STUDY OF SMALL & MEDIUM
ENTERPRISES IN AZERBAIJAN
IFC AZERBAIJAN BEE Project
Baku, 25 June 2009
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www.ifc.org/azbee
Azerbaijan was ranked Top Reformer in 2009 ‘Doing
Business’
ECONOMY
DB 2009 rank
…
…
…
…
Latvia
29
Israel
30
France
31
South Africa
32
Azerbaijan
2
2
33
St. Lucia
34
Puerto rico
35
Slovakia
36
…
…
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Ease of…
DB 2009
rank
DB 2008
rank
Change in
rank
Doing Business
33
97
+64
Starting a Business
13
66
+53
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
Dealing with Construction
Permits
Report covers a wide range of topics
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RECOMME
NDATION
TOPIC
REPORT
 Analysis of the existing
legislation
 Study of implementation of the
legal norms and procedures
SUBJECT
 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
Registration
Permits
Licensing
Inspections
Taxation
Access to Finance
Import/Export
PROBLEM
 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
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 Study of enterpreneurs’
opinions
 Comparison to the
international legal norms and
experience
Sample of 1800 representatives of all business sectors and
areas
Existing and new enterprises
Main sectors of economy
8 social and economic regions and Baku
9%
Region
% of
respondents
Baku
40%
Aran
20%
Ganja-Gazakh
12%
13%
1%
1%
2%
2%
43%
5%
7%
63%
10%
Lenkeran
7%
Sheki-Zagatala
6%
Absheron
6%
Quba-Khachmaz
6%
44%
Retail and wholesale trade
Transport and storage
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Dagliq Shirvan
2%
Yukhari Garabakh
1%
Agriculture
Up to one year
Hotels and restaurants
From one to three years
Real estate, renting and business
activities
Repair of motor vehicles, household and
personal goods
Construction
Three years and more
Other manufacturing
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
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5
Top five regulatory challenges
Business
registration
Foreign
trade
Permits
Enterprise
Taxes
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6
Inspections
Informal arrangements was often a ‘solution’
Problems during business registration process
Situation prior to introduction of the
registration one-stop shop in 2008
(those who faced problems)
48%
Extensive number of
requested documents
Extensive number of
procedures (steps, bodies)
during registration
Didn't have
problems
29%
41%
20%
Lengthy registration
process
Had
problems
71%
Low professional level of
staff of registering
authorities
Imposed requirements are
not clear and transparent
Necessity to use unofficial
means
13%
11%
9%
Every fourth entrepreneur made unofficial payments to solve problems
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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...
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Registration simplification leads to significant savings
Before the new system was implemented, the registration
was a problem for 26% of entrepreneurs
26%
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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
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Top five regulatory challenges
Business
registration
Foreign
trade
Permits
Enterprise
Taxes
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Inspections
Obtaining permits still too cumbersome
Didn't have
problems
46%
Had
problems
54%
Every 3rd entrepreneur made unofficial payments to address the problem
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Almost all government agencies issue permits
Approximately 62 agencies, including local executive authorities, issue permits
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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
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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
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Top five regulatory challenges
Business
registration
Foreign
trade
Permits
Enterprise
Taxes
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Inspections
Most entrepreneurs allocate large resources to inspections
Inspections by the sectors of activity
86%
Trade and restaurants
80%
Construction
74%
Manufacturing
70%
Service
Agriculture
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22%
Average for country - 79%
Average number of inspections per year
Average expenses per inspection, annually
9 inspections
363 manat
Many inspections not officially registered
Registration of inspections
All inspecting
(those who were inspected)
43%
Ministry of Taxes
agencies must
officially record the
Ministry of Econom ic
Developm ent
42%
on-site and off-site
inspections carried
34%
Ministry of Health
Ministry of Labor and
Social Protection
32%
Ministry of Em ergency
Situations
24%
Ministry of Industry
24%
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Presidential order #69
07 January, 1999
31%
Ministry of Transport
The information covers state authorities that conduct
inspections in more than 5% of all enterprises.
out, in their books.
AVERAGE REGISTRATION – 42%
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
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Top five regulatory challenges
Business
registration
Foreign
trade
Permits
Enterprise
Taxes
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Inspections
A comparison in tax compliance requirements
Comparison of some Azerbaijan’s and Kazakhstan’s tax indicators
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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
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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
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Top five regulatory challenges
Business
registration
Foreign
trade
Permits
Enterprise
Taxes
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Inspections
Engagement of SMEs in foreign trade remains very low
Main problems faced by SMEs in imports
Administrative barriers and excessive
bureaucracy are main export problems
in foreign trade.
Main problems faced by SMEs in exports
Bureaucracy in
customs authorities
Customs clearance
procedures
Customs tariffs
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Railway service
control (access to
trains, delays etc)
44%
Customs tariffs
Bureaucracy in
customs authorities
33%
23%
33%
21%
20%
Half of the entrepreneurs that conduct
imports are dissatisfied with the control
exercised by the railway department.
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
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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.
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THANK YOU FOR YOUR ATTENTION!
International Finance Corporation
Azerbaijan Business Enabling Environment Project
www.ifc.org/azbee
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