QUALITATIVE ANALYSIS OF SMEs PERFORMANCE IN MONTENEGRO
Podgorica, April 2015
Introductory notes
This information used the data obtained from the Council for Regulatory Reforms and Business Environment Improvement, Investment and Development Fund, Directorate for Development of Small and Medium-Sized Enterprises and the data generated from the assessments and activities implemented by the Government of Montenegro, given in the spring Analysis of Microeconomic Trends and Structural Reforms in Montenegro, 2014.
According to the Tax Administration’s data, Montenegro had a total of 21,463 small and medium-sized enterprises in 2013, i.e. 10.9% more relative to the number in 2012, and, during the same period, the SME sector recorded 20% more employed persons, i.e. 134,590 total. Creating a competitive economic system that will ensure long-term sustainable economic growth and development has been conditioned by the implementation and realization of commenced structural reforms and corresponding sectoral policies respectively. Economic reforms have been in progress in three directions, as follows: business environment improving through measures for developing simpler requirements for doing business, driving both regulatory reforms to the creation of more effective administration and ordered regulatory framework
and structural reforms meant for adjusting certain fields to contemporary standards practiced in developed countries. Business environment improvement had its focus on areas important to performing business activities, whereas the said areas were the subject matter of international analytical reports. On the other hand, regulatory reforms resulted from long-term processes dedicated particularly to both public sector reorganization and regulatory amendments aimed at creating for-the public clear and visible regulatory solutions.
Reform activities were primarily in relation to making simpler procedures, i.e. to creating and introducing local level one-stop shops for issuing construction permits; implementing the recommendations given in The Analysis of Local Level Taxation, with reference to canceling the fees for supplying construction land with utilities (the implementation of the said measure will commence in 2016, thereby contributing considerably to developing favorable conditions for local level investing); approaching to analyzing all economic system areas, with education and health care and pension systems being found respectively as areas requiring further reforming. At the same time, while for advancing education system, efforts were being invested in more extensive education system adjustments to labor market demands, introducing the concept of vouchers in the higher education system and increasing the use of information technologies, and alike; further taking advantage of the Regulatory Impact Analysis (RIA), obtaining opinions on the validity of the RIA, and the impacts thereof on the business environment and budget respectively; as well as the innovated Action Plan-based implementation of the Regulatory Guillotine.
In the coming period, activities will be implemented relating to the continuation of implementing one-stop shops for issuing construction permits, at local self-government units; solving illiquidity issues; further simplification of procedures and shortening deadlines for tax payer registration, enhancing the corporate profit taxation system, enlarging tax basis for personal income taxation, improving VAT taxation system and excise policy, creating more effective property taxation system; establishing adequate criteria for state property valuation, which has a direct effect on the level of investors’ confidence and high quality management and requires establishing legislative framework and practicing international standards relevant to this area; further strengthening the rule of law and legal certainty and, in terms of that, drafting new Law on General Administrative Procedure, Law on Arbitration and Amendments to the Bankruptcy Law; considering and implementing the reforms in tourism industry and sustainable development areas and, in terms of that, implementing the reforms that should ensure the development of high quality tourism products for offer and matching accompanying amenities, along with increasing traffic accessibility of Montenegro being as a prestigious tourism destination
1.1Montenegro in 2014 Doing Business Report
Reform activities directed to business environment improvement resulted in multiannual progress trend reflected also in reports of relevant international institutions on the ease of doing business. Thus, July 2012 – May 2013 World Bank’s report on the ease of doing business (2014 Doing Business Report) ranked Montenegro at 44th position on the list of 189 ranked countries, which, as compared with the rank given by the previous report, stands for 7 places move up on the list. Such a progress has resulted from previous years’ reforms. However, a more competitive position on the global ranking list is particularly important having in mind an ongoing progress of Montenegro from the 92nd position given by the 2008 Report.
Table No.1: Doing Business Reports,2011-2014
MONTENEGRO RANK / 2011: 56th / 2012: 56th / 2013: 51st / 2014: 44thMaking it easy to start business / 51 / 47 / 57 / 69
Making it easy to deal with construction permits / 161 / 173 / 174 / 106
Making it easy to register property / 116 / 108 / 114 / 98
Making it easy to get credit / 32 / 8 / 3 / 3
Protecting investors / 28 / 29 / 32 / 34
Making it easy to pay taxes / 139 / 108 / 85 / 86
Making it easy to trade across borders / 34 / 34 / 51 / 53
Making it easy to enforce contracts / 135 / 133 / 134 / 136
Making it easy to wind up business / 47 / 52 / 45 / 45
Making it easy to obtain an electricity connection / - / 71 / 57 / 69
Source: World Bank
The most significant progress was reached within the framework of “Making it easy to deal with construction permits” indicator (+70), followed by “Making it easy to register property” (+19) and “Making it easy to get credit” (+1). Besides the foregoing progress, some indicators reversed, such as: “Making it easy to start business” (-11) and “Making it easy to pay taxes” (-5), because other countries studied by the Report invested more efforts in reforming the foregoing sectors, which draws attention to a necessity to accelerate already commenced activities (e.g. simplifying tax payment procedures).
Table No.2: Montenegro on the Doing Business world ranking list and per significant drop in ranking
Structure /rank, i.e. position in Doing Business / DB 2010 / DB 2011 / DB 2012 / DB 2013 / DB 20141. Montenegro on DB world ranking list / 71 / 66 / 56 / 51 / 44
2. indicators where Montenegro recorded drops:
- Making it easy to start business / 85 / 51 / 47 / 58 / 69
- Making it easy to deal with construction permits / 160 / 161 / 173 / 176 / 106
- Making it easy to register property / 131 / 116 / 108 / 117 / 98
- Making it easy to pay taxes / 145 / 139 / 108 / 81 / 86
- Making it easy to enforce contracts / 133 / 135 / 133 / 135 / 136
Source:
Broadened scope of credit register kept with the Central Bank of Montenegro, with bank debt particulars available to natural and legal persons, was evaluated by the Doing Business Report as one of the best globally. Therefore, Montenegro had the best ranking exactly in this indicator and took the 2nd position out of 189 countries on the world ranking list. An important reform implemented by the Government took place in the contract enforcement field. Putting the Law on Enforcement and Securing of Claims into full effect – which is expected to be early in the following year - while through establishing the instrument of the public enforcement officer, will contribute to more efficient and effective enforcement procedure relating to the obligations contracted between parties in Montenegro. Simultaneously, amendments were initiated to the Law on Enforcement and Securing of Claims, i.e. to the treatment of bills of exchange during the enforcement procedure, with the aim of faster and better engagement of this instrument being as the security of claim.
1.2 Analysis of local level taxation
For decreasing operating expenditures, a business environment improvement-related document, i.e. the Analysis of Local Level Taxation was prepared. The Analysis is an overview of both the improvement of local level investment climate and the elimination of one of the biggest investments realization burdens, namely the fee for supplying utility infrastructure to construction land. The said document has presented two key aspects, out of which one being as a consequence of the current financial situation at the local self-governments level and the other one being as a necessity to undertake measures to have economic activities growth through new investments. The document has described all taxes, fees and charges imposed by local self-governments level for collecting their revenues and it has given recommendations about regulatory framework and investment conditions improvement.
The most important recommendations relate to the fees paid for supplying utility infrastructure to construction land, being - due to the high amount thereof - as the key barrier to investments. The fee is one of the highest charged in the world if observed both as a unit amount per square meter and as the total amount charged for one average either commercial facility or residential property; however, the actual measure was given by the ratio of this fee to the per capita GDP, i.e. gross domestic product per capita as the measure of a country’s standard of living. The ratio of expenses on the said fee to gross domestic product per capita put Montenegro on the top of the list of those countries poorly ranked by the World Bank, with only Afghanistan, India, Nigeria, Niger, Serbia, Zimbabwe and several smaller African countries ranked lower then Montenegro. Besides, with paying full respect for the importance of local self-government financing and taking into account the grey market, the Analysis made recommendations with reference to collection of property taxes. When it comes to the fee for supplying utility infrastructure to construction land, which used to be the most considerable source of funds for local self-governments for years, as well as to the amount charged for it, the Analysis has provided three scenarios for overcoming the issue. Scenario I is based on the concept of canceling the fee and providing funding, from revenues generated by property taxes, for the construction and maintenance of utility infrastructure. During the two-year transitional period, i.e. until January 1st 2016, local self-governments would be able to have the said fee-based revenues loss compensated for from other sources, in order to provide funds for the construction and maintenance of the utility infrastructure. It is obvious from the Analysis that canceling the fee would entail the best effects on revenues in the municipalities of Budva and Podgorica Administrative Capital respectively and in the majority of local self-governments in the seaside region, whereas the negative effect of the fee canceling would be negligible in remaining local self-governments – if the revenues generated therefore are taken into account. The proposed Scenario IIadvocates for leaving the fee in the system, while to have its amounts reduced to the level considered as the best practice in the EU countries, while primarily in Slovenia in which, for example, expenses pertaining to a structure of 1,000m² amount to €9,000 and are paid together with the connection to the mains fee that is, in our country, an expense separate from the supplying utility infrastructure to construction land fee amounting to approximately €44,000 charged for the same size structure. That means that fees must be reduced by approximately 80.0% of the current amounts respectively. The proposed Scenario III suggests as same requirements as given in Scenario II, while advocating for the fee payment to be over ten-year period either in annual or monthly installments.
The foregoing document prepared guidelines on upgrading the payment/collection mechanism and on broadening tax base with reference to property taxes; changes to the local self-government financing concept; and amendments to the set of utility and administrative fee, toll, tourist organization financing and similar related legislation. The Government of Montenegro session has approved the Scenario I setting out the said fee cancellation as of the early 2016 and after local self-governments make themselves ready therefore, all as recommended by the European Commission. According to the new provisions of the Law on Space Development and Construction of Structures, during the first stage of the transitional period, local self-governments shall be under an obligation to make new ordinances for the supplying utility infrastructure to construction land fee; such ordinances shall be subject to the Government consent; the novelty will be an obligation to make the commercial facility-related fee equal to the one currently charged for the residential property. Certain local self-governments will face the above-mentioned fee reduction accounting for almost 30% of the current fee amount.
1.3Regulatory impact analysis (RIA)
One of the most important steps in terms of ongoing improving of regulatory framework is the Regulatory Impact Analysis (RIA) introduction in the new Montenegrin legislation drafting system, with such Analysis using a series of already proven steps for finding out what impacts a new regulation or amendments to the current regulations will be on citizens, business community and the country. The major advantages resulting from RIA are as follows:
policy makers can have a better understanding of consequences, i.e. costs, benefits and distribution effects of their decisions (who is the one to pull benefits together and who is the one to bear the costs);
better insight into and understanding of regulations’ legal effects, taking into account that RIA helps assessment and identification of costs and benefits;
timely detection of indirect and unintended regulations’ impacts;
regulatory environment simplifying;
the process transparency; stakeholders are enabled to express their views/commnts and additional facts through consultations with regulators and during public discussion;
upgrading the public administration performance and improving coordination between regulatory activities and regulator’s responsibilities.
As of the formal introduction of RIA, the Ministry of Finance has given more than 590 opinions (299 in 2012 and 291 as of the early 2013) on proposal acts and accompanying forms of the Report on Conducted Regulatory Impact Analysis, from the point of vies of the impacts on business environment and national budget respectively.
1.4Implementing the Regulatory Guillotine recommendations
The Regulatory Guillotine stands for ex post analysis of the impact of the current regulations’ provisions. In our system, the Guillotine was implemented through three phases, as follows:
Phase I: overall Montenegrin legal materials listing and gathering;
Phase II: regulations analyzing;
Phase III: giving opinion and recommendations intended for making amendments to or even repealing of certain regulations.
1.5Solving illiquid issue
In cooperation with the Central Bank of Montenegro, while for increasing liquidity, the Government of Montenegro approached to producing a transparent periodic listing of companies with their respective accounts frozen – with the aim of encouraging sound companies and business ideas. With reference to that, starting as of July 1st 2012, the Central Bank of Montenegro has been publishing the names of legal entities, and/or entrepreneurs and their respective Identification Numbers and amounts (higher than €10,000) due to which their accounts were frozen during the procedure of enforced collection lasting for longer than 30 days in continuity. Since the illiquidity is strongly connected with the issue of non-performing loans (NPLs) in banks, the Working Group was considering particularly the Recommendations given by the “Vienna” Initiative Working Group on Non-Performing Loans, for mitigating and overcoming the issue of non-performing loans, in March 2012. On July 1st 2012, the World Bank started delivering to Montenegro technical assistance aimed at applying measures that should contribute to a faster decrease in the number of non-performing loans. After the non-performing loans balance and Montenegrin legal and institutional framework for the collection of non-performing loans analysis, the World Bank team and the Central Bank of Montenegro reached to the agreement on how to proceed with actions in order to have as faster and successful reduction in their number of non-performing loans. The direction of their acting was grounded in “The Istanbul Approach” , being as a winning model intended for resolving financial/economic crisis in Turkey from 2002 to 2005. “The Podgorica Approach” put forward voluntary renegotiation of non-performing loans in banks, with such renegotiation grounded in new measures for encouraging banks and companies to adjust their respective credit portfolio valuations to the post-crisis situations of their debtors. In June, the Law on Deadlines for Settlement of Money Claims was enacted, with expectations to resolve the issue of defaulting on payments and improving companies’ liquidity. The goal is to have the collection of claims ordered by means of payment deadlines shortened; the stipulation of unfair deadlines prevented; policy of fines in place; and, for the first time, control function introduced and to be carried out by the Tax Administration. The Law should solve the issues of both imposing inappropriately long payment deadlines and preventing barriers to the businesses of a series of suppliers, while particularly of those small and medium-sized ones, and it should accelerate the cash flows, prevent company dissolutions and reduce the total debt and number of companies with their accounts frozen. The entity to be in charge of control and to ensure the Law enforcement has been identified, and that entity shall be the Tax Administration.
The debt at the end of the previous year and in the early current year amounts to more than €420 million Euros total. The causes of such situation are numerous, while one out of them is the low intensity of competition in Montenegro - because the life goes on in a small system that is susceptible to monopoly. The deadline for money claims settlement by business entities shall be 30 days as of the origination of the debtor and creditor relationship. A contract may stipulate any different deadline for a money claim settlement by debtor, but such deadline may not be longer that 60 days. Exceptionally, a contract entered into by and between business entities may set out a deadline longer than 60 days, whereas with full respect for good practice and good faith and honesty principle; however, along with the debtor, and/or delivered goods and/or services recipient’s obligation to secure the payment therefore within the stipulated deadline, by providing the creditor with a bank guarantee including the clauses „irrevocable“, „unconditional“, „payable at first demand, without objection“ or with a backed bill issued by a bank as the form of security instrument for debt repayment. Also, amendments to the Law on Enforcement and Securing of Claims, under which the bill of exchange becomes a document that may directly be submitted to an enforced collection organization whose functions shall be performed by the Central Bank of Montenegro. Thereby, complex court proceedings are avoided, while the bill of exchange is being given the meaning of a significant security instrument for payments on claims.