EntErprisE survEys 65104 Country notE sEriEs Kyrgyz rEpubliC Running a Business in the Kyrgyz Republic 2011 N ew data from Enterprise Surveys indicate that business regulation reforms in the Kyrgyz Republic, such as simplifying tax payment procedures, are positively impacting the private sector. Firms interviewed in 2005 and 2009 report significantly lower incidences of tax- related bribes when required to meet with tax officials. Nevertheless, firms continue to face obstacles such as corruption, inadequate provision of electricity, and limited access to finance. Small firms in particular are more credit-constrained compared to larger firms. The Kyrgyz Republic lags far behind the region regarding technology innovation measures. The Kyrgyz Republic is second to bottom in capacity utilization (58 percent); only Georgia is lower (50 percent). The percentage of 10 firms using e-mail to communicate with clients and suppliers and the percentage of firms using their own Web site are some of the smallest in the Eastern Europe and Central Asia (ECA) region. Finally, notE no. the Kyrgyz Republic leads ECA countries in female participation in ownership (figure 1). The Enterprise Surveys1 use standard survey instruments Figure 2 Characteristics of the firms to collect firm-level data on the business environment interviewed from business owners and top managers. The surveys Country cover a broad range of topics, including access to finance, Size corruption, infrastructure, crime, competition, labor, obstacles to growth, and performance measures. The Large (100+ survey is designed to be representative of a country’s employees) 16% Small private non-agricultural economy, and firms sampled are (5-19 employees) 42% Location Medium Figure 1 The Kyrgyz Republic has the (20-99 employees) 42% highest female participation in Chui 6% firm ownership in the ECA region Issyk-Kul 12% Percentage of firms with female participation in ownership Osh Bishkek World banK group 14% 44% 70 Sector 60 Jalal-Abad 50 24% ECA Regional Average 40 Percent Retail 30 23% 20 Manufacturing 10 40% 0 Other services Azerbaijan Rep. of Kosovo Albania Czech Rep. Montenegro Serbia Slovak Rep. Armenia Bosnia & Herzegovina Russian Fed. Bulgaria Tajikistan Kazakhstan Estonia FYR Macedonia Lithuania Uzbekistan Turkey Georgia Croatia Slovenia Hungary Latvia Ukraine Poland Romania Belarus Moldova Kyrgyz Rep. 37% Source: Enterprise Surveys. Source: Enterprise Surveys. Table 1 How does the Kyrgyz Republic 2009 compare within Eastern Europe and Central Asia Descending ranking Ranking 1 assigned to the largest value (out of 29 countries) Percent of firms formally registered when started operations in the country 20 Private domestic ownership (%)* 27 Private foreign ownership (%)* 2 Government/state ownership (%)* 15 Percent of firms with female participation in ownership 1 Bank finance for investment (%) 24 Percent of exporter firms 21 Domestic sales (% of sales) 11 Percent of firms with internationally recognized quality certification 19 Percent of firms with annual financial statement reviewed by external auditor 12 Capacity utilization (%) 28 Percent of firms using their own web site 26 Percent of firms using e-mail to communicate with clients/suppliers 25 Ascending ranking Ranking 1 assigned to the smallest value (out of 29 countries) Value of collateral needed for a loan (% of the loan amount) 14 Number of power outages in a typical month 24 Senior management time spent in dealing with requirements of government regulation (%) 4 Average number of visits or required meetings with tax officials 23 Incidence of graft index ** 25 Losses due to theft, robbery, vandalism, and arson against the firm (% of sales) 8 Source: Enterprise Surveys. Note: This table presents a ranking out of 29 economies for each of the listed indicators. The numbers are ranks as opposed to the actual value of the indicator. the Kyrgyz Republic, full-time female workers constitute stratified by size, location, and sector (figure 2)2 to ensure a higher proportion of workers compared with the rest that most major types of firms are covered. Only firms with five employees or more are included in the sample. In the of the region (table 2). Compared with their respective Kyrgyz Republic, 235 firms were surveyed from September counterparts, female representation in the work force is 2008 through March 2009. The information collected refers higher in Kyrgyz firms that have a female top manager (55 percent vs. 39 percent) and that have a female owner to a firm’s characteristics at the moment it was surveyed or during fiscal year 2007. (46 percent vs. 37 percent). The Kyrgyz Republic has the highest proportion of firms with female owners What is the average firm in the Kyrgyz (figure 1). Equally striking is that about 70 percent of Republic? the manufacturing firms have female The average firm in the Kyrgyz 3 participation in ownership compared with Republic is 16 years old even though more Kyrgyz firms only 48 percent of the retailing firms. than 75 percent of the firms are younger are more likely In contrast, a majority of other ECA than the average age. Firms in the Kyrgyz countries (20 out of 28) have a smaller Republic stand out for relying on a large to have full-time proportion of manufacturing firms with supply of temporary workers. On average, female workers female owners compared with retailing a Kyrgyz firm employs 10 temporary and firms. 46 permanent workers as compared to and to have female Foreign private ownership of firms an average of only 3 temporary and 43 participation in in the Kyrgyz Republic equals 13 permanent workers in the region. That percent, which is the second highest firm ownership is, temporary workers make up about 18 in the region after Albania (table 1). A percent of the work force in the Kyrgyz compared with majority of firms in the Kyrgyz Republic Republic compared with 7 percent in the the ECA region. are closed shareholding companies (68 region. percent) followed by open shareholding Kyrgyz firms are more likely to have companies (27 percent). Among large full-time female workers and to have female participation firms, open shareholding companies are more common in firm ownership compared with the ECA region. In (60 percent) than closed shareholding companies (40 percent). 2 Table 2 The average firm in the Kyrgyz Republic 2009 Kyrgyz Republic ECA† EU-10‡ Age (years) 16.0 13.9 13.9 Percent of firms formally registered when started operations in the country 95.9 96.8 98.7 Most common legal form Closed Closed Closed Shareholding Co. Shareholding Co. Shareholding Co. Private domestic ownership (%)* 86.5 91.3 90.3 Private foreign ownership (%)* 12.6 6.2 7.4 Government/state ownership (%)* 0.8 1.1 0.5 Percent of firms with female participation in ownership 60.4 36.7 39.0 Percent of firms with female in top management position 23.0 18.9 22.2 Experience of the top manager (years) 14.1 16.1 17.2 Average number of temporary workers 9.9 3.2 2.5 Average number of permanent, full-time workers 46.4 43.4 36.4 Percent of full-time female workers 42.6 38.5 40.1 Source: Enterprise Surveys. How do businesses operate in the Kyrgyz large firms (figure 3). For example, the value of collateral Republic? required for loans equals about 157 percent of the loan amount for small firms in the Kyrgyz Republic and 98 Compared with the rest of the region, firms in the Kyrgyz percent for large firms. In the rest of the region, these Republic rely less on bank financing for investments and amounts stand at 134 percent and 129 percent, respectively. more on equities and sales of stock. Only 14 percent of all While 12 percent of the Kyrgyz firms export as investments in the Kyrgyz Republic is financed by banks compared with about 22 percent in the region, direct as compared with 23 percent in the region. Equity and export volume as a percentage of sales averaged over stock sales account for 21 percent of the investments in all firms in the Kyrgyz Republic is comparable to the the Kyrgyz Republic compared with only 9 percent in the rest of the region (table 3). The Kyrgyz Republic also region. In fact, this figure for Kyrgyz Republic is the third stands out for the high percentage of its sales that are highest in the region. Less reliance on banks by regional pre-paid (39 percent) compared with the region as a standards is also reflected in the low percentage of Kyrgyz whole (23 percent). By contrast, sales made on credit are firms that have a checking or savings account (69 percent) much lower in the Kyrgyz Republic than elsewhere in the (table 3). In the ECA region, only the Slovak Republic and region (table 3). Romania have lower percentages. The prevalence of firms that use their own Web The Kyrgyz Republic stands out in the region for its site or e-mail to communicate with clients is low by sharp differences in financing patterns between small and Table 3 Choices by the average firm in the Kyrgyz Republic 2009 Kyrgyz Republic ECA† EU-10‡ Internal finance for investment (%) 58.3 59.7 58.8 Bank finance for investment (%) 13.9 22.9 25.7 Value of collateral needed for a loan (% of the loan amount) 127.8 132.2 123.4 Loans requiring collateral (%) 85.1 81.0 74.2 Percent of firms with a checking or savings account 68.9 88.9 85.2 Percent of exporter firms 11.9 22.1 29.1 Domestic sales (% of sales) 93.0 90.8 88.3 Sales exported directly (% sales) 6.4 7.1 9.5 Sales exported indirectly (% sales) 0.7 2.0 2.2 Sales that are pre-paid (%) 38.9 23.0 11.2 Sales sold on credit (%) 31.7 49.4 66.3 Percent of firms with internationally recognized quality certification 16.2 20.0 25.8 Percent of firms with annual financial statement reviewed by external auditor 37.8 37.9 38.6 Capacity utilization (%) 57.7 73.7 81.3 Percent of firms using their own Web site 26.1 48.5 63.6 Percent of firms using e-mail to communicate with clients/suppliers 43.9 73.1 88.3 Source: Enterprise Surveys. 3 Figure 3 Small firms lack access to credit compared to large firms in the Kyrgyz Republic Kyrgyz Republic Rest of ECA 160 160 140 140 120 120 100 100 Percent Percent 80 80 60 60 40 40 20 20 0 0 Internal finance for investments (%) Bank finance for investments (%) Supplier credit financing (%) Equity, sale of stock for investment (%) Collateral value required (% of loan amount) Percent of loans requiring collateral Percent of firms with a checking/ savings account Internal finance for investments (%) Bank finance for investments (%) Supplier credit financing (%) Equity, sale of stock for investment (%) Collateral value required (% of loan amount) Percent of loans requiring collateral Percent of firms with a checking/ savings account ■ Small fims ■ Large firms ■ Small fims ■ Large firms Source: Enterprise Surveys. Source: Enterprise Surveys. regional standards (table 3); this is especially true among percentages (43 percent and 52 percent, respectively). manufacturing and other services firms. For example, Firms in Bishkek report a significantly higher prevalence about 39 percent of the manufacturing firms in the of tax-related bribes (53 percent) compared to the other Kyrgyz Republic, compared with 79 percent in the entire four regions (17 percent to 24 percent) (figure 4). Almost region, use e-mail. Comparable figures for retailing one-half of the firms report having to bribe public officials firms equal 53 percent and 65 percent, respectively. The in order to “get things done� with respect to procedures percentage of firms using internationally recognized such as customs, licenses, and services (only Azerbaijan quality certification is also lower compared to the ECA and Uzbekistan are higher). The prevalence of this type region (table 3). The Kyrgyz Republic stands out for the of particular bribe varies by ownership: firms with female lowest level of capacity utilization (58 percent) in the participation in ownership report significantly fewer bribes region after Georgia. of public officials compared to entirely male owned firms (38 percent vs. 61 percent). Among firms that have secured What constrains firms in the Kyrgyz Republic or attempted to secure a government contract, 53 percent Kyrgyz firms face many constraints to doing business, report that the firms are expected to give gifts to secure most notably corruption, inadequate provision of electricity, the government contract; this is the highest percentage and access to finance. Transparency International’s 2010 in ECA. In addition to pervasive corruption, less than Corruption Perceptions Index ranks one-quarter of Kyrgyz firms believe the Kyrgyz Republic at 164 out of 178, the court system to be fair, impartial, which parallels the Enterprise Survey Almost one-half and uncorrupted; only four other ECA data Incidence of Graft index ranking of firms report countries have lower percentages for of 25 out of 29 ECA countries (table 1). having to bribe this measure. Conventional crime, as Corruption is a tangible constraint for the opposed to corruption, does not appear private sector. When asked to choose the public officials in to be a major issue for firms in the Kyrgyz biggest obstacle facing the establishment order to "get things Republic relative to the rest of ECA (table among the 15 obstacles presented, 24 done" with respect 4). percent of the firms chose electricity and to procedures The Kyrgyz Republic fares poorly in 20 percent of the firms chose access to infrastructure, specifically electricity, finance. such as customs, when compared to the ECA region: the Corruption is pervasive in the Kyrgyz licenses, and number, duration, and value lost due to Republic and firms report some of the services. power outages is consistently greater than highest levels of bribery and corruption for most ECA countries. (The Kyrgyz throughout the ECA region. Thirty-nine Republic ranks 24, 27, and 26 out of 29 percent of the Kyrgyz firms report having to bribe tax countries for these three indicators respectively.) Eighty- inspectors; only Azerbaijan and Uzbekistan have higher one percent of exporter firms identify electricity as a 4 Table 4 Constraints on the average firm in the Kyrgyz Republic 2009 Krygyz Republic ECA† EU-10‡ Number of power outages in a typical month 5.7 5.2 2.1 Senior management time spent in dealing with requirements of government regulation (%) 4.9 10.6 9.5 Average number of visits or required meetings with tax officials 2.1 1.6 1.1 Percent of firms expected to pay informal payment to public officials (to get things done) 47.8 23.1 12.7 Incidence of graft index** 25.7 13.5 6.8 Losses due to theft, robbery, vandalism, and arson against the firm (% of sales) 0.3 0.5 0.4 Percent of firms paying for security 45.2 57.7 62.2 Source: Enterprise Surveys. major constraint—significantly more than non-exporter this subset of data provides a more appropriate evaluation firms at 56 percent. In addition to the inadequate provision of the evolution of the business environment and the of electricity, corruption is a large issue regarding the impact of business environment reforms than the full data provision of infrastructure services. Compared to other sets for both years. Considering the full data sets would ECA countries, Kyrgyz firms report high percentages of introduce effects that are the result of variations in the expected bribery in order to obtain multiple infrastructure sample composition over the two years.5 Therefore, the services, such as electrical connections, water connections, following analysis refers only to those firms that were and construction permits. interviewed in both rounds of surveys. Overall, Kyrgyz firms fare well in terms of the “time Improvements regarding less corruption of public tax� relative to other ECA countries. On average, 4.9 officials are evident in the cross-year data. The percentage percent of senior management time is spent dealing with of firms expected to give gifts in meetings with tax the requirements of government regulation. However, on officials significantly decreased from 87 percent in 2005 to average, firms have more required visits or meetings with 37 percent in 2009 (figure 5). Business reforms undertaken tax officials (table 4). In fact, the Doing Business Paying by the Kyrgyz government regarding tax rates and tax Taxes index ranks the Kyrgyz Republic at 150 out of 183 administration are likely responsible for the decrease in in the Doing Business 2011 report. tax-related bribery. Furthermore, the percentage of firms expected to give gifts to public officials “to get things How has the business environment changed done� significantly decreased from 69 percent to 36 over the past three years? percent (figure 5). These large decreases suggest that the The Enterprise Surveys data provide the tools to business environment is improving over time with regard monitor changes in the business environment across to corruption. different rounds of surveys. In the Kyrgyz Republic, of Other changes in the business environment over time the 235 firms interviewed in 2009, 71 were also surveyed included increased sales using credit and an improvement in 2005.4 Since the same firms were interviewed over time, in the use of internationally recognized certifications. The Figure 4 Prevalence of tax-related bribes Figure 5 Decreasing bribery of public varies by location officials over time Percent of firms expected to give gifts in meetings with tax inspectors 60 100 50 80 40 Percent Percent 60 30 40 20 10 20 0 0 Bishkek Chui Jalal-Abad Osh Issyk-Kul Expected to give gifts in Expected to pay informal meetings with tax inspectors payment (to get things done) ■ 2005 ■ 2009 Source: Enterprise Surveys. Source: Enterprise Surveys. 5 panel data indicate that firms are increasingly selling their characteristics from the Kyrgyz Republic 2009 Enterprise goods and services pre-paid or on credit. The percentage Survey. The sample of firms interviewed is representative of the manufacturing and services sectors of the economy. For more of sales sold on credit significantly increased from an information on the survey methodology please consult http:// average of 18 percent to 41 percent from 2005 to 2009; www.enterprisesurveys.org/Methodology/ for pre-paid sales, the increase was 27 percent to 38 4. The information collected in 2005 refers to the characteristics of percent.6 Firms have also reported a significant increase the firm at the moment of the survey or to fiscal year 2004. 5. The firms surveyed in both years may not be representative of in internationally recognized quality certification (from 9 the Kyrgyz Republic’s private non-agricultural economy since percent to 22 percent). However, despite this improvement these are a subset of the full sample. Firms with fewer than five in technology, the percentage of manufacturing firms employees may be included among the firms surveyed in both offering formal training has significantly decreased from years. The analysis presented is purely descriptive and does not aim 63 percent to 29 percent. at establishing causality between reforms and their intended effects. 6. For pre-paid sales, the increase was marginally significant at p=0.06. Despite a noticeably improving business environment, * The ownership variables represent the average ownership firms in the Kyrgyz Republic continue to face challenges, composition within a firm. These variables do not represent the notably corruption and inadequate provisions of ownership composition across firms. electricity. Firms also face difficulties accessing financing, ** The incidence of Graft Index is the percentage of instances in which a firm was either expected or requested to provide a gift or particularly smaller-sized firms. The Kyrgyz Republic’s informal payment during solicitations for public services, licenses strong pace of business regulation reforms during the last or permits. This Index uses data from 6 survey questions for each four years appears to be having a positive impact on firms: firm. For purposes of Index computation, a refusal to answer a firms report a decrease in the incidence of bribing public particular survey question is considered an affirmative answer. This Index is a modified version of the Graft Index defined in A. officials. Further diminishing opportunities for bribery, Gonzalez et.al. (2007) World Bank Policy Research Working Paper expanding opportunities for international trade, employing #4394. technologies to increase business efficiency, and increasing † ECA includes Albania 2009, Armenia 2009, Azerbaijan 2009, Belarus credit for smaller-sized firms offer future reforms aimed at 2008, Bosnia and Herzegovina 2009, Bulgaria 2009, Croatia 2009, improving the Kyrgyz Republic’s business environment. Czech Republic 2009, Estonia 2009, Georgia 2008, Hungary 2009, Kazakhstan 2009, The Republic of Kosovo 2009, Kyrgyz Republic 2009, Latvia 2009, Lithuania 2009, FYR Macedonia 2009, Moldova Notes 2009, Montenegro 2009, Poland 2009, Romania 2009, Russian 1. The Enterprise Surveys, implemented in Eastern Europe and Federation 2009, Serbia 2009, Slovak Republic 2009, Slovenia 2009, Central Asia countries, are also known as Business Environment Tajikistan 2008, Turkey 2008, Ukraine 2008, and Uzbekistan 2008. and Enterprise Performance Surveys (BEEPS) and are jointly ‡ EU-10 includes 2009 data from Bulgaria, Czech Republic, Estonia, conducted by the World Bank and the European Bank for Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Reconstruction and Development for this geographic region. and Slovenia. 2. This figure presents the unweighted distributions by size, sector, and location of the firms interviewed without any inferences to the whole economy. 3. The term “average firm� is used to convey the average firm The Enterprise Surveys measure the business environment in more than 100 countries in the world. A standardized questionnaire, universe under study, and implementation methodology is used to make sure information is comparable across countries and time. The full data and documentation explaining the methodology are available at www.enterprisesurveys.org. The Country Notes are a product of the staff of the Enterprise Analysis Unit. The findings, interpretations and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6