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IFC’s SME Survey: Inspections Impede Small Business Development in Ukraine


In Washington, DC
Irina Likhachova
Phone: +1 (202) 473 1813

E-mail:
ilikhachova@ifc.org


Kyiv, September 7, 2005—The International Finance Corporation’s latest survey of Ukrainian entrepreneurs revealed that the country’s current system of inspections is a significant barrier to the development of entrepreneurship. In response, IFC’s Ukraine SME Policy Development Project, in collaboration with the Council of Entrepreneurs of Ukraine under the Cabinet of Ministers, has prepared a draft of the Law on Protection of Entrepreneur’s Rights during Inspections, which was presented for discussion to the press and public in Kyiv.

IFC’s SME survey, carried out in Spring 2005, shows that in the past year:  

  • Over 1.4 million inspections of business were conducted in Ukraine;
  • 80 percent of Ukrainian firms received an on-site inspection from one or more of over 50 regulatory agencies with a mandate to carry out inspections in Ukraine;
  • Firms were inspected, on average, nine times;
  • The average tax inspection lasts two weeks and costs the firm $340;
  • More than half of all inspected firms were sanctioned for violating regulations; and
  • Over 20 percent of entrepreneurs paid inspectors unofficially during an inspection of their business.

    To improve this situation, the draft “Law on the Protection of the Rights of Entrepreneurs in the Course of State Control and Supervision of Business Activity” will increase the transparency by requiring that inspectors provide entrepreneurs with clear and detailed information on the purpose of each inspection, the inspector’s scope of authority, and the issues that may be covered during the inspection. The draft law also envisages the introduction of a risk-management system to provide transparent criteria for selection of firms for inspection and to help agencies determine how frequently inspections should be conducted based on the degree of risk to health, safety, and the environment posed by a firm’s activities.

    Key participants at a recent roundtable, “The System of Inspections: The Need for Legislative Improvement,” included the Deputy Minister of Health and Chief Sanitary Doctor of Ukraine, Serhiy Berezhnov; Member of Parliament Ksenia Lyapina; Deputy Minister of Environmental Protection Olena Yavorska; representatives of the Cabinet of Ministers; members of Parliament; and experts from international organizations and Ukrainian business associations.  Roundtable participants agreed on the key principles of the draft law, and that its adoption would serve to encourage firms to comply with regulatory requirements as well as impose greater accountability on supervising authorities for infringing the rights of entrepreneurs during inspections.

    The European Union numbers 25 nations determined to shape their future together. Through 40 years of enlargement these countries have built a zone of peace, stability, progress, and solidarity. The European Union is a model for overcoming conflict and promoting reconciliation through close cooperation to achieve common goals while respecting national sovereignty and territorial integrity. But the EU is not focused solely on itself: its ambition is to share its values with countries and peoples beyond its borders. The European Commission is the EU’s executive body.

    The mission of IFC (
    www.ifc.org) is to promote sustainable private sector investment in developing and transition economies, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the emerging markets, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY04, IFC has committed more than $44 billion of its own funds and arranged $23 billion in syndications for 3,143 companies in 140 countries. IFC’s worldwide committed portfolio as of FY04 was $17.9 billion for its own account and $5.5 billion held for participants in loan syndications.

    Ukraine became a shareholder and a member of IFC in 1993. Through the end of fiscal year 2005 (June 30, 2005), IFC has invested $335 million in 18 projects in the country. IFC expanded its investment program in Ukraine significantly in 2004-2005, committing $255 million in the agribusiness, financial, and general manufacturing sectors. IFC has also been conducting an extensive advisory program since 1992, which initially focused on the privatization of small businesses, land, and idle construction sites. Current donor-funded programs offer advice on corporate governance, leasing, and agribusiness. Programs also seek to improve the business environment and promote the growth of small and medium enterprises.