Study of Small and Medium Enterprises in Azerbaijan - IFC

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entities nationwide from the official statistical data provided by the State Statistical Committee of the Azerbaijan Republic as of January 1, 2007. The stratification of the sample was based on: (i) sectors of the economy defined by the State Statistics Committee; (ii) size and type of enterprise, defined as number of employees; and (iii) regions. Tables 1.1, 1.2 and 1.3 show the distribution of the official data and the distribution of the survey sample. Stratified random sampling is used to capture all the sectors of economic activity, including firm classification and geographic distribution of the business entities’ universe. In other words, in order to make the sample selection representative of a sector, firm type and region, the selected sample fully represents the larger economic picture. 1.4 Firm classification in the Azerbaijani economy According to decree No. 57 of the Cabinet of Ministries of the Republic of Azerbaijan on Identification of the Small Entrepreneurship Subjects by Types of Economic Activity dated April 20, 2004, small businesses are defined as follows according to sector: • In the construction and industry – number of employees of less than 40 person and annual turnover of less than 200,000 Azerbaijani manats (~$247,000); • Agriculture – number of employees of less than 15 people and annual turnover of less than 100,000 Azerbaijani manats (~$123,500); • Wholesale trade – number of employees of less than 10 people and annual turnover of less than 300,000 Azerbaijani manats (~$370,500); • Other branches – number of employees of less than 5 people and annual turnover of less than 100,000 Azerbaijani manats (~$123,500). There is no official definition of midsize legal entities in Azerbaijan. IEs are classified as small enterprises while legal entities are further classified as either small or all the others that make up the SME sector. Therefore except for the large companies, all other registered businesses fall within the category of SMEs. In terms of regional coverage, the survey was conducted in the urban areas of eight regions (Absheron, Ganja-Gazakh, Sheki-Zagatala, Lenkoran, Guba-Khachmaz, Aran, Yukhari Garabakh, Daglig Shirvan) and the capital city Baku. The survey does not cover the occupied territories of the Republic of Azerbaijan and Nakhchivan. In terms of sample size, 873 individual entrepreneurs and 893 legal entities’ were interviewed during the survey, for a total of 1,776 respondents in the sample. The respondents were the owners or top managers of private sector small and medium enterprises and individual entrepreneurs, responsible for decision making. Since retail and wholesale trade individual entrepreneurs form the largest share of economic subjects (58 percent of the entrepreneurs), a decision was taken to reduce their number, since the scope of their business operations is less complex and thus less informative. Their share was therefore halved. This was done with an aim to increase 28 St u d y o f Sma l l a n d Me d i u m Ent e r p r i s es in Az e r b a i j a n
the share of economically active companies in the sample. After that all weight coefficients were calculated and used during the analytical process. 1.5 Data collection The survey was conducted by an independent survey company commencing in autumn 2007. The main survey instrument was a written questionnaire with 134 questions, which was pilot-tested before commencing the fieldwork. The questionnaire covered the following procedures: business registration, obtaining licenses, permits and certificates, access to finance, inspections, taxation, and foreign trade regimes. 1.6 Qualitative method of data collection In addition to the probability-based quantitative method of data collection as described above, the survey also used qualitative means to gather information through meetings with industry experts, practitioners, and focus groups discussions. Qualitative methods to gather information are often used during identification of a problem, and when trying to understand the scope of a problem when information gaps exist in the data. Since the survey had to do with quantification of different regulatory procedures, key informant interviews and focus groups were organized to understand for example, average expenditures and average time required for particular procedures. In-depth interviews with experts were conducted to understand the details of several special procedures. For example, meetings with experts such as professional agents/ lawyers dealing with business registration were organized to understand the steps and procedures relating to business registration. Focus group discussions with entrepreneurs were organized in order to identify the most problematic procedures for entrepreneurs, and also to understand and interpret the empirical survey results. The focus groups, of five-seven participants, were led by an experienced moderator; a total number of 10 focus group discussions were held. Topics included business registration, permits, and inspections. 1.7 Distribution of official data and survey sample, by sector of activity The sampling frame was prepared in accordance with the official statistics data for Azerbaijan for the last available year the information was fully processed. The tables below serve the purpose of indicating the sampling strategy for the IFC’s SME survey. The total breakdown includes a split between IEs and SMEs in the ratio 85:15 percent. The lower two tables present the split by the economic activity. Aze r b a i j a n Bu s i n e s s En a b l i n g En v i r o n m e n t Pr o j e c t 29
Page 1 and 2: Study of Small and Medium Enterpris
Page 3 and 4: Study of Small and Medium Enterpris
Page 5 and 6: 5. Business Permits................
Page 7 and 8: Foreword and Acknowledgements IFC,
Page 9 and 10: critically examines all areas of op
Page 11 and 12: of each formality. Special attentio
Page 13 and 14: Policy Recommendations Business Reg
Page 15 and 16: Problems Sources of Problem Recomme
Page 19 and 20: Business Taxation Problems Sources
Page 25 and 26: Capital: Baku Country’s populatio
Page 27 and 28: The state, ultimately responsible f
Page 29: 1. Methodology 1.1 Background The s
Page 33 and 34: Scope of activity Official statisti
Page 35 and 36: 2. SMEs in Azerbaijan The aim of th
Page 37 and 38: Meanwhile, the number of small and
Page 39 and 40: Table 2.2 Statistical information o
Page 41 and 42: The “typical” small enterprise
Page 43 and 44: According to the IFC survey, more t
Page 45 and 46: 2.5.3 Legal disputes Most entrepren
Page 47 and 48: 3. Business Registration In January
Page 49 and 50: According to the law previously in
Page 51 and 52: 3.4 Economic impact estimate Accord
Page 53 and 54: tion duplicate is addressed to the
Page 55 and 56: the local tax inspectorate for regi
Page 57 and 58: 3.10.3 Introduce the electronic reg
Page 59 and 60: 3.10.7 Simplify the liquidation pro
Page 61 and 62: Business registration before ‘one
Page 63 and 64: Process map of one-stop-shop busine
Page 65 and 66: Registration for individual entrepr
Page 67 and 68: 4.1 Licensing: the legal framework
Page 69 and 70: Chart 4.1 Number of activities requ
Page 71 and 72: While the Rules specify limits for
Page 73 and 74: Chart 4.6 Economic impact of licens
Page 75 and 76: Annex 4.1 Checklist of issues for d
Page 77 and 78: Based on the IFC survey estimates,
Page 79 and 80: 5.2 Permits coverage The Azerbaijan
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Box 5.4 An example of overlapping p
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5.4 Permit expenses Azerbaijani leg
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Chart 5.9 40% Average percentage of
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2.4. Specifying in the law a unifor
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Annex 5.1 Procedure for obtaining c
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Annex 5.2 Checklist of issues for d
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The most significant legal act in i
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6.1.2 There is no effective mechani
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6.1.4 Entrepreneurs are not aware o
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IFC’s analysis showed that only h
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6.2.2.1 The inspections process and
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View from an entrepreneur: “The s
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Chart 6.11 Average registration in
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going in the opposite direction. In
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clearly defined circumstances, or a
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Annex 6.2 Presidential Decree No. 7
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The bulk of individual entrepreneur
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Items 1-9 are collected at the firs
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The IFC survey reveals that one in
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Table 7.5 Main tax obligations of a
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Chart 7.3 IFC Survey: Complexity of
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7.3.2 Tax inspections negatively af
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7.3.5 The cumbersome VAT administra
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• Introducing clearer and more el
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Chart 8.1 Development of Credit Ins
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More than 90 percent of entrepreneu
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Chart 8.9 The loan interest rates o
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Case study of a Baku-based glass an
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View from a bank employee: “One p
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Box 8.2 Examples of a successful cr
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Box 8.3 Examples of alternative mec
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9. Foreign Trade The volume of fore
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Box 9.1 Customs regimes under the C
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As Chart 9.1 illustrates, 98 percen
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Table 9.1 A comparison of the proce
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The comprehensive system of mandato
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Table 9.2 Average costs for imports
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Box 9.5 Customs payments The Custom
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Box 9.8 An excessive number of docu
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Moreover, due to the underdeveloped
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Expected impact More comprehensible
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9.5.6 Accelerate WTO accession of A
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Chart 9.5 Goods importable upon app
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Azerbaijan has been long pending a
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List of Laws 1. The Tax Code of the
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Statistical Annexes Aze r b a i j a
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Chart A1.3 Individual Entrepreneurs
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Chart A1.7 Individual Entrepreneurs
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Chart A1.14 Three Major Types of Ob
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Registration Chart A2.1 Entrepreneu
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Chart A2.8 Three Major Problems Occ
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Chart A3.3 Existence of Licenses by
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Chart A3.9 Three Major Obstacles to
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Chart A4.4 Obtaining of Any Permits
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Chart A4.10 Time Required to Obtain
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Chart A5.4 Application for Credit o
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Chart A5.12 Average Interest Rate (
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Chart A6.3 Entrepreneurs That Under
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Chart A6.8 Authorities That Made In
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Chart A6.13 Breakdown of Number of
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Chart A6.19 Average Duration of One
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Chart A6.25 Small and Medium Enterp
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Chart A7.3 Small and Medium Enterpr
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Chart A7.8 Reported Share of Busine
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Chart A8.3 Usage of Optional (not c
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Azerbaijan Business Enabling Enviro
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