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SMEs need a level playing field to develop

3 Sep '08
Small business owners in Russia have had tough sledding for years. The gauntlet they face is daunting—from endless red tape barriers, ever-changing “rules of the game” and the impossibility of getting loans for startups to “official” kickbacks and briberies to get orders and “bought” tenders for government contracts. A law to the level the playing field is now being developed in Nizhny Novgorod region.

A number of speeches made by RF President Dmitry Medvedev following his inauguration in May helped focus a new wave of attention to small businesses. Mr. Medvedev emphasized the necessity to take radical measures to loosen the restrictions hindering SME development. The old law on the books doesn’t focus on development; its aim is reflected in its title: “On state support for small businesses”.

The authors of a new draft on SME development in Nizhny Novgorod region feel that there is a big difference between development and support. Julia Kruse, the CEO of the legal firm TM Service that won a tender to help draft the new law puts it this way, “one needs to “develop” what is viable enough to develop, while the concept of “support” refers more to providing funding.”

In public focus

Nizhny Novgorod officials held a public hearing in late August on the latest SME development draft and a concept. The SME Concept that Kruse and her staff are developing is designed to help SME’s through 2020 and the enacted law will be enforceable as long as it is up to date. The previous law was adopted as far back as 1997 but was abolished in May 2008.

Participating in the public hearing were Nizhny Novgorod businessmen, representatives of social organizations, non-commercial entrepreneurial associations and state regulating authorities. The latter group included the Regional Ministry for Small Business Support and Development and Consumer Market and Services’ Vasily Kazakov, who championed the revised legislation.

TM Service’s concept calls for a three-phased government assistance program to support SME development. The first stage aims at increasing awareness and importance of being an entrepreneur. While preparing the draft, developers polled young people in Nizhny Novgorod and found out that the youth prefer good positions at large, and most of all, transnational companies rather than starting their own businesses. To motivate more people to consider becoming an entrepreneur, any new legislation will have ensured that it’s worth the sweat because the rewards, access to funding and support will be easy and large enough to make the risk worth the effort.

During the second stage, the program will focus on structural changes to help move SME’s who are “addicted to retail” to develop innovative businesses. Only then, Kruse feels, will the stage be set to start really sustainable and effective growth.

TM Service’s goal for the SME share of regional GDP is an ambitious 50%--it’s now less than 20%.

To jump start this growth, priority assistance will be given to SMEs who are actively expanding into other regions. Creating sector and area specific SME clusters are other ways Kruse is suggesting to make small business more competitive and more profitable.

The draft also suggests financial incentives for SMEs: partial reimbursement of loan rates, targeted grants for startups, partial guarantees and liability subsidies. To facilitate this, the region intends to set up guarantee funds, micro-credit funds, seed funds and direct SME investment funds, all of which will use both government funds and private capital.

Cautious optimism, lingering cynicism

Overall, the entrepreneurs at the public meeting liked what they heard, but wanted more specific assurance that the proposals would actually be put in place. As one business owner said, the plans are “too theoretical, they lack specifics.” Some participants also questioned the criteria selecting which SME’s would get support. And a few had no faith that the new law would be any better than the previous one, which had been roundly criticized earlier.

Businessmen’s worries are easy to understand, Kruse feels, they all want a law that helps them, but they worry that its all just another formal bureaucratic exercise void of substance and compiled only to make a report on bringing regional legislation into compliance with federal laws.

While it’s too early to forecast what will happen in reality, Kruze believes that a lot depends on businessmen themselves. “In the final analysis they are the one’s that will have to compete for funds at government tenders. They have to be ready for these tenders and prove their strengths in front of other applicants. New mechanisms for cooperation between regions and federation are in place today. There are new targeted programs for emerging businesses, but small and medium firms have to show their potential to get into them,” she concluded.

Nursing reserved hope

The draft developers have less than a month to complete their task. Before any new SME law can be enacted, however, the concept needs to be approved by a number of administrative bodies. “Getting all of these agencies to sign off is no easy task,” Kruse admits, “but the very fact that the regional government has hired an independent company to draft legislation is exceptional. It gives us hope that authorities are ready to set up necessary conditions to ensure SME’s will play a leading role in our region’s future.”

Svetlana Zabalueva, senior journalist
Oleg Kouzbit, managing editor: “I’m glad you join us here and take The Bridge walk for Marchmont’s weekly review of the Russian regions’ innovative present and future. Stay close and you’ll find out more of how Russia is bridging the existing gap between its researchers and businesses.”
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