STUDY OF SMALL MEDIUM ENTERPRISES IN AZERBAIJAN

STUDY OF SMALL & MEDIUM ENTERPRISES IN AZERBAIJAN IFC AZERBAIJAN BEE Project Baku, 25 June 2009 1 www. ifc. org/azbee

Azerbaijan was ranked Top Reformer in 2009 ‘Doing Business’ ECONOMY DB 2009 rank … … Latvia 29 Israel 31 South Africa 32 DB 2009 rank DB 2008 rank Change in rank 30 France Ease of… 36 … … … 2 66 +53 155 160 +5 Employing Workers 15 67 +52 Registering Property 9 63 +54 Getting Credit 12 25 +13 18 110 +92 102 143 +41 174 176 +2 26 27 +1 Closing a Business Slovakia 13 Enforcing Contracts 35 Starting a Business 81 78 -3 Dealing with Construction Permits 34 Puerto rico +64 Trading Across Borders St. Lucia 97 Paying Taxes 33 33 Protecting Investors Azerbaijan Doing Business …

Report covers a wide range of topics ü Registration ü Permits ü Licensing ü Inspections ü Taxation ü Access to Finance ü Import/Export RECOMME NDATION TOPIC REPORT ü Analysis of the existing legislation ü Study of implementation of the legal norms and procedures SUBJECT ü Legal recommendations aimed at the current weaknesses in the laws and legal norms ü Institutional recommendations aimed at the proper implementation of the laws. ü Practical technical recommendations aimed at the proper and problem-free implementation of the administrative procedures ü Study of enterpreneurs’ opinions ü Comparison to the international legal norms and experience PROBLEM ü Detection of the current flaws in the law and legal norms ü Detection of problems caused by subjective reasons and by inappropriate execution of the laws ü Study of the problems caused by the legal illiteracy and passive attitude of entrepreneurs 3

Sample of 1800 representatives of all business sectors and areas 8 social and economic regions and Baku Main sectors of economy Existing and new enterprises 13% Region % of respondents Baku 20% Ganja-Gazakh 12% Lenkeran 7% Sheki-Zagatala 6% Absheron 6% Quba-Khachmaz 6% Dagliq Shirvan 2% Yukhari Garabakh 4 40% Aran 1% 43% 44%

Many procedures still too burdensome How challenging were the following procedures? (for those who underwent these procedures) Percentage of respondents who evaluated the procedures as “problematic” and “very problematic” Since January 1, 2008, business registration is conducted through a one-stop-shop Access to finance – problem faced by more than half of entrepreneurs 5

Top five regulatory challenges Business registration Foreign trade Permits Enterprise Taxes 6 Inspections

Informal arrangements was often a ‘solution’ Situation prior to introduction of the registration one-stop shop in 2008 Every fourth entrepreneur made unofficial payments to solve problems 7

Business registration then & now BEFORE To register a business Entrepreneurs had to: • submit 33 documents • undergo 13 procedures This took 30 -34 days to complete. AFTER Entrepreneurs have to: • submit 7 documents • undergo 6 procedures Overall this takes 8 days to complete. And the work goes on. . . 8

Registration simplification leads to significant savings Before the new system was implemented, the registration was a problem for 26% of entrepreneurs W em st h sy it n dw tio te ra cia tly st gi so an re as ic e ts nif th in ig in pla d s s e rm om as fo , c re re ted ec d e th en ve ith lem t ha p i im ? 9 The success of the new system can be discussed only following research on the impact of the new system

Registration system recommendaitons Legislative recommendations: • Introduce the ‘silence is consent’ principle in the law • Simplify the pre-registration process: • remove the requirement to obtain a confirmation of the legal address • no notarizations of registration documents • Simplify the procedure for voluntary liquidation through the one-stop-shop • Simplify procedures for opening, operating, and closing bank accounts Institutional recommendations: • Introduce electronic registration through a user-friendly online application • Equally apply to all banks the possibility to open an account online through the registration offices • Enable online access to information on existing business entities • Media broadcasts to be aired on any further procedural changes 10

Top five regulatory challenges Business registration Foreign trade Permits Enterprise Taxes 11 Inspections

Obtaining permits still too cumbersome Every 3 rd entrepreneur made unofficial payments to address the problem 12

Almost all government agencies issue permits Approximately 62 agencies, including local executive authorities, issue permits 13

Permits system recommendations Legislative recommendations: • Review the list of all permits, their coverage, validity and issuance process • List all government agencies authorized to issue permits • Set up clear grounds for introducing new permits through a uniformed procedural act: 1. Protection of public health and safety, and environment protection 2. Ensure appropriate allocation of scarce resources 3. Refrain from excessive requirements • Introduce the “silence is consent” and “self-certification” principles in the act • Extend the “one-stop-shop” principle for issuance of certain types of permits Technical and practical recommendations: • Increase legal awareness of entrepreneurs by disseminating information on permits • Clear procedural maps available in permits issuing agencies • Organize roundtables aimed at increasing dialogue between private and public sector • Run PR campaign focused on procedural changes 14

Licencing system recommendations Legislative recommendations: • Ensure that all licenses are issued for same period as provided for by the Licensing Rules • Simplify and shorten the internal decision making process for granting of licenses • Introduce clear criteria for introduction of new licenses • Level the playfield for all enterprises when entering into licensable activities Technical and practical recommendations: • Increase legal awareness of entrepreneurs by disseminating information on licences • Clear procedural maps made available in license issuing agencies • Organize roundtables aimed at increasing dialogue between private and public sector • Run PR campaign focused on procedural changes 15

Top five regulatory challenges Business registration Foreign trade Permits Enterprise Taxes 16 Inspections

Most entrepreneurs allocate large resources to inspections Average for country - 79% Average number of inspections per year 9 inspections 17 Average expenses per inspection, annually 363 manat

Many inspections not officially registered All inspecting agencies must officially record the on -site and off-site inspections carried out, in their books. Presidential order #69 07 January, 1999 AVERAGE REGISTRATION – 42% The information covers state authorities that conduct inspections in more than 5% of all enterprises. 18

Inspection system recommendations Legislative recommendations: • Regulate the objectives and procedures of inspections, and determine the list of state authorities carrying out inspections • Develop a risk based inspection (RBI) system • Introduce sanction mechanism to be launched only by judiciary decision Institutional recommendations: • Eliminate identical and duplicating functions of state authorities • Selecting subject of inspections applying risk management principles • Ensure the use of checklists for inspection conduct and compliance • Review inspection penalties and increase accountability of inspectors • Establish websites, hotlines, etc. of inspection authorities to increase awareness of entreprenuers 19

Top five regulatory challenges Business registration Foreign trade Permits Enterprise Taxes 20 Inspections

A comparison in tax compliance requirements Comparison of some Azerbaijan’s and Kazakhstan’s tax indicators Azerbaijan Difference VAT, number of payments per year 1 -12 1 0 -11 Social security payments, number of payments per year 12 1 11 Profit tax, number of payments per year 1 1 0 All taxes, number of payments per year 21 Kazakhstan 23 9 14

Taxation system recommendations Legislative recommendations: • Review the VAT threshold and consolidate further the simplified tax; • Reduce overall tax burden of standard tax regime • Eliminate double taxation of corporate earnings • Reduce the number of VAT and social security reports – introduce unified tax reporting • Limiting the scope of tax inspections to tax specifics Institutional recommendations: • Further encourage electronic tax reporting • Further enhance risk based approach in planning and conducting inspections • Increase the supervision of tax inspectors and ethics standards 22

Top five regulatory challenges Business registration Foreign trade Permits Enterprise Taxes 23 Inspections

Engagement of SMEs in foreign trade remains very low Administrative barriers and excessive bureaucracy are main export problems in foreign trade. Half of the entrepreneurs that conduct imports are dissatisfied with the control exercised by the railway department. 24

Foreign trade system recommendations Legislative recommendations: • Reduce number of documents required for importing • Eliminate double certification requirements • Revise the list of standards of health and safety following good international practices • Introduce process rather than product certification • Introduce uniform tariff rates for similar types of goods Institutional recommendations: • Reduce the number of offices controlling foreign trade • Encourage establishment of bonded warehouses • Separate standardization and certification functions • Increase accountability of customs and railway service officials • Create internationally required laboratory facilities for certification 25

Azerbaijan BEE Project basics IFC’s Azerbaijan Business Enabling Environment Project will be working with the Azerbaijani Government until 2012 with the budget of US$ 4. 7 million. IFC is prepared to assist the Republic of Azerbaijan in making further progress in all the aforementioned policy areas, as well as government capacity building and outreach to the private sector. IFC’s activities are generously supported by Swiss State Secretariat for Economic Affairs (SECO) and the British Petroleum (BP) on behalf of its coventurers. 26

THANK YOU FOR YOUR ATTENTION! International Finance Corporation Azerbaijan Business Enabling Environment Project www. ifc. org/azbee 27