Study of Small and Medium Enterprises in Azerbaijan - IFC

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Executive Summary The report examines closely the key areas of the business life cycle. Observa tions are based on the comprehensive survey of businesses conducted in late 2007 and early 2008 on a statistically representative sample of 1800 entrepreneurs, and additionally in-depth interviews with businesses operating in Azerbaijan, as well as a review of the legislative framework in Azerbaijan. The report looks at the experience of the small and medium sized companies as well as individual entrepreneurs in dealing with various administrative aspects of doing business in the country and the problems they face. This is then compared against the good international practices and recommendations are being made to the Azerbaijani authorities in making improvements in every specific area of the business life cycle. The key findings and the subsequent recommendations are summarized below. 1. The business climate in Azerbaijan is steadily improving, while further reforms are being planned Azerbaijan has been listed as the top global reformer by the IFC/World Bank’s 2009 Doing Business report, with improvements in seven out of ten indicators of business environment reform. Azerbaijan moved far up the global rankings, from 97 th place to 33 rd , in the overall ease of doing business. This increase recognized a number of important legislative and institutional reforms that visibly improved the investment climate of the county. Ease of… DB 2009 rank DB 2008 rank Change 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 This SME Report focuses on specific administrative and regulatory costs to doing business in Azerbaijan, covering some of the same areas as the Doing Business study, but using a survey methodology. In addition to the snapshot of the current environment, it closely examines the features that businesses identify as being very important and hindering their further expansion. The SME Report is problem-solution oriented and 6 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
critically examines all areas of operations, while IFC remains committed to working with the Government of Azerbaijan in further improving the environment. Common problems faced by the SME sector include: (a) restricted competition and uneven treatment of certain economic players, such as preferential treatment of large or state-owned enterprises; (b) a tax system that requires additional enhancement, as currently business engage in evasions, under-reporting, and other illicit practices; and (c) use of informal means to settle issues. In addition to these generic problems, this survey report examines individual areas of the business life cycle. These are divided in the following categories: registration, licensing and permits, business inspections, access to finance, taxation, and foreign trade, while tax payment procedures are seen as comparatively least troublesome. 2. Several regulatory and administrative areas require immediate attention According to the survey results, comparatively most difficult procedure for entrepreneurs is related to obtaining permits and other formal requirements enabling operations. A third of respondents mentioned this procedure to be difficult or very difficult. Compulsory certification procedures, inspection by controlling authorities, business registration, as well as obtaining licenses were also seen as difficult by a quarter of all entrepreneurs at the time of the survey (late 2007/early 2008). Some of these issues tend to emerge as relatively troublesome in all transition economies and from that point of view, Azerbaijan faces similar SME development problems and may benefit from solutions successfully implemented elsewhere. Improvements in the business climate are well evident, yet businesses do layout the reform priorities as they perceive them (see the charts below). Chart 1. Development tendency evaluation Individual person Worsened Left the same 18% 18% 64% Improved Legal person 10% 17% 73% Total 17% 18% 65% 0% 20% 40% 60% 80% 100% Chart 2. The procedures identified by entrepreneurs as the most difficult Obtaining permits and other permissive documentation Compulsory certification procedures Inspections by controlling authorities Business registration Obtaining licenses Tax payment procedures 15% 28% 26% 26% 24% 32% 0% 5% 10% 15% 20% 25% 30% 35% 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 7
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: Foreword and Acknowledgements IFC,
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 and 30: 1. Methodology 1.1 Background The s
Page 31 and 32: the share of economically active co
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
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3.10.7 Simplify the liquidation pro
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Business registration before ‘one
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Process map of one-stop-shop busine
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Registration for individual entrepr
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4.1 Licensing: the legal framework
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Chart 4.1 Number of activities requ
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While the Rules specify limits for
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Chart 4.6 Economic impact of licens
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Annex 4.1 Checklist of issues for d
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Based on the IFC survey estimates,
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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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Study of Small and Medium Enterprises in Azerbaijan - IFC

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