygrid 9.1. Seekadditionalconsentfromalocalpolicemanonthebeat. 9. Receiveconsentfromthepolice. does notneedtovisitthesite). Thisstagewas rated asapureformalitybyentrepreneurs. Thisdoesnotincludelicensingand certificationprocedures. 2 2 2 1 to 2 (apoliceman 2 A p e n d i x s Appendix 7. Permits Issued by Local Authorities

Applicable legislation broadly defines the remit of local authorities. They are tasked with monitoring and enforcing economic entities and organisations’ compliance with legislation within their area of jurisdiction. The Law of the Republic of Belarus N617XII, dated 20th February 1991, On Local Governance and SelfRule lays down some general guidelines for permitissuance by local authorities: Approval of the creation, location, construction or reorganisation of economic and social entities located within their area of jurisdiction, including companies, organisations and unions; Approval of opening hours for companies, organisations and unions regardless of their form of ownership; Approval of events held by companies, organisations and unions regardless of their form of ownership or subordination in the course of planning and execution of economic activities, if these might pose environmental, social, demographic and other hazards or otherwise affect the population or the territory; Consent to the sale of buildings, structures and other objects owned by economic entities and located within their area of jurisdiction. The legal framework regulating permitissuance by local authorities is fragmentary and comprises numerous legal acts adopted by a plethora of state agencies. Permitissuance powers of local authorities are set forth in the following legal acts: the Housing Code of Belarus, the Civil Code (permission to use residential premises for nonresidential purposes); Presidential Decree N11, dated 16th March 1999, (permit to locate an office on residential premises); Law On Advertising (approval of outside advertising). Issuance of some permits is governed by legal acts passed by state agencies and technical legal acts (sanitary, fire safety and construction norms and rules). The Law On Local Governance and SelfRule grants local governments some lawmaking powers. However, the guidelines for regulating permit issuance at a local level are not yet defined and so lack uniformity. In addition, acts adopted by local governments (except for regionlevel authorities) are not registered in the National Register of Legal Acts, which makes it difficult for entrepreneurs to access these documents.

59 60 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 about applyingforthemortheirpossiblecosts. entrepreneurs areunabletogetaclearideaofthetotalnumberpermitsrequiredorhowbestgo tostudyapplicablelegislation, safety, healthandconstructionnormsrules.Evenaftertrying not includedintheNationalRegisterofLegalActsRepublicBelarus.Thisholdstrueforfire adopted bycityandregionalauthoritiestechnicallegalactspassedcentralstateagenciesare lack fullaccesstoinformationregardingpermitissuanceconditionsandproceduresaslegalacts regulating somepermitissuanceproceduresallowsmuchleewaybystateofficials.Entrepreneurs Specifically, thelackofanexhaustivelistdocumentsforsubmissionandabsenceprocedures of applicablelegislation,legalloopholesandthemultistagenaturepermitissuanceprocedures. This Appendixbringstogetherinformationonsomepermitstodemonstratetheunwieldycomplexity frequently soughtpermits Appendix 8.Overviewoflegislationgoverning A p e n d i x s

61 62 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 bodies inthecourseofcertificationprocedure Appendix 9.Types ofworkperformedbycertification A p e n d i x s Appendix 10. Procedure for certification of mass produced goods

1. Submission of an application and the required documents to a certification body1 (The following documents are submitted: technical specification2, drawings, design documentation and technological documents. It can take up to two months for a company to get all its documents together. The technical specification should be registered with the State Standardisation Committee within two months. If an outside consultant is hired, the preparation of documents can cost from 400 to 800 USD).

2. Approval by the State Standardisation Committee3.

3. Consideration of an application and submitted documents by a certification body and adoption of a decision (up to five days )4

4. Conclusion of a contract for the performance of certification

5. Identification of goods and selection of samples for testing (up to one day)

6. Conclusion of a contract with an authorised laboratory for the performance of tests

Testing of samples at an authorised laboratory. The duration and cost of tests depends on the goods being tested. Most laboratories are currently located in Minsk so applicants are obliged to travel to the capital to get their goods tested.

7. Establishment of a commission and assessment of manufacturing facilities (up to 10 days)

8. Assessment of test results, evaluation of manufacturing facilities and adoption of a decision to issue a certificate (up to 0.6 day)

9. Conclusion and registration of certification (up to 0.8 day)

The survey findings show that certification of mass produced goods might take up to eight months and cost up to USD 10,000.

1Applicable legislation does not provide an exhaustive list of certification documents. The documents are identified by a certification organ on a casebycase basis. 2 There are no legal guidelines for technical specifications. 3 Certification of mass produced imported goods is carried out by a certification organ in consultation with the Committee for Standardisation, Metrology, and Certification of the Cabinet of Ministers. 4 The time frame of the followon stages is not specified; it can be stipulated by a certification agency or in consultation between an applicant, a certification agency and a testing laboratory. In October 2004, the head of the State Standardisation Committee capped the amount of certificationrelated work making it possible to introduce time limits for different certification stages. 63 64 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 obtaining a certificate, days onaverage obtaining acertificate, Chart 3.Testing ofsamplesaccountsforanaverage60%timespent on Chart 2.AverageUSD costsofcertificates, Chart 1.Industrialcertificatestookthelongesttosecure,daysonaverage Appendix 11. A p e n d i x s Appendix 12. Regulation of inspections in Belarus

1. Financialoperational inspections

Presidential Decree N673, dated 15th November 1999, On Certain Measures to Improve Co ordination of Control Agencies of the Republic of Belarus and the Procedure for Levying Economic Sanctions (hereinafter referred to as the Decree) governs financialoperational inspections. The decree envisaged the creation of a Council for the Coordination of Control Activities in Belarus (hereinafter referred to as the Council) and similar regional councils. It also adopted the regulation on the Council. The council and its regional branches are quite effective in coordinating supervisory activities. The Decree also put in place the procedure for conducting financialoperational inspections and applying economic sanctions (hereinafter referred to as the Procedure). The Procedure has the following positive features: Defined inspections, economic violations, sanctions and liability; Clear objectives for inspections; Actions to be performed during inspections are listed; Clear procedure for mounting inspections introduced and duration limited; Rights and responsibilities of inspectors and those being inspected are defined; Transparent procedure for formulating conclusions laid down; and Procedure for levying economic sanctions and appealing against the decisions of control agencies is stipulated. The Procedure divides inspections into scheduled and extraordinary. Scheduled inspections of the same economic entity can only be held once a year. Extraordinary inspections of the same firm can be conducted on orders from the President, Council of Ministers, the State Control Committee, the Council for the Coordination of Control Activities in Belarus, as well as tax, law enforcement and judicial bodies. This provision does not apply to cross inspections. Cross inspections are the inspections of business partners of the inspected economic entities. Following the passing of General Section of the Tax Code, the Decree has seen certain amendments. In particular, some provisions of the Procedure dealing with inspection rules no longer apply to tax inspections. Tax inspections are governed by Chapter 9 Tax Control of the Tax Code and the provisions of the Procedure regulating the application of economic sanctions and appeals. Tax inspections are covered by the Taxation Ministry’s Instruction N142, dated 29th December 2003. Tax inspections are subdivided into scheduled and extraordinary, as well as onsite or inhouse.

2. Operational inspections

The abovementioned inspections are regulated by law, including legislation On Fire Safety and On the SanitaryEpidemiological Security of the Population, etc. However, these documents do not contain detailed inspection procedures and do not limit their frequency or duration. This is one of the most serious problems. Inspections are regulated in more detail by legal acts issued by the state agencies involved, for example the Head State Sanitary Doctor’s Ordinance N36, dated 17th May 2001 On the Adoption of the List of Officials and Experts Authorised to Execute Sanitary Control and Their Rights. This situation favours the narrow interests of state agencies and can lead to conflict.

65 66 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 tax andfiresafetyauthorities financialoperational andoperationalinspectionsby Appendix 13.Approximateschemesforconducting Fire safetyinspectionscheme Tax inspectionscheme A p e n d i x s Appendix 14. Review of Inspection Reforms in CIS, Western Europe and Canada1

The following inspire business inspection reform: Vaguely worded inspection legislation, lack of statutory procedures or insufficient transparency; If many issues are left to the discretion of control agencies; Inspectors’ abuses; Unjustified decisions taken by inspectors; Overlapping functions of inspecting authorities; Haphazard implementation of inspections, which do not factor in risk assessment; Formal approach to performing inspections without taking account of results and objectives set; and Negative impact of inspections on business. These problems are evident in most countries to some degree and span all controlling bodies. These shortcomings may stem from deeper problems within the public administration system or be caused by the state lacking a coherent role in the economy. Inferior legislative frameworks such as weak procedures for adopting administrative decisions, powers of discretion or administrative procedures are also a factor.2 Although most countries encountered broadly similar problems, each state opted for reform in its own way. Each inspection has two key objectives: 1) policing the implementation of applicable legislation and 2) to prevent the legal activities of economic entities from being hindered. Reform can be activated by excessive or inadequate measures. The review of inspection procedures in the Netherlands was triggered by an industrial accident and a public outcry over lax enforcement of legislation. In Central and Eastern Europe, persistent complaints by entrepreneurs regarding the lack of professionalism and overlapping functions of control agencies and exorbitant costs of inspections (eroding competitiveness) are the driving force behind reform. Both factors are in evidence in some CIS countries (Russia and Armenia); inspections took a heavy toll on entrepreneurs and did not ensure better enforcement of applicable legislation. Reform strategies adopted in different countries comprise the following common elements: Simplification of procedures; Development of clear methods and procedures; Organisation of training and dissemination of information; Introduction of strategic planning; Application of risk assessment techniques to inspections; Assessment of the effectiveness of inspections; Reorganisation of structures; and Devolution of some control functions to the private sector. Inspection reforms have a limited impact if they are not coupled with other wideranging reform efforts addressing the shortcomings of the civil service, legislation and even remuneration. Unfortunately, these problems are often outside the scope of regulatory reform.

1 The overview is based on the analysis of control activities and reform experience accumulated in Latvia, Armenia, Canada, the UK, Croatia, Mexico, Poland, Romania, the Russian Federation, Uzbekistan, the Netherlands and Tajikistan in the 1990s and early 2000. 2 Only affordable rules should be created, Paul Seabright, Company of Strangers: The Natural History of Economic Life, 2004, Princeton University Press. 67 68 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 Table 1. were developed(Table 1): In thecourseofinspectionreform,followingapproaches,whichcanreproducedinothercountries, A p e n d i x s Appendix 15. Brief analysis of the regulation of inspections in the Russian Federation and Uzbekistan

Russia

The Federal Law On the Protection of Rights of Legal Entities and Individual Entrepreneurs in the Course of State Control was enacted on 11th August 2001. The Law’s title is, in itself, revealing as it focuses on the protection of rights rather than on implementation or procedures for state control. The key provisions of the Law are listed below: It does not cover some kinds of state control (tax, foreign exchange, budgetary, bank, insurance, etc); these are governed by separate legal acts. The Law applies to inspections held by federal and regional executive agencies of the Russian Federation and authorised state bodies, which report to these agencies. State control is defined as an inspection of compliance with certain mandatory requirements imposed on goods (services) by federal law and facilitating legal acts (hereinafter referred to as mandatory requirements). Of particular importance are inspected entities’ safeguards, which are set forth in Article 3 of the Law. These include presumption of innocence, transparency and accessibility of legislation regarding mandatory requirements. The inspection should be within the agency’s mandate and all legal acts explaining mandatory requirements should be nullified in line with established procedure. Control agencies should oversee the setting right of all violations committed, if a court of law rules that actions are illegal. No fee should be charged for conducting inspections other than for testing and expert assessments which reveal violations of mandatory requirements. Control agencies should not receive a percentage of the fines imposed. Most of these principles not only protect the rights of economic entities being inspected but also deter corruption. In Belarus, Presidential Decree N673, dated 15th November 1999, allows control agencies to order inspections. In line with Russian Law, an inspection warrant should set out goals and objectives for an inspection as well as the legal grounds for the inspection, quoting those legal acts naming the mandatory requirements to be inspected. (The abovementioned decree says that an inspection warrant should specify only its goal.) An inspector should present an inspection warrant or an authenticated copy along with his identification. The duration of an inspection in Russia is limited to one month, as in Belarus. However, Russian Law states that an inspection can be extended for an additional month on the authority of the head of the inspecting agency. Scheduled inspections can be held only once every two years and unscheduled inspections can be mounted in cases set forth by Law. Among the responsibilities of inspectors, provided for in Article 11 of the Law, particularly interesting are those obliging inspectors to take account of the gravity of transgressions. They shouldn’t unduly limit the rights and statutory interests of legal entities or individual entrepreneurs and must be able to prove the legality of their action in cases of appeal. Article 16 of the Law empowers unions of entrepreneurs and other nonprofit organisations to uphold the rights of legal entities and individual entrepreneurs. Uzbekistan

The applicable legislation in Uzbekistan1 provides that: 1. Scheduled financialoperational inspections of micro firms, small companies and farmers should be conducted once every four years and other entities should be subject to inspections once every three years. 2. Startup micro firms, small companies and farmers should be immune from inspection until two years after their establishment.

1 Based on the Law On the State Control of Activities Pursued by Economic Entities and the Decree of the President of the Republic of Uzbekistan, dated 5th October 2005, On Measures to Further Streamline the Business Inspection System. 69 70 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 authority inthearea ofinspections.Itsdecisions arebindingforallcontrolagencies. 4. TheNationalCouncilfortheCoordinationofActivitiesControlAgencies 3. Ifeconomicentitiesabidebytherecommendationsofcontrolagenciesandarepreparedtofully 2 Establishedin1996,theNational CouncilfortheCoordinationofActivitiesControlAgencies isacentralcoordinating of EconomicEntities. inspections mustbeconductedinstrictcompliancewiththeLawOnStateSupervisionoverActivities unscheduled inspectionsinexceptionalcasesprovidedthereisgoodreason.These sanctions arelevied. reimburse thestatefordamagecausedwithintimestipulatedandpayapenalty,nofinancial 2 canauthorise A p e n d i x s Appendix 16. SMEs involved in all sectors of the national economy regard the current taxation system as complex (Chart 1,2)

Chart 1. SMEs operating in different sectors of the economy regard tax administration as complex, % of respondents broken down by sector

SMEs found the existing taxation system the most complex (Chart 1). 56% of individual entrepreneurs reported difficulties in paying and calculating taxes. However, most individual entrepreneurs are payers of a flat tax and do not encounter problems with the calculation and payment of taxes seen by legal entities. Chart 2. SMEs found the existing taxation system the most complex, % of the respondents broken down by company size

71 72 B u s i n e s s E n v i r o n m e n t i n B e l a r u s 2 0 0 5 respondents makingthesedeductions Chart 3.MostSMEsmake1or2deductionstooffbudgetfunds,%ofthe % oftherespondentspayingthesetaxesandduties Chart 2.Morethan60%ofSMEspayfrom3to5taxesdutieslocalbudgets, budget, %respondentspayingthesetaxesandduties Chart 1.MorethanhalfofSMEspayfrom4to6taxesanddutiesthestate local budgetsaswelloffbudgetfunds(ChartsN13) an averageof12taxesanddutiesintonational Appendix 17.Smallandmediumsizedenterprisespay A p e n d i x s Appendix 18. Penalties for Violations of Tax Legislation as set forth in Presidential Decree N 36, dated 22nd January 2004, On Additional Measures To Regulate Taxation

1 Br 25,500 (12 USD). 2 Economic penalties set forth in Paragraph 2 of Part 1 shall not be levied if a tax payer or other responsible individual commissioned the bank in a timely fashion to make such a transfer and the bank could not perform such a transaction as the tax payer’s account did not hold sufficient funds. 3 Economic penalties set forth in Paragraph 2 of Part 1 shall not be levied if a tax payer or other responsible individual commissioned the bank in a timely fashion to make such a transfer and the bank could not perform such a transaction as the tax payer’s account did not hold sufficient funds. 73