1 1 STUDY OF SMALL & MEDIUM ENTERPRISES IN AZERBAIJAN IFC AZERBAIJAN BEE Project Baku, 25 June

2 2 Azerbaijan was ranked Top Reformer in 2009 ‘Doing Business’ Ease of… DB 2009 rank DB 2008 rank Change in rank Doing Business Starting a Business Dealing with Construction Permits Employing Workers Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business ECONOMYDB 2009 rank …… …… Latvia29 Israel30 France31 South Africa32 Azerbaijan33 St. Lucia34 Puerto rico35 Slovakia36 …… ……

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

4 4 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% 44% 43% Region % of respondents Baku40% Aran20% Ganja-Gazakh12% Lenkeran7% Sheki-Zagatala6%6% Absheron6% Quba-Khachmaz6% Dagliq Shirvan2% Yukhari Garabakh1%

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

6 6 Top five regulatory challenges Enterprise Business registration PermitsInspectionsTaxes Foreign trade

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

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

9 9 Registration simplification leads to significant savings Before the new system was implemented, the registration was a problem for 26% of entrepreneurs The success of the new system can be discussed only following research on the impact of the new system ? With the reforms in the registration system implemented, complaints associated with it have decreased significantly

10 Institutional recommendations: 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 Registration system recommendaitons 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

11 Enterprise Business registration PermitsInspectionsTaxes Foreign trade Top five regulatory challenges

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

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

14 Technical and practical 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 Permits system 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

15 Technical and practical 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 Licencing system 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

16 Enterprise Business registration PermitsInspectionsTaxes Foreign trade Top five regulatory challenges

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

18 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.

19 Institutional 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 Inspection system 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

20 Enterprise Business registration PermitsInspectionsTaxes Foreign trade Top five regulatory challenges

21 AzerbaijanKazakhstanDifference VAT, number of payments per year Social security payments, number of payments per year Profit tax, number of payments per year 110 All taxes, number of payments per year A comparison in tax compliance requirements Comparison of some Azerbaijan’s and Kazakhstan’s tax indicators

22 Taxation system recommendations Institutional 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 Further encourage electronic tax reporting Further enhance risk based approach in planning and conducting inspections Increase the supervision of tax inspectors and ethics standards

23 Enterprise Business registration PermitsInspectionsTaxes Foreign trade Top five regulatory challenges

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

25 Foreign trade system recommendations Institutional 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 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

26 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 co- venturers. Azerbaijan BEE Project basics

27 THANK YOU FOR YOUR ATTENTION! International Finance Corporation Azerbaijan Business Enabling Environment Project