ROMANIAN CASE STUDY
1.2. EXISTING GOVERNMENT POLICIES AND INSTITUTIONS SUPPORTING THE SECTOR
2 CNA Veneto, Italy
1.2. EXISTING GOVERNMENT POLICIES AND
three-year program. Until then, the most significant measures with a favourable impact on the SME sector were: the issuing in 1990 of a decree- law permitting the establishment of several kinds of private undertakings, the enacting in 1991 of the company law, the setting up of the grounds for privatisation by giving the status of commercial companies to the former state enterprises and enacting the privatisation law.
Yet, the strategy adopted in 1992 initiated a new approach, based on the awareness of policy makers and the public about the fact that SMEs are not equal to the private sector and committed the government to an active policy aimed at catalysing the development of a strong SME sector from scratch. The strategy was conceived as a very comprehensive one, listing a full set of policies and measures. They were mainly up-front measures preparing the grounds for a future SME sector, and therefore focussed on legal, institutional, educational and cultural maters. The strategy, however, was implemented only partially.
During 1993-1996, several policy papers emphasised the commitment of the government to support the development of the SME sector but few real measures were actually put into practice.
Out of them, the following are the more significant:
• enactment of the Government Ordinance 25/1993 regarding the development of SMEs,
• establishment of two credit lines with subsidised interest rates,
• setting-up of the Romanian Guarantee Fund for private investors; and
• implementation of several donor programs.
The policy documents issued by the government during that period emphasised the priority given to the building up of a countrywide network of SME advisory and development centres.
All these measures had a limited effect because of weaknesses in design and implementation. Thus, the GO 25/1993 has been criticised because of its wrong definition of SMEs and because its declarative character (the lack of any clear obligation of the government). The credit scheme financed from the unemployment fund3was not correlated with the SME policy and was affected by the periodic selection of another implementing bank; it created dissatisfaction because of the reimbursement period considered to be too short, the too high percentage of the investors own contribution, and the time consuming bureaucratic procedures. The low amount allocated for the second credit scheme with subsidised interest4 allowed very few entrepreneurs to take advantage of it. Further, the upper limit of the loan decreased very much in real terms because of the failure to upgrade it in nominal terms, despite the high inflation recorded several years.
The Romanian Guarantee Fund and the SME advisory and development centres were designed based upon the assumption that they would become immediately self-sustainable. As a consequence these centres were obliged to abandon their initial goal in favour of more lucrative activities, or to limit the access to their services to only a few entrepreneurs willing to pay high fees. Because of such inconsistencies of the adopted solutions, the
3 Instituted through an amendment brought in 1994 to Law no. 1/1991 4 Instituted through Government Decision no. 805/1995
effectiveness of the initial investment is now questionable.
During the same period, the profit tax exemption of new enterprises has been removed (1994) and the privatisation of small business units (asset privatisation) has been stopped. In such a way, two main incentives for enterprise creation were removed.
Since 1997, the necessity of a more substantial support for the development of the SME sector was strongly promoted by the representatives of the entrepreneurs and widely recognised by political groups. This resulted in the initiation of two new SME programs5. However, despite the fact that the programs approved in 1998 were well received by entrepreneurs, they had a modest impact because of their inconsistency and the small number of entrepreneurs who had the opportunity to access them. In 1999 a new SME Law was adopted: Law 133/July 1999 concerning the stimulation and development of SMEs, completed subsequently by the Methodological norms regarding the modalities for financing programs and incentives for the set-up and development of SMEs (through GD 797/September 1999).
The law offers private SMEs certain economic, financial and tax facilities, like:
• exemption from payment of custom duties on industrial machinery and equipment, as well as on imports of raw materials;
• tax exemption for the share of the reinvested gross profit;
• reduction with 20% of the profit tax in the case that the company increases by at least 10% its number of employees,
• reduction with 75% of tax on profits obtained from exported output;
• Guaranteeing credits through the set up of the National Credit Guarantee Fond for SMEs, with offices in each county;
• Simplification of the system for taxing incomes of natural persons, family associations and SMEs.
Law 133/1999 was very generous in providing facilities for SMEs, but unfortunately the facilities were not in line with the capacity of the public budget to finance them. As a result, the facilities were suspended immediately after the enactment of the law, and during the following period many of the provisions of the Law were explicitly repealed through other laws. Thus, Emergency Ordinance 215/December 1999 has repealed the stipulations offering facilities to SMEs for custom duties on equipment imports, and EO 217/December 1999 repealed the articles of the law concerning tax facilities. In March 2001, EO 297/2000 regarding the stimulation of private entrepreneurs and the setting-up and development of SMEs came to complete Law 133/1999. The ordinance offers various facilities, like tax exemption for reinvested gross profits, however under the condition of being approved by the public finance departments at county level. The methodological norms for applying Law 133 were approved only in March 2001 through GD 224/2001. The law needs to be republished, due to the many ordinances that affected it. However, it seems that the good intentions that have lead to granting certain facilities to SMEs do not have a counterpart in financial resources of the state budget.
5 Approved through Governmental Decisions 788/1998 and 789/1998
One important cause of the lack of continuity and coherency of SME policy was the frequent change of the institutional responsibility. Over a period of 10 years, the responsibility for SME policy has been successively entrusted to the National Agency for Privatisation, the Romanian Development Agency, once again to the National Agency for Privatisation, then to the Council for Reform. The National Agency for Small and Medium Enterprises was created by Government Decision no. 975/December 1998. Law 133/1999 provided for the creation of the National Agency for Small and Medium-Sized Enterprises (NASME). In May 2000, through EO 48/2000, NASME was merged with the National Agency for Regional Development, which become the governmental body in charge with policy making in the SME sector. In 2001, the newly elected government set up the Ministry for Small and Medium-Sized Enterprises and Cooperatives. There is also a National Council of Small and Medium-sized Enterprises from Romania.
Another institution of importance to SMEs is the recently created (GD 16/
Jan. 2001) Ministry of Development and Forecasting, with attributions in regional development, attracting FDI and European integration. This institution will propose to the National Council for Regional Development the financing of regional development programs and projects, and will also establish the criteria, the priorities and the procedures for financing such programs and projects.
The governmental policy as regards SMEs is to improve the business and investment environment in Romania, to complete and simplify legislation, to restructure the tax system, as well as to support the private SME sector through various facilities and institutions. The Medium Term Economic Strategy document adopted in March 2000 after wide consultation with SME associations, political parties and a broad variety of civil society organisations and submitted to the European Commission included among the fundamental options of Romania for the medium term the following:
The creation of an enabling business environment, based on a coherent and stable legal framework that ensures the development of the market competition, the reduction of transaction costs and the diminishing of the tax burden; the promotion of specific measures to stimulate small and medium-sized enterprises; a clear definition of the property rights; the ensuring of adequate administrative and judicial structures, capable to enforce the law and to ensure the respect of the contractual liabilities.
Studies regarding the business environment have shown that the current legal and administrative settings are not favourable for the development of a sound SME sector in Romania. The same conclusion is confirmed by the statistics regarding the development of the SME sector in Romania, the screening of the main issues affecting the prospects for development of the sector - presented above - as well as by considering - in the following section - the obstacles faced by enterprises individually. This situation is partly due to the low performance of the Romanian economy, affected by the delay of structural adjustment, but the fundamental cause of this state
of affairs seems to lie more with weaknesses in policy making and implementation.
It is time to recognise that overall government policy, including the SME policy, has been characterised by insufficient coherence, credibility and transparency6. It has been difficult to feel confident in the coherence and completeness of national SME policy.
The OECD country survey of 1998, includes the following statement:
Because most of the restructuring problems are related to the existing large industrial companies, the governmental policy has, so far, concentrated on them. Some of the governments efforts should be devoted from now on to the promotion of entrepreneurship and development of a new private sector7.
From the point of view of the legal background, the points of concern are:
- lack of stable & coherent legal framework,
- need to improve enforcement of laws relating to SMEs,
- the level of bureaucracy and administrative burden/constraints,
- need for a standing monitoring & review mechanism on legal matters, and - a need for a consultation and advocacy function or mechanism.