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11
STUDY OF SMALL & MEDIUM
ENTERPRISES IN AZERBAIJANIFC AZERBAIJAN BEE Project
Baku, 25 June 2009
www.ifc.org/azbee
22
Azerbaijan was ranked Top Reformer in 2009 ‘Doing Business’
Ease of…DB 2009
rankDB 2008
rankChange in
rank
Doing Business 33 97 +64
Starting a Business 13 66 +53
Dealing with Construction Permits 155 160 +5
Employing Workers 15 67 +52
Registering Property 9 63 +54
Getting Credit 12 25 +13
Protecting Investors 18 110 +92
Paying Taxes 102 143 +41
Trading Across Borders 174 176 +2
Enforcing Contracts 26 27 +1
Closing a Business 81 78 -3
ECONOMY DB 2009 rank
… …
… …
Latvia 29
Israel 30
France 31
South Africa 32
Azerbaijan 33St. Lucia 34
Puerto rico 35
Slovakia 36
… …
… …
33
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
SU
BJE
CT
PROBLEM
RE
CO
MM
EN
DA
TIO
N
REPORT
44
Sample of 1800 representatives of all business sectors and areas
63%10%
7%
5%
2%2%
1%1%
9%
Retail and wholesale trade
Transport and storage
Agriculture
Hotels and restaurants
Real estate, renting and businessactivitiesRepair of motor vehicles, household andpersonal goodsConstruction
Other manufacturing
Other services
8 social and economic regions and BakuMain sectors of economy Existing and new enterprises
Up to one year
From one to three years
Three years and more
13%
44%
43%Region
% of respondents
Baku 40%
Aran 20%
Ganja-Gazakh 12%
Lenkeran 7%
Sheki-Zagatala 6%
Absheron 6%
Quba-Khachmaz 6%
Dagliq Shirvan 2%
Yukhari Garabakh 1%
55
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)
66
Top five regulatory challenges
Foreigntrade
Foreigntrade
TaxesTaxes InspectionsInspections
PermitsPermits
Business registration
Business registration
EnterpriseEnterprise
77
Informal arrangements was often a ‘solution’
Had problems
71%
Didn't have problems
29%
Problems during business registration process(those who faced problems)
9%
11%
13%
20%
41%
48%Extensive number ofrequested documents
Extensive number ofprocedures (steps, bodies)
during registration
Lengthy registrationprocess
Low professional level ofstaff of registering
authorities
Imposed requirements arenot clear and transparent
Necessity to use unofficialmeans
Every fourth entrepreneur made unofficial payments to solve problems
Situation prior to introduction of the registration one-stop shop in
2008
88
Business registration then & now
BEFORE
AFTEREntrepreneurs 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 30-34 days to complete.
To register a business
And the work goes And the work goes on... on...
99
Registration simplification leads to significant savings
26%
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?W
ith the reforms in the registration
system im
plemented, com
plaints
associated with it have decreased
significantly
1010
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
1111
Foreigntrade
Foreigntrade
TaxesTaxes InspectionsInspections
PermitsPermits
Business registration
Business registration
EnterpriseEnterprise
Top five regulatory challenges
1212
Obtaining permits still too cumbersome
Had problems
54%
Didn't have problems
46%
Every 3rd entrepreneur made unofficial payments to address the problem
1313
Almost all government agencies issue permits
Approximately 62 agencies, including local executive authorities, issue permits
1414
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
1515
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
1616
Foreigntrade
Foreigntrade
TaxesTaxes InspectionsInspections
PermitsPermits
Business registration
Business registration
EnterpriseEnterprise
Top five regulatory challenges
1717
Most entrepreneurs allocate large resources to inspections
Inspections by the sectors of activity
86%
80%
74%
70%
22%
Trade and restaurants
Construction
Manufacturing
Service
Agriculture
Average number of inspections per year
9 inspections
Average expenses per inspection, annually
363 manat
Average for country - 79%
1818
Many inspections not officially registered
Registration of inspections (those who were inspected)
43%
42%
34%
32%
31%
24%
24%
Ministry of Taxes
Ministry of EconomicDevelopment
Ministry of Health
Ministry of Labor andSocial Protection
Ministry of EmergencySituations
Ministry of Transport
Ministry of Industry
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.
1919
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
2020
Foreigntrade
Foreigntrade
TaxesTaxes InspectionsInspections
PermitsPermits
Business registration
Business registration
EnterpriseEnterprise
Top five regulatory challenges
2121
Azerbaijan Kazakhstan 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 23 9 14
A comparison in tax compliance requirements
Comparison of some Azerbaijan’s and Kazakhstan’s tax indicators
2222
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
2323
Foreigntrade
Foreigntrade
TaxesTaxes InspectionsInspections
PermitsPermits
Business registration
Business registration
EnterpriseEnterprise
Top five regulatory challenges
2424
Main problems faced by SMEs in imports
23%
33%
44%
Bureaucracy incustoms authorities
Customs tariffs
Railway servicecontrol (access totrains, delays etc)
Main problems faced by SMEs in exports
20%
21%
33%
Customs tariffs
Customs clearanceprocedures
Bureaucracy incustoms authorities
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
2525
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
2626
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
2727
THANK YOU FOR YOUR ATTENTION!THANK YOU FOR YOUR ATTENTION!
International Finance CorporationAzerbaijan Business Enabling Environment
Project
www.ifc.org/azbee