MONITORING OF ADMINISTRATIVE BARRIERS, round 1

Transcription

1 Center for Economic and Financial Research MONITORING of Administrative Barriers to Small Business Growth Round 1 The goal of the deregulation program recently launched by the Ministry of Economic Development and Trade of the Russian Federation is a significant reduction in administrative discretion and overall costs to businesses associated with procedures of registration, licensing, certification, and inspections. Three of the four new laws that govern these most important areas of administrative regulation were enacted during the last year and a half. i The fourth law, the law on certification and standardization is under review in the State Duma. Enforcement of these laws (if successful) will bring down the regulatory burden and allow for a much freer and less corrupt market economy. On request of the Ministry, the Center for Economic and Financial Research (CEFIR) is conducting an independent monitoring of regulatory burden on small businesses that evaluates the enforcement and success of the deregulation program. In the spring of 2002, CEFIR in collaboration with the World Bank conducted the first round of surveys of small businesses in a number of Russian regions. The purpose was to establish the benchmark levels of the regulatory burden in registration, licensing, certification, and inspections before the launch of the government s deregulation program. The future rounds (the second is scheduled for the fall of 2002) will detect change in the costs of administrative regulation over time. The monitoring is undertaken to increase the accountability of the federal government for its own reforms. In the past, many good laws in Russia have not been enforced. Thus, it is necessary that an institution independent from the government monitor the progress of the de-bureaucratization, so that there is no potential interest in concealing the true results. In addition, the monitoring is a tool for applying pressure on the regional governments to collaborate with the federal government on implementation of the reform. Due to financial constraints, it is impossible to cover all regions. Thus, twenty regions (and sixty nine localities) distributed among all seven okrugs are covered by the monitoring project, each with sufficient representation to observe cross-territorial differences. Page 1

2 Figure 1. Regional coverage Altai krai Nizhny Novgorod oblast Amur oblast Novosibirsk oblast Chelyabinsk oblast Perm oblast Kaluga oblast Primorskii krai Khabarovsk krai Rostov oblast Komi republic Sakhalin oblast Krasnoyarsk krai Samara oblast Kurgan oblast Saratov oblast Moscow city Smolensk oblast Mosсow oblast St. Petersburg city The results of the first round ii can be summarized as follows. The current regulatory burden is heavy: firms see little improvement to date and claim the situation is getting worse with respect to some administrative barriers. Existing practices in the areas of registration, inspections, licensing, and certification are very far from the benchmarks established in the new legislation. Administrative pressure often exceeds even the pre-reform laws that allowed for much greater bureaucratic discretion (these laws were in effect during the first round of surveys). The extent and costs of regulatory burdens increase as the size of the firm increases, suggesting a regulatory glass ceiling beyond which further growth attracts costly administrative interference. As a result, only half of the small firms surveyed reported growth of sales and only a fifth increased employment in the second half of The regulatory burden was found to have an individual and unsystematic character. On average, each particular area of regulation may not be a grave problem, but most firms have at least one very serious unique problem related to ad-hoc harassment by a certain bureaucrat. There is no clear ranking of good vs. bad regions across the whole spectrum of administrative burdens: there is a significant variation in the intensity of different administrative burdens within each region. One region may be problematic in terms of registration, while another in terms of licensing. The administrative costs of entry are heavier in municipalities with high concentration of production and in municipalities with weak fiscal incentives to develop their own tax base. Table 1. Age structure of firms Distribution of older # of firms registered firms (%) Older registered firms, of which: 1543 Registered before Registered in Registered after Newly-registered firms 379 Intermediaries 71 Survey Procedure The survey was conducted in 20 regions of the Russian federation (see Figure 1 for the exact coverage). The sample of 100 firms to be interviewed in each region was stratified in the following manner: 20 recently registered firms, in most cases during the second half of 2001, and 80 older firms, of which eight were construction companies and 25 were retail firms. Selection was based on the industry code Page 2

3 Table 2. Industry distribution # of firms % Trade and retail Services Industrial manufacturing Construction Research and development Food industry 79 4 Agriculture, hunting, and fishing 33 2 Other Total Figure 2. Size of firms (number of employees) % of firms Table 3. Ownership structure Owner # of firms % Private sector, of which: а) Russian 1817 b) Foreign 4 State Mixed Other or more originally reported by the firms at the time of registration, and therefore, can be different from the actual industry reported during the interview. In addition, in each region up to six consultants who provide intermediary services for registration, licensing, and certification were interviewed. The resulting distributions of firms by age and industry are reported in Tables 1-2. The face-to-face interviews were conducted with either the top managers of the firms or their deputies. Different questionnaires were used for newly registered firms, intermediaries, and all other firms (that henceforth are referred to as incumbents or old firms). The main survey for incumbent firms consisted of four sections: general firm information and subjective perceptions about the overall business environment in their locality, licensing, certification, and inspections. The questions focused on recent experiences of firms and dealt with a wide variety of indicators of the regulatory burden, such as monetary payments, time and effort costs, number of different agencies dealt with, perceptions about the current level and change over time, etc. By contrast, the questions in the survey of newly registered firms focused on costs of entering the market: registration, licensing, and certification. Although the survey was conducted in the spring of 2002, all of the questions were about the second half of In addition, respondents were asked to compare the level of the administrative burden with the first half of The timing of the survey relates to the enactment of the four new deregulation laws in the following way: the first round of monitoring concentrated on the six months before and the six months after the law on protection of rights during inspections came into force. Regarding the laws on licensing, certification, and registration, the survey focused on the time before these laws came into effect. Thus, the survey's goal was to establish a baseline for comparison with the results of the subsequent rounds and to evaluate how far the current practice is from the legislated targets. Page 3

4 Table 4. SME sales growth Sales Second Half 2001 All of 2001 # of firms % # of firms % Decreased Stayed the same Increased Figure 3. Small business growth is not the main engine of Russian economic growth Krasnoyarsk Primoriye Kurgan Sakhalin Cheliabinsk Khabarovsk N.Novgorod Smolensk Moscow city St.Petersburg Perm Samara Kaluga Saratov Rostov Komi Novosibirsk Altai Amur Moscow Nominal growth of industrial output in 2001 (Goskomstat) Nominal growth of small business output in 2001 (based on survey results) Sample Makeup The total sample included 1548 incumbent firms, 379 "new" firms, and 71 intermediaries, evenly distributed across the 20 regions. Most firms in the sample were very small, with the median firm officially employing 10 people. The vast majority of firms in the sample were private limited liability companies, 11% were closed joint stock companies and 5% had the state as one of the owners. Only 16% of the firms had a predecessor that originated before 1987, so most of the firms were post-soviet startups. In terms of the industrial decomposition, half were in trade and services, 14% were in manufacturing, and 11% were in construction. A description of the sample is given in Tables 1-3 and Figure 2. An important finding of the survey is that during 2001 small businesses did not grow faster than industry: only 52% of the surveyed firms reported growth of sales during the year (Table 4), which is hardly in line with the rapid overall GDP growth, especially when considering that in transition economies small businesses should grow much faster than big industrial companies due to reallocation from the old to the new sector. Figure 3 shows that in half of the surveyed regions, the interviewed businesses grew slower than the total industrial output. The situation is even worse in terms of the official employment, which rose for only 20% of respondents over the half year period (Table 5). Small businesses in Russia, therefore, are not an engine for growth, in contrast to those in Central and Eastern Europe and Southeast Asia. Perceptions about business climate Table 5. SME growth of employment in the second half of 2001 Employment # of firms Decreased 261 Remained the same 945 Increased 331 In the general overview section of the survey for incumbent firms, the respondents were asked to rank a number of potential problems with the business environment (not necessarily related to regulation), such as the tax level and administration, corruption, competition, racket, and macroeconomic instability. Page 4

5 Table 6. General problems Problem average score tax level tax administration macro instability regulation level of competition access to credit anticompetitive barriers corruption racket 4.67 Table 7. Problems of regulation Problem average grade general documentation requirement 3.01 purchase of premises 3.51 licensing 3.55 certification 3.63 tax inspections 3.72 fire safety inspections 3.85 customs inspections 3.91 leasing of premises 3.93 sanitary inspections 3.95 currency regulation 4.00 price regulation 4.05 barriers to trade 4.18 registration 4.24 labor protection inspections % Figure 4. Number of regulatory burdens rated "very significant" or more % > 5 5% 1 26% Less of a Problem Less of a Problem 0 36% Most firms suffer from a small number of very significant regulatory problems Respondents were asked to rate those problems on the scale 1 to 5, where "1" means "threatens the existence of the business" and "5" means "not a problem at all." In addition, respondents were asked to rate different types of regulation (inspections, licensing, certification, etc.) using the same scale. The simple averages shown in Table 6 reveal that the biggest problems from the managers' viewpoint remain those associated with taxes, namely the tax level and tax administration, which is a typical result in such studies. iii The next worst problem is general macroeconomic instability in the country (inflation and exchange rate fluctuations). Governmental regulation comes fourth with an average score of 3.1, representing "a significant problem." The racket does not pose any problem at all according to most surveyed entrepreneurs. This result is striking, since managers in a Russian survey in 1996 named it a severe problem. iv Furthermore, many respondents who indicated that racket is a problem commented that they meant "government racket." In terms of specific problems associated with regulation, respondents complained most frequently about the general documentation requirements (average score of 3.01), regulation of purchasing premises (3.51), licensing (3.55), and certification (3.63). (See Table 7.) These results indicate that each area of administrative regulation is indeed a serious problem on average, but these averages strongly underestimate the severity of the regulatory burden. One of the major findings of this survey is that governmental regulation oftentimes has an unsystematic and individual character, taking the form of ad-hoc bureaucratic harassment. Many respondents complained about one particular problem of government predatory regulation unique to their firm not only in responses to the standard questions of the survey, but also in additional comments recorded in the face-to-face interviews and in follow-up calls. Each problem is severe for some firms, and most firms experience at least one severe problem. Only a minority of firms find any one problem to be severe, however, so the average severity across all firms is not high. Page 5

6 100% 80% 60% 40% 20% 0% Figure 5. Use of intermediaries for registration varies considerably across regions. Moscow city St.Petersbur Samara Primoriye Amur N.Novgorod Cheliabinsk Khabarovsk Kurgan Sakhalin Krasnoyarsk Altai Novosibirsk Komi Perm Moscow Rostov Kaluga Saratov Smolensk % firms, registered with intermediares % firms, registered without intermediares Table 8. The costs of registration for firms registered in 2002: TIME COSTS Time to complete registration # of firms (%) Without consultant With consultant Legitimate according to the old and new laws, i.e., a week or less 36 (21.4) 26 (12.9) Legitimate according to the old, but not the new law, i.e., from a week to a 100 (59.5) 131 (65.2) month Illegitimate according to both laws, i.e., more than a month 32 (19.1) 44 (21.9) Average, days 26* 29* Max, days Note: * indicates statistically significant (at 1%) difference from the new law goal. Table 9. The costs of registration for firms registered in 2002: MONEY COSTS Payment for registration # of firms (%) Without consultant With consultant + Legitimate (2000 rubles or less) 79 (51.0) 28 (15.4) Illegitimate (more than 2000 rubles) 76 (49.0) 154 (84.6) Average, rubles 4692* 7252* Maximum, rubles Notes: + payment to consultant is included * indicates statistically significant (at 1%) difference from the new law goal. The ad-hoc nature of predatory regulation is illustrated by the distribution of the number of times that a respondent names a certain regulatory problem (out of the list of 11), "very significant" or "threatening the existence of the business," corresponding to scores 2 or 1. Figure 4 demonstrates that two-thirds of all firms reported at least one such problem, and almost a half reported two or more. Therefore, the regulatory burden is much more severe than the averages suggest. Next we discuss the costs associated with each of the four areas of regulation. Registration In each region up to 20 newly-registered firms were interviewed about their experience with registration. It turns out that many firms never had to deal with the official registration procedure and instead simply ordered a private intermediary to do the work for them. A small number of firms both requested help from intermediaries, but also had to visit a certain number of registration authorities themselves. The fraction of firms who used an intermediary varies greatly across regions, as shown in Figure 5. Tables 8-9 show that the time and the monetary payments needed to register in the second half of 2001 appear to be well above the level targeted by the government in the new law, which came into force shortly after the survey on July 1, Furthermore, the payment for registration exceeds the level prescribed by the previous laws on registration. According to both the new and old laws, registration should cost 2000 rubles. Yet in our sample the average total payment for the registration, including fees, gifts, and all other forms of payments, was almost 5,000 rubles for firms not using intermediaries and over 7,000 rubles for those that did. Only half of firms not employing intermediaries paid the prescribed 2,000 rubles or less. The average time needed to obtain registration was 26 days for firms not using intermediaries and 29 days for those who did. The average is within the bounds of the laws that were in effect at the time of the survey: before summer 2002, the government Page 6

7 Table 10. Number of offices visited to get a registration. Number Time to fill out Time from of firms, documentation submission until visited the person-days registration, days agency to register mean median mean median Tax authorities Local administration Pension fund Statistical office Social insurance Registration chamber Medical insurance Sanitary standards Fire safety agency Table 11. Frequency of inspections in 2001 (%) sanitary police fire safety certification admin.-tech ecology labor protection tax inspection tax police licensing 0 inspections inspection inspections >3 inspections mean 1.43* 1.12* 1.71* median Notes: Colored figures indicate a number of inspections higher than that prescribed by the new law. * indicates statistically significant (at 1%) difference from the new law goal. Table 12. The number of inspections by all agencies increased after the introduction of the new law sanitary police fire safety certification admin.-tech. ecology 2nd half 2001 labor protection tax inspection tax police licensing mean 1.11* 0.97* 1.28* * 0.42* 0.33* 0.87* median st half 2001 mean median Notes: The average number of inspections is calculated for firms reporting data for both time periods. Colored figures indicate inspections in excess of that prescribed in the new law. * indicates a statistically significant (at 1%) discrepancy between the observed number and the 0.25 inspections per half year prescribed by the law. agencies were supposed to approve or deny registration no later than a month after the submission of the application. Registration took longer than this for a significant number of firms, however, and the average timing is far in excess of the five days prescribed by the new law. An interesting finding is that the monetary payment and waiting time are higher for firms using an intermediary. The likely explanation is that firms use consultants when registration is particularly difficult. In Moscow, for example, all new firms interviewed admitted that they employed a consultant, and Moscow is by far the hardest place to register, both in terms of money and time. And it is possible that the waiting time is not really a burden for the businessmen: they pay consultants not to reduce total time of registration, but rather to save them from having to stand in lines and learning the cumbersome rules for filling out documentation. One has to remember, however, that intermediaries may be unofficially affiliated with the bureaucrats. If so, this would represent an institutionalized form of corruption. The "one window" rule advocated by the government in the new legislation is also a distant goal. The average number of offices that need to be visited to register a business is five among those who did not use intermediaries. The list of the offices frequently visited by the registering firms is presented in Table 10. The most frequently visited offices are the tax authorities, city administration, registration chamber, pension fund, statistical agencies, and the social insurance fund. Starting July 1, 2002, registration is supposed to be done at the tax office alone; however, the businesses are still obliged to visit the pension fund and the social insurance fund, so the legislation falls short of the "one window" goal. Whether a reduction in the number of offices visited for registration takes place will become apparent in the next rounds of the survey. Page 7

8 Table 13. The costs of inspections have increased on average Question mean More or less time has been spent on inspections than in the previous 6 months? 2.86* *Scale: 1-much more, 2-somewhat more, 3-same, 4-somewhat less, 5-much less Has the process of passing an inspection become more 2.93** or less transparent and predictable? ** Scale: 1- much less transparent and predictable, 2 - somewhat less transparent and predictable, 3 - same, 4 - somewhat more transparent and predictable, 5 - much more transparent and predictable How did the monetary costs of inspections change since the previous six months? tax inspection 2.74 tax police 2.78 sanitary inspection 2.79 police 2.75 licensing 2.78 fire safety 2.75 certification 2.66 administrative-technical 2.70 ecological inspections 2.81 labor protection 2.84 ** Scale: 1 - increased significantly, 2 - increased somewhat, 3 - stayed the same, 4 - fell somewhat, 5 - fell significantly Note: all mean values are statistically significantly different from 3 ( stayed the same ) Figure 6. Some agencies are more likely to conduct excessive inspections Police Sanitary Administrative-technical Fire safety Tax inspection Tax police Ecology Licensing Certification Labor protection 0% 10% 20% 30% 40% 50% of them, firms inspected more than once by that agency fraction of firms inspected by this agency in the 2nd half of 2001 Inspections Inspections are the only form of regulation for which a new law was enacted before the baseline survey in the summer of Since the survey included questions about both the first and second halves of 2001, we are in a position to measure any change post-reform. The rule imposed by the new law is that the number of planned inspections cannot exceed one in two years. The law, however, does not regulate the number of unplanned inspections, which can occur if the inspecting agency suspects some violation on the part of a business. Yet if the new law is working as intended, we should observe a reduction in the number of inspections between the first and the second halves of The most striking finding is that the number of inspections actually grew from an average of less than six inspections by 10 agencies about which the survey asked, to an average of over seven by the same agencies in the second half of Furthermore, as Table 12 demonstrates, the reported numbers of inspections by each one of the 10 agencies increased. Subjective perceptions of the respondents demonstrate the same pattern (Table 13). When asked whether the time and money costs of inspections changed, most respondents reported increases. Rules of inspections, according to their answers, became less transparent and predictable. A word of caution is due here. Any reform, even if aimed at the simplification of a certain procedure, can make things more complicated during the period when entrepreneurs are adjusting to the new rules. In addition, the increase in the number of inspection may be a sign of a seasonal pattern. Whether this is true will become apparent after the next rounds of the survey. Another way to check for violations of the new law is to see whether one agency inspected a certain firm more than once over the time period in question. It turns out that such practice was common. For example, even though the police came only to 18% of all firms, they visited 54% of these firms more than once in the second half of 2001 (see Figure 6). Inspections with such a frequency clearly must Page 8

9 Figure 7. A significant fraction of fines during inspections are not determined transparently Labor protection Ecology Administrative-technical Certification Fire safety Licensing Police Sanitary Tax police Tax inspection 0% 15% 30% 45% 60% Fines not based on official scale Explanation of fine not clear have been in violation of the law prescribing only one visit in two years. The fire safety office inspected half of all firms during those six months and came more than once to 32% of them. These examples again emphasize the finding stressed at the beginning: regulation often takes the form of irregular harassment of a very individual nature. Monetary payments to inspecting agencies are common and often illegitimate. Firms report payment of some form of fines during about 30% of inspections. Of those fines, between a third and a half, depending on agency, were not based on an official schedule and explanations of the violations were not clear. The biggest offender in this respect is the police (see Figure 7) almost half of all fines paid to them did not have a clear explanation and most probably were bribes. Moreover, it is likely that these numbers are underreported, as respondents are reluctant to answer sensitive questions about bribery. Table 14. Average term of validity of a license. Term of validity % Illegitimate according to both laws (less than 3 years) 34.1 Legitimate according only to the old law (3-5 years) 45.2 Legitimate according to the new law (at least 5 years) 12.7 mean, months 32.9 median, months 36 Note: Statistics are calculated for firms with no permits. Table 15. Average payment for a license Firms not Payment using All firms intermedia ries Legitimate according to the new law (1300 rubles or less) 15.3% 17.6% Legitimate according only to the old law ( rubles) 19.2% 20.7% Illegitimate according to both laws (over 3000 rubles) 65.5% 61.7% mean median Note: Statistics are calculated for firms with no permits. Licenses The new law on licensing, which was meant to severely cut the number of activities subject to licensing, came into effect in February Thus, the survey was conducted after the enactment of the law, but the questions concerned the experiences of firms obtaining licensing in the second half of Besides cutting the number of activities to be licensed, the law also specified that all licenses need to be valid for not less than 5 years, and the fee for obtaining the license should be 1,000 rubles, plus 300 rubles for application. This is an improvement over the previous law, which said that licenses should be valid for at least three years and cost 3,000 rubles to obtain. Simple descriptive statistics (Tables 14-15) demonstrate that the current situation is far from what even the old law intended. 34.1% of all licenses appear to have terms of validity less than 3 years, which contradicts both laws. Only 12.7% of all licenses are valid for 5 years. The monetary cost of licenses is also much higher than what is prescribed in the law. A firm paid 8,000 rubles for a license on average, with only 15% of firms paying less than 1,300 rubles and 65.5% paying more than 3,000 Page 9

10 Figure 8. Many firms have licenses and permits for activities not legally subject to such regulations 0 Licenses Permits Legitimate Illegitimate Table 16. Legitimate licenses are more difficult to obtain Mean Median Cost of a license, rubles Time spent on licensing over the half year, person-days Total time to get a license, days Legitimate licenses Permits and illegitimate licenses rubles. In a third of all cases the licenses came in the form of "permits," which are technically not licenses. These permits are harder to analyze in a unified framework, because it is not clear how many of them are legitimate. For example, many of the permits are to conduct trade, while it does not say in any law that trade of regular goods is subject to licensing. In many cases respondents noted that these permits come from the fire or sanitary inspections, which is clearly illegal. But in most cases they did not say who issued the permits, so the permits could be perfectly legitimate, coming from, say, a private owner of the premises, who allowed trade on his or her property. As shown in Figure 8, about 80% of the permits are indeed for types of activity not listed in either the old nor the new law on licensing. At the same time, a substantial number of regular licenses (259 out of 700) are also for types of activity not described in either the old or the new law, and hence appear illegitimate. In most cases, these permits and illegitimate licenses are probably the result of predatory behavior of local governmental agencies. It appears that they are both cheaper and easier to obtain than the legal licenses. The average payment is 5,000 rubles versus 8,000 for a legal license, and the average time to obtain them is 42 days versus 50 days (see Table 16). Decomposition of licenses into legitimate and illegitimate, as well as further break down of them into those listed in the 1998 and the 2002 laws sheds some doubt on the effectiveness of the reform, which is meant to reduce the number of licensed activities. Thus, out of the 1036 licenses and permits, for which the responding firms applied in the second half of 2001, only 441 are legitimate licenses (Figure 8). Thus, the problem is once again with the enforcement of the law rather than with the law itself. Even if some of those permits, which seem illegitimate, are indeed legal, they must go outside of the scope of the new law, and hence, the situation for small businesses is not going to become much better. Furthermore, out of the 441 legitimate licenses for which the firms applied in the second half of 2001, 360 remain in the new laws as well. Figure 9 demonstrates this point for all licenses, and Figure 10 breaks the licenses down by industry. The radical Page 10

11 Figure 9. Does the new licensing law decrease the number of existing licenses required by small business? 100% 80% 81 Legitimate only under the law of 1998 Regulated by the law of 2002 as well 360 (out of all legitmate licences) Figure 10. Does the new licensing law decrease the number of existing licenses required by small business? industry cut reduction of licensed activities undertaken in the new law seems much more modest in practice, implying that the activities removed from the list are not very popular among small businesses. However, one should not go too far when interpreting these results, as there are at least two reasons for optimism. First, the interviewed sample is a very particular sample of very small firms, and perhaps the new law will be felt more by bigger firms. For example, a sizeable fraction of the legal licenses are for trade of alcohol, which is actually regulated by a separate law, and since commerce is the most represented industry in the sample, many of the interviewed shops wish to have an alcohol license. Second, many businesses probably knew in 2001 that starting in February many activities would not be subject to licensing. Hence, they may have chosen not to apply for licenses that would not be needed once the new law was in force. Hence, the distribution of licenses for which firms applied in the second half of 2001 may be biased towards those which remain in the new law. 60% 40% 20% 0% Food industry Manufacturing Science intensive Services Commerce Construction Regulated by the law of 2002 as well Legitimate only under the law of 1998 Table 17. The costs of certifications # of certificates for which firm applied >50 average payment per certificate, rubles mean median average wait after submission of application, days mean median Other Certification According to the objective numbers reported by the respondents, certification arguably presents the smallest problem for small businesses out of the four types of regulation considered. This conclusion is based on the fact that only 30% of small firms have certificates, and even fewer applied for them recently, and thus were not able to provide information on what it takes to acquire a certificate. Firms that do need certificates are primarily in the food industry and manufacturing. The new law on certification and standardization is still in the process of being drafted, and the current draft does not have any specific guidelines in regard to how much a certificate should cost, for how long it should be valid and how long it should take to acquire a certificate. Thus, there are no benchmarks, to which one can make comparisons. Summary statistics on costs of certification are presented in Table 17. The average time to get a certificate and the average payment turn out to be Page 11

12 Licensing Certification Inspections share of working time spent by management, % Table 18. Smaller firms face lower costs of regulatory burdens Number of employees >20 average payment, rubles time needed to acquire, days average time spent by management, persondays average payment, rubles time needed to acquire, days average time spent by management, persondays Registration average payment, rubles time to register, days Table 19. Smaller Firms are Less Troubled by Regulations Less of a Burden # of employees >20 regulation fire safety inspections sanitary inspections certification tax inspections labor protection inspections price regulation documentation requirements Note: Light/Dark green highlighted figures indicate significantly higher/lower values relative to values aggregated by the whole sample holding other key firm characteristics, sectoral and regional differences constant. comparable, but somewhat lower than their counterparts in licensing. Due to economies of scale, the costs of acquiring a certificate should decrease with the number of certificates for which firms apply, since some firms apply for a bundle of certificates for a number of similar products. Statistics show that economies of scale in getting certificates kick in when the number of certificates exceeds 50. Certificates are most expensive on average for the firms that applied for between 11 and 50 certificates, but the median was the highest for firms which applied for two certificates. Thus, the median payment for such firms was 7,500 rubles per certificate, and waiting time averaged 30 days. These numbers are somewhat lower than the corresponding figures for licensing. Effects of size, age, and growth Different types of firms are subject to different levels of regulatory burden. The most important and vivid difference is among firms of different size. The corresponding statistics are presented in Table 18. The results take into account age differences of the firms and the variation across industries and regions. Bigger firms in general have a harder time with all four of the studied areas of regulation. A firm with over 20 employees pays more than 17 thousand rubles for a license, whereas smaller firms pay less than 12 thousand. Likewise, a small firm with four employees or less waits 32 days for a license, while bigger firms spend 50 days on the same procedure. More restrictive regulations of licenses for larger firms can be efficient as larger firms may need licenses for more complicated activities that may require a more thorough review of a license application. This pattern, however, is visible in other forms of regulation as well. The average payment for a certificate for a small firm of at most four employees is half of what it is for a firm with 20 employees (4,000 rubles versus 8,000). The waiting time to acquire a certificate is three times shorter (19 versus 64 days). The management of small firms spends 7% of their time on inspections, in contrast to 11-12% in bigger firms. Finally, registration of a small firm, which should be done automatically regardless of the size of a firm, costs about 4,000 Page 12

13 Table 20. Regulatory burdens and the age of firms average values very new new old (2000) ( ) (<1987) L average payment (rubles) time to obtain (days) C average payment (rubles) time to obtain (days) R total payment (rubles) time spent (days) I time spent by management during half year (per cent) Licensing Certification Registration Inspections 45% 30% 15% 0% Figure 11. Use of intermediaries to obtain licenses varies across regions Smolensk Altai Moscow city Kurgan Cheliabinsk St.Petersburg Saratov Novosibirsk Moscow Khabarovsk Komi Samara Perm Rostov Primorie Kaluga Amur Krasnoyarsk N.Novgorod Sakhalin % of firms applying for licenses in the second half of 2001 of which, share employing intermediaries Table 21. Growing firms face greater regulatory burdens in some areas Sales growth stayed the decreased increased same average payment (rubles) time to obtain (days) L time spent by management during half year (person-days) average payment (rubles) time to obtain (days) C time spent by management during half year (person-days) time spent by management I during half a year (per cent) Licensing Certification Inspections rubles for a small firm, in comtrast to 6,000 for bigger firms. A similar pattern is present in the subjective perceptions: small firms complain significantly less about virtually all forms of government regulations (see Table 19). The same is observed for corruption and anti-competitive barriers. Age of the firm also matters. Controlling for size, region and industry, new firms have a harder time dealing with government officials on average than old ones (see Table 20). This difference is especially stark when one compares firms with roots in the Soviet era (having a predecessor existing before 1987) to those starting up after New firms complain significantly more about all types of regulation. This suggests that older firms have more experience and connections that help them to maneuver around the regulatory obstacles. At the same time, the dispersion of the subjective measures among the newest firms is lower. New firms are much less likely to name a particular problem "very significant" or "threatening the existence of the business." The reduction in the probability of such an answer by new firms compared to other firms for a particular potential problem reaches 31% for the tax level and is 16% for overall regulation, but it is in single digits for most other regulatory problems. The objective measures of time and monetary costs provide a mixed picture with respect to the effect of age. On the one hand, licensing is more costly for new firms both in terms of payment and waiting time. Registration, however, is more expensive for those re-registering an existing business that has roots in the Soviet era. Other differences are not statistically significant. As Table 21 shows, the growth of firms seems to be strongly related to the regulatory burden. Firms whose sales neither grew nor fell in 2001 complain the least about regulation. Those whose sales fell complain the most, giving support to the hypothesis that regulation hinders growth. In terms of objective measures, firms with growing sales seem to have the highest payments and waiting times, although these differences are in most cases not statistically significant. Other measures of growth suggest that expansion is robustly associated with increased governmental pressures. The introduction of a new Page 13

14 Table 22. Ranking of regions by each regulatory obstacle inspections registr. licens. certif. Rank (1 - best, 20 - worst) fire safety sanitary administrative-technical ecology labor protection total number of inspections registration - payment registration time to complete total cost of registration licensing - payment licensing - time to get total cost of licensing certification - payment certification - time to get total cost of certification Smolensk Cheliabinsk Primoriye St.Petersburg Krasnoyarsk Rostov N.Novgorod Altai Moscow obl Perm Samara Saratov Sakhalin Amur Komi Kaluga Novosibirsk Khabarovsk Kurgan Moscow city % 20% 15% 10% 5% 0% Figure 12. Use of intermediaries is more common for obtaining certifications Smolensk Sakhalin Cheliabinsk Komi Kurgan Rostov Altai Primorie Moscow Samara Novosibirsk Saratov Khabarovsk Kaluga Krasnoyarsk Moscow city N.Novgorod Perm St.Petersburg Amur % of firms applying for certificates in the second half of 2001 of which, share employing intermediaries product increases payments for certificates by 25%, payment for licenses by 10%, time to get a certificate by 20%, and the total number of inspections by 1.6. An increase in employment growth over the half-year period by 10% leads to a 2.8% increase in time to get a license, a 3.7% increase in the corresponding payment, and a 10% increase in the time spent on inspections. Therefore, administrative regulation hurts bigger, growing, and new firms more. These results suggest that there is a certain threshold level glass ceiling, below which firms interest rent-seeking regulators less. As soon as the firm grows beyond this threshold, it attracts the bureaucrat s attention. Regional differences The differences in the level of the regulatory burden across regions are high but non-systematic: regions where one form of regulation causes severe problems may be quite benign in terms of other forms of regulation. For example, Moscow firms experience the highest number of inspections by virtually all agencies, and registration in Moscow is far harder than in any other region, so that all interviewed firms report registering through an intermediary. At the same time, licensing and certification in Moscow are relatively easy. Moscow ranks 7 and 9 out of 20 in terms of ease of these procedures. Smolensk oblast, on the other hand, is the best in terms of inspections, and the worst for certification. The ranks of regions in regard to different forms of regulation appear in Table 22. Another illustrative exercise is to consider the difficulty of entry for the median firm in each region. Table 23 reports the results. The median firm in each region needs to register and acquire one license. We measure the costs associated with these actions in three ways: in terms of total days needed to complete these procedures, total payment for the procedures, and the effort in terms of person-days. The table shows that costs of entry are very non-uniform across regions. The median firm in Altai elicits the most effort (48 person-days) to enter the market, but the waiting time is the least - only 30 days, which implies Page 14

15 Table 23. The total costs of entry vary significantly across regions Total time needed to gain entry, days Time spent, person-days Cost, thousands of rubles Altai Moscow obl Saratov Primoriye N.Novgorod Kaluga Amur Perm Rostov Samara Komi Kurgan Novosibirsk Smolensk St.Petersburg Cheliabinsk Krasnoyarsk Sakhalin Moscow city Khabarovsk The results are for a median firm of 5 to 20 employees in the trade or service industry. Table 24. Registration: intermediaries and firms which didn t use an intermediary firms intermediaries mean number of agencies mean time spend by staff, person-days mean time for registration, days mean payment for registration, rubles are regulations transparent? (5-yes) have appealed, if rejected? 1% 41% file a lawsuit, if rejected? 1% 12% use personal connections? 30% 74% provide a gift when register? 21% 56% that several people need to be working on this entry. In Moscow, on the other hand, the wait is tied for the longest at 120 days. At the same time, the effort is very low at 11 person-days. This is explained by the fact that registration in Moscow is normally done entirely through an intermediary. Monetary payment also varies significantly, from 4,000 rubles in Primorsky krai to 35,000 in Moscow oblast. Lessons from territorial differentiation Regional and municipal variation provides means for the analysis of the influence of regulatory costs on small business development. Across regions, a 10% increase in the time needed to get a license is associated with a statistically significant 0.4% reduction in the percent of small firms among all firms. At the same time, no significant influence of certification, registration, and inspections was found on different measures of regional small business development (the small number of observations may explain this). The number of inspections is negatively related to the tax collection level in a region. This finding supports the hypothesis that bribery through inspections is an alternative to official taxation, i.e., they share the same tax base. Exogenous factors, such as concentration of production in a few large enterprises within a city and fiscal incentives of municipalities, have been found to have a significant effect on the regulatory burden. For instance, concentration of municipal output in a large enterprise has a strong positive effect on entry costs. The time and money needed to register or obtain a license are higher in cities with more concentrated production. This finding suggests that firms that employ a significant portion of the town population are interested in erecting entry barriers in order to avoid competition in the labor market that potentially may lead to a significant increase in their wage costs. These firms apply political pressure on local governments to restrict entry. At the same time, those small firms that did enter enjoy an easier time in terms of inspections than their counterparts in less concentrated cities: concentration in terms of both Page 15

16 Table 25. Licensing: intermediaries and firms which didn t use an intermediary firms Intermediaries mean payment per license, rubles mean time spend by staff, person-days mean time elapsed, days are rules transparent? (5-yes) have appealed, if rejected? 12% 17% file a lawsuit, if rejected? 0% 3% use personal connections? 56% 71% provide a gift? 41% 53% Table 26. Certification: intermediaries and firms which didn t use an intermediary firms Intermediaries mean payment per certificate, rubles mean time spend by staff, person-days mean time elapsed, days are rules transparent? (5-yes) have appealed, if rejected? 0% 6% file a lawsuit, if rejected? 1% 6% use personal connections? 41% 68% provide a gift? 28% 62% production and labor is strongly negatively associated with the number of inspections in an average firm. This is consistent with the view that only firms with special (political) connections pass the entry barriers in concentrated localities. Fiscal incentives defined as the dependency of municipal budget revenues on its own local tax base (as opposed to regional transfers) also have a significant effect on the regulatory burden. Firms in cities with strong fiscal incentives report spending less time on inspections than similar firms in other cities. Therefore, an effective program in support of small business development should include reform of federalism that provides additional incentives for local governments to develop their own tax base. Page 16

17 Implications The results of the survey point to certain recommendations that can be made to policy makers. Although the new laws on licensing, inspections, registration, and certification are definitely a step forward in the process of the deregulation of the economy, they may not produce the expected outcomes without appropriate enforcement and the provision of incentives for local and regional governments to embrace the development of small businesses. The most important incentive that needs to be given to the local governments is, of course, associated with the dependency of the regions and localities on their own tax base. Provision of these fiscal incentives should be addressed by the fiscal federalism reform, in which transfers to regions and municipalities should be made independent of the ability of a region to collect taxes from small businesses, or even be positively correlated with local tax collections. At present, however, municipalities are frequently "rewarded" for poor economic conditions by transfers from regional governments, and thus do not have incentives to develop the small business sector. Anecdotal evidence suggests that the benign regulatory burden in Krasnoyarsk kray observed in the results of the survey is caused precisely by the fact that the regional government became interested in the development of local businesses. The region is heavily dependent on ferrous metals, such as aluminum and nickel, and the fall in world prices for these metals created serious problems with revenues in the regional budget. As a consequence, the regional government was forced to improve the conditions for small and medium-size enterprises. This story seems to correspond well to the findings of the survey. Table 22 shows that registration was the easiest in Krasnoyarsk, and firms in this region were visited the least by some of the inspectors, for example, by the sanitary control. Simplification of registration and inspections procedures immediately produced a positive effect. Figure 3 shows that Krasnoyarsk was the only region where industrial output declined in 2001 (due to a fall in world market prices), and yet small businesses demonstrated strong growth. Another important point concerns the concentration of production within a region, which makes entry of small firms harder. If the reason for this is indeed the fear of competition for labor on the part of large enterprises, then this problem is intrinsically connected to the more general problem of labor mobility. Studies show that labor mobility is high within cities, but quite low between cities. v If workers cannot move easily to a different town, big enterprises can lock them in at their current jobs by making it difficult for workers to find outside opportunities. This problem disappears when the workers have real chances to leave their locality for a different job elsewhere. There no easy solution to the problem of low labor mobility in Russia. Therefore, deregulation enforcement turns out to be dependent on reforms that are very far from deregulation at the first glance: a more market-oriented education system and developed markets for mortgage and real estate are needed to promote labor mobility. In addition, the government could try harder to enforce its own laws on the removal of restrictive local registration systems. Another important finding is that small businesses do not use civilized methods of fighting for their rights. Only 6% of all respondents said that they went to court to resolve a conflict with an inspector, whereas a quarter used personal connections and provided a gift. Numbers are more striking for other forms of regulation: for instance, none used courts to fight for their rights in licensing, but 56% used personal connections and 41% provided gifts to officials (see Tables 24-26). Thus, small firms do not yet trust the judicial system. An important step forward could be the creation of a federal center in support of small businesses that would receive complaints from small businesses and help them through conflicts with regional authorities. Such a center does not have to be associated with the government: an association of small businesses or a political party can take such a role. A dialog with the small business sector is an important step in the development of civil society. CENTER FOR ECONOMIC AND FINANCIAL RESEARCH 17