TCS Daily

Kafka in Kiev

By Larissa Apasova - November 20, 2003 12:00 AM

At a time when the legal environment in Ukraine is more favorable for democratizing society and protecting human rights, there is still a significant gap between standards which exist on paper and the reality for millions of defenseless people, particularly in small cities and agrarian areas.


The growing role of businesses in the economic life of Ukraine gives birth to significant problems in protecting their rights. A strong bureaucratic mechanism that works against the development of business has been established. Among the nations of Europe and the Commonwealth of Independent States, Ukraine has the lowest number of small enterprises per 1,000 residents. Even in favorable conditions last year, 38 percent of small businesses operated at a loss. The number of profitable companies comprised less than 3 percent of the total.


One of the most typical violations of citizens' rights in business is the excessive interference of government organs in the affairs of management. For instance, a decision of the executive committee denied a license to open a mercantile business on the grounds that a sufficient number of such enterprises already existed. This decision contradicted the Law of Ukraine "On Enterprises."


As a rule, small businesses establish themselves in temporary structures, such as kiosks or pavilions. The procedure for approving the necessary permits remains at the discretion of local authorities; it is a costly and time-consuming process that can take months if not years. There is also no guarantee that upon completing all the requirements a permit will be granted.


For instance, the Fram enterprise obtained all the required documents from the Minsk district administration in the city of Kyiv to set up a network of commercial kiosks to be located on Obolonsky Prospect. The process of reviewing all technical documentation and their approval in more than 20 agencies took three years and cost several tens of thousands of hryvnias. In the end, however, when all the required documents were submitted to the Minsk district administration in order to obtain a permit to begin construction of the kiosks, the enterprise was denied the permit. The costs incurred by the enterprise were not reimbursed and none of the officials was held accountable.


Today, nearly 30 percent of government bodies -- or more than 100 different organs -- have the right to fine enterprises directly. Small businesses have the greatest number of inspections by government bodies -- more than even large companies -- yet have the fewest resources for overcoming the negative effects of those inspections.


According to the International Finance Corporation, the most active inspectors were tax authorities. Every firm has been inspected on average 2.8 times annually. In all, the number of inspections totaled 1,600,000, which comprised 2 million working days. The total loss of revenues for small business as a result of these inspections was more than 230 million hryvnia. Forty-four percent of the enterprises said they were fined by government organs as a result of the inspections. In answering questions posed by authorities, or interpreting the meaning of legal and normative acts, businessmen lost an average of 16 percent of their work time. In nine months of 2000 alone, as a result of inspections by the tax police, 8,900 criminal cases were filed under the tax evasion statute. However, only 3,500 criminal cases were tried. Of those, only 940 of the cases resulted in a guilty verdict and a court judgment was made. This disproportion is felt as an excessive unjustified charge. In other words, it is not inspections per se which are criticized but it is the excess of bureaucracy and costs.


In their appeals, businessmen reported that authorities such as tax police, fire safety and sanitary-epidemiological inspecting agencies, often violate their rights. One example cited by businessmen of an abuse of power by government officials is their demand that businesses contribute to various charities in which the officials have a personal interest. Even in cases that are clearly regulated by law, officials from controlling organs, in particular the tax police, demonstrate a sort of legal nihilism by overlooking provisions that do not suit their cause or impose extra regulations at will. For instance, the tax police introduced changes to the registration procedure for legal entities. One of the new requirements is that all the founding members, their number notwithstanding, must report in person to the tax police. The absence of even one the founding members led to the registration being rejected.


The real wages of Ukrainian citizens show once again that poverty is a violation of human rights, as well as the underlying cause for the violation of other human rights in Ukraine. In this environment, the development of small- and medium-sized enterprises is not a goal in and of itself. Rather, it is a necessary precondition for solving issues related to employment, improving living standards and building a stable base for the development of a democratic society. Although the share of small enterprises in the nation's GDP has more than doubled since 1996, it has not yet reached 10 percent. In EC countries, that number is closer to 70 percent. The ratio is similar in regard to the number of people employed by small enterprises. According to data provided by the Office of the Ombudsman of Ukraine, only 40 percent of registered small enterprises are operational.


Larissa Apasova is a writer in Kiev. She is the author of Keys for Success: What Should the Beginner Entrepreneur Know?

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