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Business Survey: Serbia 2016 Summary Methodology and Highlights For six years in the row, USAID Business Enabling Project (BEP) has surveyed businesses in Serbia to ascertain views about the quality of the business environment. The findings can serve as a signpost for the Government of Serbia in prioritizing and carrying out reforms that will result in the greatest improvements to investment, economic growth, and job creation. This survey differs from others due to its year-on-year comparability, and broad range of respondents, interviewed face to face. All of these features make it a significant means of support to businesses and the public sector in advocating and pursuing reforms that impact economic growth and development. The survey measures perceptions and attitudes of Serbian businesses toward regulatory environment, macro-economic issues and access to finance, based on their experience. Ipsos Strategic Marketing carried out the survey between September 10 and October 6, 2016 through face-to-face interviews with representatives of 1,032 businesses and sole proprietors. This is a representative sample of all registered business entities and sole proprietors active in Serbia and employing at least three staff, representing every region, business activity and size. The findings indicate that the business environment has improved relative to 2011. Major improvements have been recorded in a number of areas: such as progress in inspection oversight and
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construction permitting, reflected both in the perception and assessment of Serbia’s businesses. 81 percent of businesses claim inspectors are well trained, a major increase on last year’s 73 percent and 37 percent recorded in 2011; 72 percent of all respondents feel inspection legislation is easily available and clear, as opposed to 67 percent seen in 2015 and 28 percent in 2011. The average time spent by a firm’s management on dealing with inspections has continued to decline, falling from 12 hours per inspection visit in 2011 to four hours in 2016. The time needed to obtain a construction permit has fallen from 9.3 months in 2013 and 7.7 months in 2015 to 4 months this year; in 2016, 40 percent of those polled believe that costs involved in obtaining construction permits are reasonable, compared to 24 percent last year and 16 percent in 2013. These improvements were also reflected in this year’s World Bank Doing Business ranking. Some deterioration is visible only when it comes to the burden of court procedures, seen as negative by 47 percent of businesses this year as opposed to 43 in both 2015 and 2011. Additional negative perception is also in the area of enforcement of contracts, which, after seeing a major improvement in 2015, declined by ten percentage points: 45 percent of those polled last year rated the enforce-
time and money have nevertheless been achieved in comparison to the period from 2011 to 2013. Respondents feel that corruption had nearly the same impact on their businesses in 2016 as in 2015: 13 percent of those polled now believe that corruption affects their business “a lot”, while 36 percent claim that corrupt practices “sometimes” affect the way they do business. In 2011 these figures stood at 41 and 38 percent, respectively. ment system as “excellent” or “very good”, while this year the figure stood at 35 percent. This area did improve since 2011, when as few as 15 percent of all respondents had rated the enforcement system positively. Of all the elements of the regulatory framework in Serbia, para-fiscal fees and charges are still seen as having the most detrimental effect, with 68 percent of all respondents awarding those poor scores. Aspects of the regulatory framework most consistently seen by businesses as negative1 include wage taxes and contributions, value added tax, tax administration, the shadow economy, and administrative procedures. However, in 2016 businesses rated all of these areas as being less damaging than before, particularly with major improvements seen in tax administration and administrative procedures. Inspection oversight is perceived as least damaging to business in 2016 (with 23 percent negative responses in 2016, 28 percent in 2015, and 43 percent in 2011); this is followed by obtaining business licences. Unfortunately, improvements in these aspects have not yet resulted in a net decrease in the time and money spent by businesses on dealing with regulatory issues: both of these indicators remain virtually unchanged in 2016 relative to the previous two years. Major savings in terms of both
Corruption in the form of blackmail by a public servant has now been almost completely eradicated – as few as two percent of those polled claim to have been blackmailed, but did not pay, whereas 98 percent report not having experienced blackmail at all. Perception of other corrupt practices demonstrates improvement as well. As for the macroeconomic environment, businesses still believe inflation, wage taxes and contributions, and exchange rate volatility are the principal negative factors, albeit with some improvement over last year. Access to finance for MSMEs remains highly constrained. Borrowing by businesses is on the decline: as many as 68 percent claimed they did not borrow or use other external finance, up from 62 percent in 2015 and 31 percent in 2011. Of those who did not borrow, 68 percent claimed they had no need for loans, which indicates a decline in demand for additional funding but may also mean that Serbian businesses are extremely cautious to investing into growth and expansion. Most businesses are financed from their own funds: 85 percent of total finance for all 1,032 businesses surveyed comes from this source.
The question was worded as follows: “Please assess the impact of the following elements on your business”, and the options for all responses offered were “very negative”, “negative”, “neither positive nor negative”, “positive”, and “very positive”.
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3
Business Environment Improvements 2011-2016 When trends from 2011 and 2016 are compared, nearly all areas have seen improvements. Major highlights include: • Inspections, seen as negative by 43 percent in 2011 and 23 percent in 2016, and inspection oversight regulations, whose availability and clarity of which was seen as positive in 2016 by 75 and 72 percent of those polled, respectively, when compared with 28 percent of both, respectively, seen in 2011; • Business licences, negative perception improved from a historic high of 42 percent in 2012 to 27 percent in 2015; • Construction permitting, measured in time needed to obtain construction permits, has fallen from 9.3 months in 2013 and 7.7 months in 2015 to 4 months this year; in addition, 40 percent now be-
lieve that costs associated with obtaining construction permits are reasonable, as compared to 16 percent in 2013 (these questions were introduced in 2013 for the first time); • Wage taxes and contributions have shown consistent improvement, from being perceived as negative by 81 percent of those polled in 2011 to 64 percent in 2016; • Impact of corruption in public administration, which 13 percent of those polled today believe affects their business, as compared to 41 percent in 2011; • Negative views of the transparency and predictability of doing business, held by 76 percent of the businesses polled, has improved to 37 percent of those polled in 2016.
Progress of Reforms, 2011 to 2016 Para-fiscal fees and charges Wage taxes and contributions Customs and external trade procedures Payment transactions Inspection oversight
Bank collateral requirements
Obtaining construction permits
Awareness of regulatory changes
Corruption in public administration
Public administration
Transparency and predictability Obtaining various permits and licences
Tax administration Time and money spent on administrative procedures Enforcement procedure
Inflation
Use of external finance Customs duties
Bank lending
VAT rates
Excise taxes
Public procurement
Asset price volatiliy Credit demand
Exchange rate volatility Interest rate volatility
SIGNIFICANT IMPROVEMENT
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SOME IMPROVEMENT
NO IMPROVEMENT
WORSE
According to businesses, the top recently implemented reforms were: the Central Registry of Mandatory Social Insurance, simplification of KEPU ledger procedures, abolition of employment booklets, and introduction of electronic construction permits. The most desirable reforms for the coming year include tax cuts, streamlining para-fiscal fees and charges, more effective and efficient administration, and e-government. Businesses are steadily growing more optimistic: this year there has been an increase in the percentage of respondents expecting to see greater profits (from 44 to 48 percent) and planning to hire new staff (from 24 percent this year to 31 percent in 2015). Although the forecast growth of employment is significantly higher than last year, 63
percent of all businesses still do not envisage any changes in the number of their employees, while 6 percent expect they will shed jobs. Obstacles to doing business in areas such as para-fiscal charges, liquidity constraints, and poor access to finance are likely the greatest constraints to higher employment growth. The following sections will present some of the key findings of the 2016 survey by category, starting with demographics of the businesses surveyed, and continuing with corruption and transparency; regulatory framework – burdens and improvements; macroeconomic policy; and ending with access to finance. We will conclude by listing recommendations derived from the findings of this year’s survey.
Figure 1. Ranking of undertaken Government measures Negative (1+2)
Don’t know
Refusal
Functioning of the Central Registry of compulsory social insurance Simplified procedures on KEPU
Not applicable 6
1
26
3
3 6
Introduction of the e-permitting software
4
Introduction of the law on payment services
4
1
Introduction of the amendments to the law on Tax procedure and Tax Administration
6
1
Adoption of the law on inspection control
6
56 35
2 16
9
Positive (4+5) 62
31
The abolition of the emoloyment booklet
Introduction of the amedments to the Law on Tax on corporate income
Neutral
49 25
37
48 46
41
43
5
36
1
42
41 38
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Business demographics The survey was performed on a representative sample of business entities and sole proprietors in Serbia: 74 percent of these are micro-enterprises, 21 percent are small businesses, 3 percent are medium-sized, and 2 percent are large.2 A total of 68 percent of those polled had turnover in excess of EUR 100,000 in 2015, while for 19 percent turnover exceeded EUR 1mn. As many as 92 percent turned a profit in 2015, compared to 90 percent one year ago. The businesses surveyed employ 26.7 workers on average.
Women are under-represented as business owners and managers. The share of women’s employment in the businesses surveyed is 42 percent, very close to the national average, at 43 percent. Women account for 46 percent of all employees of sole proprietors, but men still dominate the group of business owners, as evidenced by the data presented in Figure 3 below. The situation is similar when it comes to business managers: as few as 33 percent of all managers are women, which is only slightly higher than last year’s finding of 31 percent.
Figure 2. Business demographics by size, region, industry and form of incorporation3
88
74 33
34
33
14
Entrepreneurs
Enterprises
Trade
Services
12 Manufacturing
South and East Serbia
Large
22
Sumadija and West Serbia
2 Belgrade
3 Medium
Small
Micro
21
25
Vojvodina
39
2 Large businesses are slightly over-represented in the overall population of businesses surveyed to ensure the sample is representative. 3 Weighted data.
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Most workers are employed on open-ended contracts: 25 percent have staff employed on fixed-term contracts, up from 24 percent last year. As in previous years, few firms are exporting. As much as 91 percent of products and services are sold in Serbia, and most firms sell only in their own hometown. Most exports (65 percent) go to the former Yugoslav republics. These numbers have remained virtually unchanged over the five years of the survey, as has the high percentage of respondents who sell exclusively in their hometown (68 percent). Only 15 percent of firms are members of business associations. This has remained the same since 2012, and represents a major decline when compared with the 36 percent who reported being members in 2011. Of those who report being in a
business association, 24 percent are members of the Chamber of Commerce and Industry of Serbia (a decline from last year’s 28 percent). Similarly, 3 percent report being members of the Belgrade Chamber of Commerce, down from 6 percent in 2015. The second best ranked association this year is YUTA, the national association of tour operators, with membership standing at 6 percent. On average, between 3 and 5 percent of all businesses surveyed report being members of “other” associations, with new ones joining the list every year. Members of business associations rate the associations higher in providing training and information (37 percent positive) and organizing business fairs and marketing support (34 percent positive) than in advocating to the government for regulatory reforms (22 percent positive) – these numbers are nearly the same as last year’s ratings.
Figure 3. Ownership share among all surveyed firms Men own more than 50%
Men and women have equal share (50%:50%)
Women own more than 50%
TOTAL
77
6
17
ENTERPRISES
78
6
16
ENTREPRENEURS
67
6
26
7
Corruption and transparency The impact of corruption on businesses remains on the decrease. The number of businesses who believe corruption has a major negative impact on their business has decreased from 41 percent in 2011 to 13 percent in 2016. Fewer businesses also report giving gifts or money or using private connections than in 2011. However, other research does not fully reflect this success in tackling corruption.4 Transparency and predictability of doing business have improved over the last six years, continuing a positive trend. As many as 63 percent of businesses agree or partially agree that “transparency and predictability for doing business in Serbia
increased in the last 12 months,” compared to 24 percent in 2011. Businesses also report being much better able to understand the Government’s economic growth strategy: 61 percent now claim to understand the strategy fully or partially, up from 22 percent in 2011. Despite low levels of business association membership and relatively low marks for associations’ ability to advocate for regulatory reforms (see above), 56 percent agreed or partially agreed with the statement “business ability to participate in reforming laws related to the business environment has improved in the last 12 months,” compared to 20 percent agreeing with this statement in 2011.
Figure 4. Effects of corruption on businesses It affect a lot
8
2013
16
2014
17
20
41
33
2012
Does not affect at all
38
41
2011
4
Sometimes it affects
38
26 46
42
42
2015
12
37
51
2016
13
36
51
European Commission Progress Report 2016
Figure 5. Transparency, predictability and publicity Disagree (1+2)
Transparency and predictability for doing business in Serbia increased in the last 12 months
Quality of public dialogue and debate on macroeconomic and fiscal issues is improved in the last 12 months
2011 2012 2013 2014 2015 2016
6
Agree (4+5)
76
20 19
73 55 41
38 37
2011 2012 2013 2014 2015 2016
4 8 9
36
45
Bidding low is still the best option for winning a public contract. Despite an increase in the average value of procurements, few companies are bidding on public procurements: 72 percent have never bid and only 11 percent have significant experience in public tenders, which amount to about EUR 2.9 bn annually.5 In the first half of 2016, the average
5
Partially agree
14 17 19
45 44
74
22
68
4
23
56
9 11
33
42
41
17
41 40
42 41
17 19
number of bidders per procurement was 2.5, lower than the 2.7 in 2015.6 Submitting the lowest bid is still seen as having the greatest impact on a business’s chances of winning a contract; the technical merits of the bid come next to last, behind political and personal connections. Perceptions did not improve, compared to 2015.
Source: Serbian Public Procurement Office, Serbia Public Procurement Report, 1 January 2016 to 30 June 2016. Ibid
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Figure 6. Factors contributing to winning public contracts
The best financial offer
The best technical capacity and experience
Connections with political parties
Private connections
Bribing members of tender panel
3.1 3.3
3.8 3.7 3.8 3.9
2.7 2.8 3.1 2.9 3.0 2.9 3.7
Scores from 1 to 5, with 1 being “never” and 5 “often”
4.1
3.1 3.4 3.2 3.3 3.1 3.2 3.1 3.1 3.2 3.1
2.6 3.0 2.8 2.7
3.9 3.6
2011
2012
2013
2014
2015
2016
Regulatory framework Perceptions of the regulatory framework improved. The survey shows that 16 percent of those polled believe the burden of laws and regulations has gone down over the past 12 months, while another 38 percent partially agree with this statement (a total of 54 percent of all respondents).
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While these findings are similar to those seen last year, they constitute a marked improvement on 2011, when as many as 82 percent did not agree that the burden of laws and regulations had been reduced in the preceding 12 months (this year the figure is nearly twice as low, at 45 percent). The
Figure 7. Perceived burden of regulations and ability to influence regulatory reform Disagree (1+2)
The burden of laws and regulations decreased in the last 12 months
2011 2012 2013 2014 2015 2016
Business ability to participate in reforming laws related to the business environment has improved in the last 12 months
2011 2012 2013 2014 2015 2016
ability of businesses to participate in regulatory reforms has received the same degree of support as last year, with 43 percent claiming this was not an option. Nevertheless, this figure has nearly halved since 2011. Findings of all surveys from 2011 to 2015 reveal a continuing decline in the burden of regulatory requirements. In 2011, 56 percent stated they were spending more time and money on compliance than they did in the previous year; in 2015 the figure was 25 percent, and 2016 has seen a decrease by
Partially agree
Agree (4+5)
82
16
71
2
22
63
7
30
46 46 45
7
37
17 15 16
40 38
80
16
72
4 7 7
22
63
30
47
37
16
43 43
42 40
15 16
an additional percentage point. The most substantial year-on-year progress was made in 2014, when the number of respondents claiming to spend less time on compliance fell to 22 percent from 47 percent in 2011. This percentage has not changed substantially since, and in 2016 stands at 21 percent. Substantial improvement has occurred with both indicators compared to the period from 2011 and 2013; a slight positive trend is also in evidence relative to 2015. Given that 2016 was an election year, this minor stagnation was not entirely unexpected.
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Figure 8. Money and time spent on regulatory requirements More money
Money
2011 2012 2013 2014 2015 2016
The same amount of money 56
Time
40
47
4 3
50
33
63
28 25 24
4
66
5
71 70
More money
2011 2012 2013 2014 2015 2016
Less money
3 5
The same amount of money
47
Less money
49
37
56 66
31
3 7 3
22
69
9
22 21
72 70
6 8
Best rated reforms improving regulatory environment Businesses report positive perception of a number of newly implemented measures. Some of the key initiatives include the functioning of the Central Registry of Mandatory Social Insurance (cited by 62 percent of those polled); simplified KEPU ledger requirements (56 percent); abolition of
12
employment booklets (49 percent); and electronic construction permitting (48 percent). As in 2015, it is evident that businesses positively perceive all Government measures aimed at the introduction or enhancement of electronic solutions or streamlining of complex administrative requirements.
Figure 9. Ranking of Government measures Negative (1+2)
Don’t know
Refusal
Functioning of the Central Registry of compulsory social insurance Simplified procedures on KEPU
Not applicable 6
1
26
3
3 6
Introduction of the e-permitting software
4
Introduction of the law on payment services
4
1
Introduction of the amendments to the law on Tax procedure and Tax Administration
6
1
Adoption of the law on inspection control
6
Findings show 68 percent believe para-fiscal fees and charges remain the least business-friendly policy. Serbian businesses see non-tax, para-fiscal fees and charges as the regulatory requirement least conducive to doing business, followed by wage taxes and contributions (64 percent); VAT (58 percent); administrative procedures in general (53 percent); and tax administration in particular (51 percent). A downward trend is noticeable in the number of businesses citing all aspects of the
56 35
2 16
9
Positive (4+5) 62
31
The abolition of the emoloyment booklet
Introduction of the amedments to the Law on Tax on corporate income
Neutral
49 25
37
48 46
41
43
5
36
1
42
41 38
business environment as negative. The perceived negative impact of the tax administration saw the greatest decrease in the past year (from 59 percent in 2015 to 51 percent in 2016), with a similar decline in evidence for administrative procedures in general (from 59 to 52 percent). Unfortunately, the length and costs of court procedures are now seen more negatively by those polled (an increase from 43 to 47 percent).
13
Figure 10. External factors perceived as most adverse to doing business 77 75 74
Other obligatory
70 72 68
(quasi-fiscal) charges Wage taxes and
72 69 66 64
contributions
61 61
VAT 61 58 49
Tax administration 51
62
Court procedures and requirement
Inspection oversight is the area with the least adverse impact on doing business in 2016 and the greatest cumulative increase since 2011 (seen as negative by 23 percent in 2016, 28 percent in 2015, and 43 percent in 2011). This is followed by business licences (viewed as negative by 27 percent in 2016 and 37 percent in 2011). Apart from the above two aspects, customs and foreign trade procedures, labor requirements, and construction permitting are seen as the least problematic aspects of the regulatory framework.
14
43
53 49
81
66 67
63 65 62 59
Administrative procedures
77
61 59
70 66
2011
2012
2013
2014
2015
2016
52 50
43 47
Businesses also believe political risks of doing business have gone down: 13 percent believe these risks have increased relative to one year ago, as compared to 18 percent in last year’s survey. Better perceptions of the regulatory environment are also affected by public administration performance, seen as more efficient now than last year by 59 percent of those polled (in 2015, 55 percent of those polled stated that performance of public administration has improved compared to the year before).
Figure 11. Perceptions of public administration Public administration’s work is more efficient now than a year ago
Disagree (1+2)
2014 2015 2016
Partially agree
45 44 41
Agree (4+5)
39 40 40
16 16 19
Construction Permits Time and cost of construction permitting decreased. The number of days needed to obtain a construction permit has gone down substantially:
in 2013 this took 9.3 months, in 2014 the time needed was 7.7 months, and in 2016 it took 4 months to obtain a construction permit.
Figure 12. Percentage of respondents who constructed a commercial property over the past two years Yes 10
2013 2014
5
No 90 96
2015
7
94
2016
7
93
Figure 13. Average time needed to obtain a construction permit 2013
9.3 months
2014
8.2 months
2015
7.7 months
2016
4 months (121.8 days)
15
Significant improvement in inspection oversight
This finding is consistent with the results of the World Bank’s Doing Business report, which found that the time needed to obtain a construction permit had fallen from 272 days in 2015 to 156 days this year. Many more respondents now feel that costs of construction permitting are moderate: in 2013, this view was held by 16 percent, and the figure has now risen to as much as 40 percent. These findings also correspond to the conclusions of the Doing Business report:, the costs of obtaining a building permit had fallen from 25.7 percent of the value of the building (in 2014) to 3.2 percent in 2016. The survey reflects overall satisfaction with efforts so far, evidenced through decreased demand for additional reforms.
For six years in the row, there is a consistent upward trend in how companies see inspections, especially after the enactment of the Law on Inspection Oversight. This piece of legislation emphasises the preventive role of inspections; the first months of its full implementation have resulted in an increase to 60 percent in the number of businesses who believe inspectors have proven efficient in their advisory and preventive roles, up from
Figure 14. Perceptions of the construction permitting system Agree Construction permits can be obtained in a reasonable time Costs related with construction permits are moderate
(*Further) simplification of construction permitting would enable me to expand my business
16
35
2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016
Don’t agree 81
41
59 47
52
42
53 9 25
16 15
14
24
25
40
9
89 25
66
14
75 61
25
47 percent in 2013. A majority of those polled (54 percent) see checklists as useful (these are new instruments that inspections have prepared and published as mandated by the Law on Inspection Oversight). Meanwhile, 75 percent of businesses feel that inspection oversight regulations are easily accessible, with another 71 percent feeling that the relevant regulations are both clear and easy to understand. In 2011, 28% of businesses agreed that inspections regulation is clear and understandable.
There has also been an increase in the number of businesses who feel inspections are an effective safeguard from unfair competition: in 2015, when the Law on Inspection Oversight was enacted, the number rose by six percentage points relative to 2014 (from 30 to 36 percent), and it has now risen by another six percentage points (from 36 to 42 percent). One-quarter of all respondents believe that inspections lack coordination and that their requirements often overlap, but this still constitutes an improvement of five percentage points relative to 2015.
Figure 15. Perceptions of the inspections system 62
70 73
Inspectors are well trained 67
Inspectors are polite in dealing with businesses 32 34
The complaints mechanism is effective
43
58 60
54 58
Regulations on inspection controls are clear Inspections effectively protect us from unfair competition
30
36
47
Inspectors have a warrant for surveillance, that is adduced to us
23
Inspections are not well coordinated and they duplicate their requests In order to pass the control without fine, companies have to bribe inspectors
26
25 14
22 23 24
30
67
67
54
75
72
60 58
The inspectors are often ordered/required to find a reason to collect the fine/initiate penalty procedure
86
42
Inspections provide information, advice and technical assistance in order to enable businesses to comply with the regulations timely
32
79
50
Regulations on inspection controls are accessible
21
76
81
62
72 2013
38 39 38
2014
2015
2016
17
The average amount of fines has declined by nearly 15 percent or EUR 165, from EUR 1,148 in 2015 to EUR 983 in 2016 (and by almost 50% relative to 2011). As in previous years, businesses are most often inspected by the major inspectorates - the market inspection, labor inspection and tax inspection. The administrative burden in this area has also declined, with the average time that managers have to devote to compliance activities decreasing nearly threefold relative to 2012 (from 36 hours to 15 hours in 2015 and 13 hours in 2016). When data about the frequency of inspection visits are cross-referenced with those indicating the amount of time businesses spend on regulatory requirements, a similar trend is seen to emerge: the average time spent by company managers on compliance per inspection visit has gone down from 12 hours in 2011 to five hours in 2015 and four hours in 2016.
Businesses believe that this year has seen deterioration in the efficiency of the contract enforcement framework. The perceived efficiency of this system rose between 2011 and 2015 due to major reforms undertaken to the enforcement framework. Yet, in 2016 businesses voiced greater pessimism with regard to enforcement, with 65 percent of those polled who had used the system rating it as “poor” or “very poor”, as compared with 35 percent who see it as “good”, “very good”, or “excellent”. This is a deterioration in comparison to the 2015 findings, according to which 55 percent of those polled had felt the system was “poor” or “very poor”, with 45 percent believing it to be “good”, “very good”, or “excellent”. It needs to be underscored, however, that a mere 30 percent of all businesses have actually used enforcement procedures, which could mean that they are able to collect their receivables outside of this system, or, conversely, that they are
Figure 16. Inspections by the numbers 2011
18
2012
2013
2014
2015
2016
868 €
2022 €
1148 €
983 €
Average amount of fines imposed
2128 € 1655 €
Average amount of time (in hours) spent by management
70
34
17
12
15
13
Average number of visits in the year before
5.5
4.8
3.1
2.2
2.8
2.8
Average number of visits in the current year
6.0
3.8
2.1
1.6
1.7
1.6
Figure 17. Effect of wage taxes and contributions on competitiveness Negative
Wage taxes
Not applicable
69
averse to using the system. One positive development is the fact that 37 percent of all businesses see the introduction of public enforcement officers (EOs) as a step forward for the efficiency of this framework and better collection of commercial receivables, as compared with as few as 7 percent of those polled in 2011 who believe that EOs have had a noticeable or major detrimental effect on the efficiency of the system. When this question is posed to the limited number of businesses who have actually used EO services as creditors, the number of positive responses increases to 65 percent. These findings justify the legislator’s decision to mandate the use of PEOs in nearly all commercial cases, which could generate some optimism about the future efficiency of enforcement procedures.
Wage taxes and contributions and employment Wage taxes and contributions are traditionally perceived by Serbian businesses as being inimical to business. However, the Survey shows that these high taxes are not the most decisive factor in deciding on employment - 22 percent of those polled had in fact increased their workforce. This year’s survey reveals a five percent increase in the number of businesses that have created new jobs and hired new staff. Those who did not hire in the past
Don’t know/Refusal
Neutral
1
26
Positive
3
year claim that the market conditions prevent them from increasing their staff. Most workers are still employed on open-ended contracts: As few as 25 percent of all respondents have fixed-term staff on board. This number has not changed after amendments to the Labor Law took effect in 2014, which have extended the maximum periods of fixed-term contracts. A possible reason for this is that the new law has also made it less burdensome and risky to hire workers on open-ended contracts (by, amongst other things, streamlining severance pay requirements and restricting grounds under which staff could claim unfair dismissal). The impact of the 2014 changes to the Labor Law on the administrative burdens is acknowledged by findings of this year’s survey. As mentioned above, respondents have recognized the abolition of employment booklets as one of the top three Government measures of the past 12 months.
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Figure 18. New hiring 64 There was no need for new workers due to market conditions
71 69 20
We’ve hired new people/does not apply to us
17
2013 2014
22
2015
Macroeconomic policy Although the perception of the impact of macroeconomic indicators on the Serbian economy has improved, businesses still see inflation, exchange rate and interest rate volatility as detrimental factors. Similar to previous survey findings, inflation and foreign exchange rate and interest rate volatility are considered to be significant reasons for concern. The inflation rate of 2 percent is very low and has been stable since 2013 . At the same time, the key policy interest rate has declined to 4 percent, and the foreign exchange rate (particularly the euro/dinar exchange rate) has been stable as well. Therefore, these negative perceptions are not, ap7
20
Based on the data from the National Bank of Serbia.
parently, based on their current values, but, rather, on historical trends. While businesses are still not fully cognizant of the improvements in this respect, the Survey’s latest findings show that this awareness has slowly been growing. A decline in negative perception of indicators related to fiscal policy is also conspicuous, but VAT rates and wage taxes and contributions still present formidable obstacles to businesses’ operations in Serbia. The negative perception of taxes and contributions levied on wages dropped yearon-year from 71 percent in 2015 to 70 percent in
2016. Wage taxes and contributions still rank high on the list of the most onerous macroeconomic and fiscal indicators as perceived by Serbian businesses, and such sentiments are indeed justified. According to the World Bank’s findings, while the tax burden on average salaries in Serbia is comparable to similar levies on salaries elsewhere in Europe, taxes on below-average wages are high. Serbia has the sixth highest “tax wedge” for lowest wages in
Europe out of 30 countries covered by the World Bank survey (33 percent of average gross wage in Serbia).8 The negative perception of VAT rate declined from 68 percent in 2015 to 66 percent in this year’s survey. However, when perceptions of VAT rates recorded in the previous three years are compared, a considerable improvement is noticeable since the number of negative replies has dropped by 12 percent since 2014.
Figure 19. Perceived impact of macroeconomic indicators on competitiveness Negative
Neutral
Positive
Inflation 2014 2015 2016
88
74 71
12
25 24
1 4
Exchange rate volatilty 2014 2015 2016
83
66 63
32 34
16
1 2 3
Interest rate volatility 2014 2015 2016
57
65
70 40
32
28
3 3
1
VAT rates 2014 2015 2016
68 66
78
30 31
20
1 2 2.8
Wage taxes and Contributions 2014 2015 2016
74 71 70
24 26 27
3 3 3
8 World Bank, Rebalancing Serbia’s Economy: Improving Competitiveness, Strengthening the Private Sector, and Creating Jobs, June 2014
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Respondents strongly oppose reductions in incentives and transfers which benefit their businesses directly, but, at the same time, are supportive of cuts in areas where transfers have no direct impact on their own business operations. While the current situation is similar to that seen one year ago, significant changes are noticeable relative to 2011, when over 50 percent of the surveyed businesses supported cuts in subsidized inputs in four out of the six areas. Such a change may have arisen from a more positive view of the effectiveness of government’s measures and/or more positive perception of the fiscal situation now as opposed to 2011. The only area in which support for a reduction in subsidized inputs from the state budget is still significant in 2016 are foreign investment allowances (53 percent of those surveyed are supportive of cuts), whereas the respondents are strongly opposing a reduction in capital infrastructure investments (only 11 percent advocate cuts in this area) and less so with regard to subsidies for energy and raw materials as well as goods and services price subsidies, which, nonetheless, is still significant
Figure 20. Percentage of respondents seeing the shadow economy as a threat to their businesses 65% 63% 61% 59% 57% 55% 53% 51% 49% 47% 45% 45% 43% 41% 39% 37% 35% 9
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(where 27, 29 and 28 percent of the respondents, respectively, would like to see cuts). The shadow economy has once again been recognized as one the main threats to the Serbian economy. While it appears that the negative perception has faded away in the past three years, about 57 percent of those surveyed still perceive shadow economy as a significant threat to their business operations. The Government of Serbia put in place a set of measures through the National Program for Countering Shadow Economy, intended to reduce the size of the informal economy from the current 30 percent of GDP9 to 26 percent in 2020. The first step in this direction was the last year’s successful inspection reform which has already yielded results. According to the Businesses Registries Agency, there has been a 19 percent yearon-year increase in the number of newly registered micro and small businesses. Almost 80 percent of all respondents are of the opinion that businesses in their respective industries pay their contributions in full. A reason for concern is that this figure is 2 percentage points lower than in the last year’s survey; however, the surveyed businesses are yet to fully experience and reflect on the consequences of the inspection reform.
62% 59% 57%
2014
2015
2016
The Shadow Economy in Serbia: New Findings and Recommendations for Reform, USAID BEP, FREN, March 2013.
Access to Finance The negative trend with regard to the use of external finance has doubled compared to 2011. As many as 68 percent of surveyed businesses reported that they were not resorting to external financing at all, which constitutes a marked increase relative to 62 percent in 2015 and 31 percent in 2011, respectively. In comparison, in emerging markets
the percentage of companies reluctant to take on debt is just 30 percent, whereas in developed countries this figure totals only 15 percent. The average annual borrowing by Serbian business entities has also halved and amounts to EUR 30,00010 as opposed to EUR 65,000 in 2011.
Figure 21. Most commonly used sources of finance 31
We do not borrow money
66
35
Banks
28 27
Family and friends 3
Leasing
0 0 1 0 0 1
Foreign sources of funding
2 1 1 0 1 0
Loans by state institutions 10
1 0 0 0 0
5 6 5
15
34
54
64 62
68
43
31
18
2011 2012 2013 2014 2015 2016
5% modified arithmetic mean.
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Demand for credit has also decreased. In 2016, 68 percent of businesses who did not take on any loans stated that they had no need for credit, as opposed to 59 percent in 2015 and 2013, respectively. The most frequently cited purposes of bank loans included equipment and inventory. A positive aspect to this, as opposed to previous surveys, is that businesses, regardless of their source of financing, are no longer using loans primarily to pay VAT and other dues.
In this respect, access to finance still constitutes one of the most problematic factors for doing business in Serbia. This is corroborated by the data from the World Economic Forum’s 2016 Global Competitiveness Index where Serbia ranks 124th out of 138 countries in terms of affordability of financial services. In Europe, Greece is the only country lagging behind Serbia with regard to affordability of financial services.
Figure 22. Main purposes of bank loans 31
Acquire/Improve Equipment or Machines
37 22
Increase inventory
23
9
Diversify business
8
Pay VAT and other government taxes
26 29
17 10
5 5 6
1
Acquire land of Building
6 5 6 4 6 4 5
Improve Business Premises 2
Pay wages 3
24
6
5 4
7
2013 2014 2015 2016
41
Figure 23. Finance excluding businesses’ own sources
85% of total funding comes from business owners themselves on average, so the structure of the remaining of 15% of total funding looks like this.
Banks
Family and/or friends
Loans by state institutions 2012 2013
Leasing
Foreign sources of funding
Grants/Non-repayable funds
Other
70 64
2014
65
2015
69
2016
68
Most financing comes from owners’ equity. This is true irrespective of the size or industry of the business entity in question, or whether it is registered as an enterprise or a sole trader. As much as 87 percent of all the financing for businesses in Serbia comes from their own equity (the same as in 2015 and 2014, but more so than in 2012 when this figure was 66 percent), whereas only eight percent of financing comes from banks, less than last year (12 percent) and considerably less than in 2012 (24 percent). Business entities negatively perceive borrowing from banks. The main reasons that those who needed financing did not borrow are as follows: 1) they used owners’ equity instead of loans; 2) financial products offered by banks were not suitable for
23
1 21 3
3 22 5
15
2 4 21
26 15 19
8
2
7
4 22
3 3 14 3
their needs or risk profiles; 3) bank requirements take too much time/incur too much cost. This raises the question as to whether bank financing will actually increase even if demand for finance starts to grow. Term loans and overdrafts are the most common forms of bank financing. A total of 33 percent of borrowers use term loans as the most frequent type of financing, which is followed in second place by overdrafts, cited by 17 percent of respondents. A positive sign is that the use of overdraft has been steadily declining for the third consecutive year (from a high of 29 percent in 2014). Other bank and non-bank products, including letters of credit, leasing, and factoring, are rarely used.
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Figure 24. Types of finance used 19
Term loans
27 28 15
Overdraft 16
Guarantees
9 9 9
Revolving credit
Letter of Credit
8
6
2
0 1
Leasing
7 7
3
2
21
26 25
30 33
29
11 11 12 14 11
2011
2012
2013
2014
2015
2016
2 6 5
7
6
7
Real property, machinery and equipment are most commonly required as collateral. Looking at the historical data, the most common types of collateral required by financial institutions are “land and buildings” (41 percent), followed by “machinery and equipment, including movables” (32.7 per-
26
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cent). The percentage of land and facilities/buildings required as collateral has dropped over the past four years. This is good news, particularly for MSMEs as the capital of these companies mostly comprises movable property rather than land or facilities/buildings.
In 2016, land and facilities/buildings were the least required as collateral in Southern and Eastern Serbia (30 percent) and most required as collateral in Vojvodina (50 percent), which might reflect trends in the real property markets in these regions. Another good news is that, after last year’s increase, financial institutions are now less likely to require personal property of business owners as a collateral, which goes to show that creditors perceive companies as business entities separate from their
owners as natural persons. On the other hand, this year the number of requests for machinery to be used as collateral has continued to decline following several years of continuous stable growth. The fact that machinery and equipment are less likely to serve as collateral may perhaps indicate that businesses are borrowing less for the purpose of acquiring such movable property, which is often crucial for ramping up production and productivity.
Figure 25. Collateral required 53
Land, buildings 41 32
Machinery and equipment, including movables
34 33
Personal asset of the owner
26 21
6
31
13
19
46
2012
2013 2014
30
13
58
40 36
19 23 23 19 21
Accounts receivable and inventories
Other
41
48 47
2015
2016
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Expectations for the future are improving As many as 48 percent expect to see an increase in their net profits in the coming 12 months, an increase of four percentage points in comparison with last year. In addition, the percentage of respondents expecting a reduction in net profits has never been lower: this stands at 9 percent, when compared with 12 percent in 2015 and 23 percent in 2012. When asked about their perceived outlook for the coming 12 months, 31 percent responded that they
expected to hire new staff: this is an increase of 7 percentage points from last year, and also constitutes the greatest year-on-year growth in this figure (from 24 percent of all respondents in 2015) since the USAID BEP Business Survey was first performed. Although similar optimism in past surveys (2011) did not translate to subsequent hiring increases, it should be noted that this year’s expectations for workforce reduction were the lowest in the history of the survey.
Figure 26. Future expectations – profits and hiring Decrease
Net profit
Number of employees
2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016
14
No change 35
51
23 16 15 12 9 11
43
34 34
45 37 44
43 44 48
44 58
15 12 10 9 6
Increase
31 66 67
61
19 20 26
67 63
24 31
Hopes for the next year When asked about their hopes for the regulatory environment, businesses clearly prioritize tax cuts and reductions in contributions and charges (as reported by 24 percent of those polled, in clear con-
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trast with 2014, when just 17 percent had cited this issue), followed at a distance by more efficient administration and e-government (7 percent).
Conclusions and Recommendations The survey shows that, when business environment constraints are addressed in a disciplined and sustained manner, businesses feel the impact. However, this approach, which includes comprehensive analysis, extensive public-private dialogue, targeted solutions, and publicity, must be applied in all areas of reforms as well. Based on the findings of the survey, our recommendations for the government, business community and other stakeholders are as follows: •
Intensify public administration reforms and enhance e-Government solutions. From the standpoint of businesses, this means less unnecessary red tape and more e-government. These were the most popular reforms undertaken during the past two years. The public administration reform needs to focus on streamlining procedures, developing a service-oriented culture, and expanding e-government.
•
Increase the predictability and transparency of the business environment. This area has seen significant improvement since 2011, but only slight progress has been made in the last two years. A business enabling environment can only be constructed through broad-based access to information; use of e-solutions, consultations and public discussions throughout the legislative process; and application of institutionalized platforms for public-private dialogue on issues that influence the business community and its growth. In 2016, businesses reported little improvement in the amount of time and money they spend in dealing with regulatory issues. It is in government’s interest to increase its ability to seek feedback and
monitor how well their reforms are impacting businesses and citizens. •
Focus on tackling the shadow economy and full implementation of inspection reform. The GoS has announced that the following two years will be dedicated to decreasing the shadow economy in Serbia. In order to succeed, the inspection reforms needs to be consistently implemented – through introduction of an e-Inspector system, transfer of all inspections to risk based management, and continuing monitoring and evaluation of inspectors work and status. However, inspections should not be seen as the only factor contributing to fighting informal businesses. Improvement in coordination between the judiciary, police and prosecution is needed, in order to establish an efficient system of sanctions for those operating at the “black” market. Strong public outreach that will educate the citizens and the businesses on consequences of the grey economy is also recommended. Finally, improving the tax administration and improving liquidity of Serbian economy by restructuring loss-making public enterprises are also policy decisions that would contribute to more growth and jobs, and lower shadow economy.
•
Remove or reduce para-fiscal charges and ensure predictability of non-tax charges and fees. This recommendation comes as no surprise given the unpredictability of these charges. The high number of loosely regulated non-tax fees and charges, both at state and local government level, represents a costly burden on businesses. The Government needs to stop the practice of ad hoc introduction of charges and insufficiently justified fees, and should mandate appropriate assessment of legitimate charges.
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•
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Develop the regulatory framework for the non-banking financial sector. With bank lending declining and, given that banks will always have difficulty serving the micro and small business market, it is important for Serbia to allow non-bank financial institutions (NBFIs) to invest and lend in the country. The Central Bank has announced this piece of legislation, and established an internal Working Group tasked with drafting NBFIs regulations with BEP’s support. This process needs to be accelerated.
•
Restructure state aid to increase finance for micro and small businesses. State aid to the private sector should be restructured to target financing gaps and focus on underwriting bank risk and ensuring additional funds for private sector lending in lending to small and medium enterprises. This could include partial and/or full guarantee and co-financing programs.
•
Improve loan enforcement and cut costs of regulatory requirements. These are needed to increase the liquidity of Serbian economy, increase the trust in judiciary system, and help reduce high interest rates and fees.
•
Provide businesses with training and education on financial management. It appears that many businesses do not understand how to structure borrowing to increase profits. Better educated and informed businesses would be more likely to seek and use less expensive and more appropriate means of financing.
•
Increase and improve investments in infrastructure. These investments are perceived as business related by our respondents and provide public goods that benefit businesses across the board.
•
Increase communications about improvements in the business environment. Businesses seem to underestimate some of the improvements in the business environment. The government should increase efforts to publicize and widely communicate all improvements to the business environment.
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