ISME welcomes the opportunity to make a submission on the many obstacles that face enterprise in Ireland. I am accompanied by Jim Curran who is head of research in ISME. ISME is an organisation owned and run by owner-managers. It is a national organisation. We represent more then 5,000 small and medium-sized businesses in Ireland. Our concerns and observations are primarily focused on SMEs and, in particular, owner-managers, the risk takers of the economy. Proper recognition of the entrepreneurs' contribution to the economy is long overdue. In addition to providing a range of goods and services to all sectors of the economy, they are a vehicle for economic growth, job creation, competitiveness, innovation and, as is often overlooked, an instrument of social cohesion.
Small and medium-sized businesses play an important role in the economy and in society, and are at the nucleus of the social model. Entrepreneurs in general are more interested in the long-term development of the economy, while big business shareholders are more interested in short-term profit and boosting shareholder returns. In general, owner managers in SMEs are more responsible towards their employees and more integrated into local society. They play an important role in stabilising society and have a bridge-building function between workers and capital and equity owners.
While many issues could be identified, and taking into account time constraints, we will highlight a number of specific issues that would be at the top of our priority agenda as follows: the administrative burdens of red tape and bureaucracy; public procurement; taxation policies; and representation at the social partnership process for SMEs. Prior to going through the relevant points on these issues, I would like to highlight the rise in business costs as a deterrent for business start-up and expansion. We could spend all day talking about obstacles. However, business costs represent one of the biggest obstacles we face.
The profitability of an enterprise is a consequence, in the main, of its ability to trade competitively. This competitiveness is enhanced when market forces are allowed free rein. Competition in Ireland plays across the economy and, to a large extent, is constrained by the dominant role of the State, either as a monopoly provider of necessary business inputs such as energy and transport, or through heavy fiscal impositions such as indirect taxes on labour, local charges, transport and related business activities.
The cost environment and the subsequent erosion of competitiveness are among the biggest immediate threats to business. For instance, between 2002 and 2007, electricity charges increased by 70%, while gas prices have risen by 146%. Water charges have increased by 94% across the board, while waste charges have risen by 150%. Commercial rates across the country are up by 37%, while labour costs have increased by 39%. In the same period the consumer price index has increased by 18%. There have been massive increases in costs. Labour costs are increasing at twice the average across the European Union. The minimum wage is now the second highest in the Union. In 2001 energy costs in Ireland were the second lowest in the Union but are now the second highest. The tackling of the cost environment is most important. It needs to be brought under control or else we run the risk of continuing to price ourselves out of the market.
Every effort should be made to increase the level of competition in the energy market, in particular electricity and gas, in order to stimulate price competition. There must be a redistribution of the burden of commercial rates and water charges to other sectors, including the State and domestic households. Business is the only sector paying rates.
On the issue of red tape, compliance with legislation and regulations means that many owners of small businesses are forced to read, understand and implement about 1,000 major legislative items which impact on their businesses in areas such as taxation, industrial relations, health and safety and others. Small businesses are also expected to complete almost 110 core forms per annum in order to comply with the requirements of many State bodies, including the Revenue Commissioners, the CSO, the Companies Registration Office and other Departments. Many of these forms need to be filled in several times. Tax compliance forms take account of all employees and the number of mandatory returns increases. The number of questions per form can vary from ten up to 100. Examples are plentiful. If we are serious about ridding ourselves of red tape and administrative burdens because of their effects on business and government, the problem should be tackled by the Government using a standard cost model which has proved to be excellent in the Netherlands and other European countries such as the United Kingdom.
I note that there are between 50 and 60 regulatory bodies in Ireland which affect small businesses. I will cite an example of the legislative requirements to be met. Under the Organisation of Working Time Act, companies and businesses are required to record starting, finishing and break times for all employees and retain these records for a period of up to three years. This is a cumbersome and, in most cases, a futile exercise, as in general employees will notify a business if they are not getting their breaks. If anything, employees view this as an imposition and an example of Big Brother at play. When the legislation was being introduced, the trade unions were not exactly in favour of it. However, this is now the law but it tends to undermine the relationship between owner-managers of small companies and their employees which up to now has always been based on trust. It is the view of the association that the requirement to record this data should be scrapped with immediate effect.
To give another example, under the waste packaging regulations, the Department of the Environment, Heritage and Local Government is reducing the threshold, with an immediate reduction from 25 tonnes to ten from 2009. This will bring a significant number of additional small businesses into this administrative mire. In the view of the association, the newly proposed thresholds have been specifically introduced to boost Repak's finances and will ensure our regulations will be among the most rigid in Europe, leading to a significant competitive disadvantage for smaller businesses, especially those trading across the Border and with the United Kingdom, where the threshold is £2.85 million turnover and 50 tonnes. The current criteria, while not completely satisfactory, should remain in place, with no reduction in tonnage levels. This certainly will create another obstacle for business.
The final example is the late payments regulation which came into effect in August 2002 with great fanfare. Where a purchaser does not pay for goods or services by a relevant date, the regulation provides that the supplier will be entitled to interest on the amount outstanding. The legislation has not worked. The ISME research confirms that it is taking smaller businesses longer to be paid than before the legislation was introduced. A recent survey carried out by ISME confirmed that 32% of members waited longer for payment than 12 months ago, with only 6% being paid faster. The difficulty was that people were allowed to opt-out of the legislation. Big business can impose the late payments legislation on their small business customers and demand to be paid within 30 days or less but when on the other side of the fence, they are opting out and taking 60, 90 or 120 days to pay. What was introduced to help small business in the area of late payments is having the opposite effect.
Another aspect is the application of the regulations of the HACCP. The same standards do not apply to the supplier in food preparation, as to manufacturers and producers in terms of temperature and condition of produce. The manufacturer and producer must police their suppliers with regard to quality because there is no applicable regulation. This is another area in which ISME thinks something should be done.
There has been an increase in regulations in recent years. We are concerned about the increased criminalisation of owner-managers and company directors with regard to health and safety, employment law and corporate issues. Owner-managers are often viewed as being guilty until proved innocent. There is an attitude of "one size fits all" with regard to legislation.
Irish businesses have become completely immersed in paperwork and almost require a direct line to their solicitors just to keep abreast of what is coming down the track. I refer to the Supreme Court case last weekend when the Office of the Director of Corporate Enforcement was given a slap on the wrist over its reticence or refusal to state the reason a director had been removed from the register. This shows the number of pieces of legislation which mean that owner-managers in business must prove their innocence rather than the other way around. This seems to be the case with much of the legislation in place. There has been a lack of regulatory impact assessments.
Each Department should be instructed to carry out a full assessment of all the legislation within its remit, with reference to the cost burden for business. Decisions could be made on this base assessment on the regulations that could be modified or scrapped. I refer to the standard cost model used in many jurisdictions. That would be the preferred option in this process but it seems to have lost its cachet.
The Business Regulation Forum which sat for approximately a year and a half was coming down on the side of the standard cost model but that forum was scrapped and a high level committee is now looking at business administrative burdens and business regulations. We have moved away from the standard cost model which seemed to be the answer to our problems and have started to look at legislative measures. It appears that all we are doing is moving the chairs on the Titanic.
It is essential that a central co-ordinating body with relevant powers be given the role to carry out this process of achieving a standard cost model, under a single ministry, within a given timeframe. The Minister mandated must also oversee and ensure total co-operation and co-ordination with other Ministers. It is also essential that business interests, both large and small, are involved in this process from the outset. With regard to late payments, ISME recommends the institution of a commercial small claims court to handle all disputes as this would be a help in that area.
The amount of information that is required to do a tender for a local authority is substantial. Each and every local authority has a different type of form to be filled with varying degrees of information. Even within some local authorities, different departments have a variety of pre-qualification questionnaires that are required to be filled and it takes forever to fill in these forms. It is important to remember that these are pre-qualification questionnaires. One could act as sub-contractor for somebody who is contracting in who is going through this process and one could be one of up to five companies asked to pre-qualify. The effort required to fill in pre-qualifying forms is a barrier to some people going after that type of business. I refer to business that may be worth €5,000 or €8,000. The amount of work involved in preparing these documents is phenomenal and is putting many companies off even attempting to participate and gain valuable business.
SMEs perceive the tendering process as being long and complex and in many instances are discouraged from bidding. Those who are new to the public sector market may not know what is involved in the tendering process and may have difficulty in understanding document requirements and in putting together good quality proposals and tenders. In view of this the tendering process needs to be completely reviewed and overhauled in recognition of the length of time it takes to complete a tendering document from an SME perspective. The language used in tenders should be jargon-free and understandable, which is not the case at present. The procedure should be appropriate to the size and complexity of the tender. It is often the case that a similar amount of documentation and information is required for tenders that vary greatly in size and complexity.
An evaluation system, including better feedback to tenderers, should be introduced to assist unsuccessful applicants in bidding for future contracts. Those making the evaluations should be qualified in the relevant contract area and should not just be an individual involved in the purchasing department of the agency requiring the product or service.
Financial information from prospective tenderers, including financial and trade references, should only be requested every three years in order to avoid unnecessary duplication of effort every time a company makes a submission for a new tender. Contracts should be awarded to the economically most advantageous tender, EMAT, instead of the lowest price. Awards to the EMAT would allow SMEs to sell their high technical expertise, which is currently being disregarded. It appears that to make it easy on the purchasing departments in local authorities and Government bodies, they lump many of their contracts into one which makes it difficult for a small business to compete and tender for large contracts because they do not have the necessary knowledge, expertise and goods.
In a culture that purports to support enterprise, it is ironic that the owner-manager on €40,000 a year will take home €750 less than a civil servant or his or her own employees on the same salary. This is due to discrimination against directors and the self-employed who cannot avail of the PAYE tax allowance. This is unacceptable and needs to be rescinded as a matter of priority. Not alone does it unfairly penalise business owners and directors, but it sends out the wrong message that perhaps the owner-manager gets something else and should not be entitled to the same allowances as any other PAYE earner. Directors and owner-managers pay their tax in exactly the same way as employees and even the self-employed pay preliminary tax and tax up front. The advantages the owner-manager had in the past when they paid their tax in arrears is long since gone but there have been no changes in the PAYE allowance to reflect this. It sends out the wrong message, never mind the €750 it costs to be one's own boss.
We suggest that the PAYE tax credit should be replaced with a personal tax credit that would include the existing personal allowance and the PAYE allowance. This would help to stop the discrimination currently experienced by owner-managers. The costs in a full year would equate to approximately €750 million in a full year. This is not small money but its value in helping to change the attitude towards small business would be of help.
We also call for the reintroduction of dividend relief for owner-managers which, prior to its removal in 1992, was the only area within the fiscal code that rewarded entrepreneurs for the risks taken in setting up their own enterprise. Tax incentives need to be introduced to encourage start-up business and to help provide them with a sound financial base in order to survive, particularly in the first five years of the business's existence. We would like to see a reduction in the tax on labour. Employers PRSI should be reduced from a rate of 10.75% to 10%. This cost the Exchequer of €362 million in a full year.
We must ensure that the minimum wage remains outside the tax net. One of the major areas from a cashflow point of view in business is the ceiling for payment of VAT on a cash receipts basis, from the current level of €1 million to €3 million per annum, thereby improving the cashflow of many SMEs.
The current partnership process must adapt to the national and global climate and welcome change and innovation. It is imperative, therefore, that the partnership central review committee is extended to include groupings that are more representative of the population as a whole and, crucially, to allow SMEs equal representation to big business at the negotiating table.
Only by exposing the deliberation process to the creative dynamic of enterprise will fresh thinking be brought to bear on long-standing problems. Full communication and representation by the enterprise sector will not bring confrontation but rather consensus, based on the full facts and not based on the narrow agenda of the big business and big union elite. Small business does not feel it has an independent voice at the partnership table, especially in terms of wage negotiation. Labour can account for up to 48% of the value added in a small business, whereas in a large business, labour accounts for approximately 8%. This is a six-fold difference. One can see how it affects small business six times more than it affects large business, but small business is not represented at the wage negotiation and when big business agree on a 3%, 4%, 5% or 6% increase, it has a six-fold impact when one takes into account the added value in small business. It is quite important, therefore, that small business has a representative at that level.
The key objectives must be the understanding of the small business ethos to devise an agenda that truly will meet entrepreneurs in their world. The greatest encouragement to the development of an entrepreneurial culture will be the placing of the entrepreneur in a respected position in society rather than the previous, and in some cases present, view that entrepreneurship is the last resort for academic disappointment or unemployment. There is a need for a return to the respectability and role of the local successful businessman in local society. They must be seen as job creators and local heroes.
As outlined already, the difficulty with current Government policy is that the multinational, first and only, approach is still very much to the fore, contrary to commitment under the programme for Government. Ireland no longer holds the massive attractions it did for foreign investors, however, and there is evidence of retrenchment by the multinationals. If this policy continues we will be left with a high cost economy which cannot be supported by a weakened non-competitive indigenous sector.
ISME urges the Government to introduce a think small first policy by introducing initiatives and policies to ensure the survival and growth of the Irish indigenous sector. This policy should go hand in hand with and not act as a substitute for efforts to encourage the flow of foreign direct investment into the economy because both sectors have been catalysts for rapid productivity growth.
To introduce these policies, however, it is vital that SMEs, and owner-managers in particular, are at the core of the decision-making process. It is imperative that greater representation is afforded to the owner-managers of small businesses not alone at the partnership process but on State boards, including FÁS, Enterprise Ireland, Science Foundation Ireland and the National Competitiveness Council. At present, there is only token representation afforded to the small business sector despite the fact that many policy decisions specifically impact on these companies. We need not keep reiterating that 98.5% of all business in Ireland is small and medium business.
Due to the importance of small and medium enterprises in the national economic and social fabric, the key objectives for any agenda for change must be to place entrepreneurs and their requirements at the centre of policy making. This is particularly important in light of the slowdown in the economy and the added focus that there should be in promoting and supporting the growth of indigenous enterprise. I use the words "should be" as it is the view of the association that while there has been a shift in emphasis towards acknowledging the role and contribution of the enterprise sector, there is too often a lack of understanding on the part of Government and the State of how enterprise operates and, consequently, huge barriers continue to be placed in front of these businesses in their efforts in the pursuit of wealth generation and job creation which benefits society.
The issues outlined are among the main but not the only areas of concern the association would like to see addressed by the Government. They must promote in a tangible way the interests of competitive SMEs in tandem with the multinationals. Policies that will stimulate the creative business dynamic of the owner-managed entrepreneurial sector of the economy need to be introduced to ensure the existence and success of a vital component of the domestic economy.
It is imperative we continue to promote an enterprise culture by rewarding owner-managers already in business for the considerable risks they have taken and for their job creation. It is essential also that the platform be set to entice individuals to set up their own businesses by providing the necessary incentives to do so.
Belatedly, the role of the entrepreneur is being recognised by politicians, the State and the country at large, but those risk takers need to be recognised and their endeavours valued, in both success and failure. The challenge now is to foster an environment in which more innovation and more new entrepreneurs can be encouraged. It is important we develop and sustain new enterprises in Ireland. The future is in a combined approach to commerce, giving equal prominence to indigenous industry and foreign direct investment and not giving one prominence over the other. An initial step, in which this committee can be instrumental and effective, would be an invitation to ISME, which is the independent voice of small business, to join as an equal partner in the partnership process which we have been denied up to now because of the cosy consensus and the vested interests within the current process.
Before I finish, I will remark on Mr. Greg Swift's mention of the Dublin Chamber of Commerce Ten Steps initiative. We agree that such an initiative needs to be looked at, but why stop at Dublin? The Dublin Chamber of Commerce has its own remit to promote Dublin, but the country does not stop at Newlands Cross. It is the country that needs to be made into a knowledge country, not merely the capital city into a knowledge city.
