Shadow economy, access to finance and electricity remain key hurdles for transition countries

By Anthony Williams
@ebrdtony

Shadow economy, access to finance and electricity remain key hurdles for transition countries

EBRD releases results of BEEPS enterprise survey
 
Competition from the shadow economy as well as access to finance and electricity remain the biggest challenges to doing business in emerging markets where the European Bank for Reconstruction and Development invests, according to new analysis by the EBRD.
 
Top managers from over 15,500 companies in 29 EBRD countries also cited tax administration issues, corruption and a lack of skilled workers as continuing impediments to enterprise.
 
The EBRD and World Bank conducted the fifth round of their Business Environment and Enterprise Performance Survey (BEEPS) in 2013/2014. A separate survey for Russia took place a year earlier.
 
 
Helena Schweiger, EBRD Senior Economist, presents new analysis showing that competition from the shadow economy, as well as access to finance and electricity remain, the biggest challenges to doing business in emerging markets where the EBRD invests.
 

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The EBRD’s report on this latest survey showed that the single largest complaint from managers was about unfair competition from the informal economy, where companies are not always registered or they seek to avoid taxes by under-reporting revenues, employee numbers or the wages they pay.
 
This issue was seen as the most severe obstacle to enterprises in nearly one third of countries surveyed and in economies as varied as Azerbaijan and the Slovak Republic.
 
Next on the list came access to finance, which was seen as the top constraint in Armenia, Croatia, Russia and Mongolia and among the top three in another 14 countries. In virtually all countries fewer firms had taken out loans during the period under review compared with the previous survey from 2008/09.
 
Although this decline primarily reflected a reduction in credit demand rather than supply, almost half of all the firms that needed credit either saw their loan applications turned down or they were simply discouraged from applying for a loan in the first place.
 
This level of financially constrained firms was very similar in the previous BEEPS round, reflecting the persistently tight credit conditions in the wake of the global financial crisis.
 
There was, however, substantial variation across countries. The percentage of credit-constrained firms increased in almost two-thirds of countries relative to BEEPS IV, conducted in 2008-2009. Particularly strong declines in access to credit were observed in Ukraine and Russia (both of which saw increases of more than 20 percentage points in the share of credit-constrained firms).
 
At the other end of the spectrum were countries where the percentage of credit-constrained firms decreased relative to BEEPS IV. The largest decline was seen in Kosovo, where that percentage fell from 72.2 to 39.8 per cent owing to the entry of new banks following its declaration of independence in February 2008.
 
Access to electricity was the biggest problem for companies in Albania, Tajikistan and Uzbekistan and among the top three issues for a further 12 countries. Complaints focused primarily on the reliability of electricity supply and linked power outages in Central Asia and on high electricity prices in central Europe and the Baltic states.
 
The same three issues had headed the list of complaints in the 2008/09 survey, although in the previous questionnaire access to finance had come out on top with competition from the informal economy taking the second position.
 
Improvements seen in court procedures and bureaucracy and skilled labour
The latest survey showed that over the last five years firms felts considerably less constrained by the court system and by issues linked to business licensing and permits and to workforce skills.
 
Improvements in courts and bureaucratic procedures were mainly the result of measures taken by governments, such as improvements in corporate governance standards in line with European Union standards, equipping courts with electronic case-management systems or the introduction of one-stop shops for registering new businesses.
 
Inadequate workforce skills had become a less severe obstacle due to reduced demand for and increased supply of skilled workers as well as increased return migration into the transition region in the wake of the global financial crisis.
 
Some progress on corruption
Corruption continues to be among the top business environment obstacles in transition countries and particularly for young enterprises.
 
The new report showed a slight increase in cases of informal payments linked to applications for an electrical connection, but a decrease in informal payments either expected or requested by tax officials.
 
There was also a decrease in informal payments to obtain import and operating licences.
 
An even larger decrease in informal payments to public officials for services in sectors such as customs, taxes, licenses, regulations partly reflects the introduction of electronic filing and payment systems in several countries.
 
In BEEPS V, enterprises reported that they paid just below one per cent of their annual sales for such purposes. In BEEPS IV, they paid close to five per cent.