ENTERPRISE SURVEYS COUNTRY NOTE SERIES AZERBAIJAN 52112 Running a Business in Azerbaijan 2009 N ew data from Enterprise Surveys indicate improvements in Azerbaijan's business environment, particularly in terms of increasing access to finance and also reductions in tax payment-related bribery. Firms interviewed in 2005 and 2009 report increasing use of credit-financed investments and increasing sales sold on credit. Nevertheless, firms face many severe constraints, including corruption and a business environment that is not conducive to international trade. For ex- ample, 32 percent of the firms in Azerbaijan report unofficial payments to public officials to get things done compared with 17 percent in all of Eastern European and Central Asian (ECA) countries. Female participation in ownership is the lowest in the whole region (figure 1). Firms in Azerbaijan are less likely to export their products, use their own Web site, or use email to com- municate with their clients than firms in the rest of ECA region. COUNTRY NOTE NO. 8 The Enterprise Surveys1 use standard survey instruments to The information collected refers to the characteristics of the collect firm-level data on the business environment from firm at the moment of the survey, or to fiscal year 2007. business owners and top managers. The surveys cover a broad range of topics including access to finance, corrup- What Is the Average Firm in Azerbaijan? tion, infrastructure, crime, competition, labor, obstacles to In Azerbaijan, female participation in ownership is the low- growth, and performance measures. The survey is designed est in the region (figure 1). Businesses with female partici- to be representative of a country's private nonagricultural pation in ownership are more likely to have a female top economy and firms sampled are stratified by size, location, manager and female permanent workers, and to rely on and sector (figure 2)2 to ensure that most major types of fewer temporary workers. The proportion of temporary firms are covered. Only firms with five employees or more workers in the total workforce in Azerbaijan is especially are included in the sample. In Azerbaijan, 380 firms were in- high in the other services sector (14 percent), followed by terviewed from September 2008 through February 2009. retail and manufacturing (2 percent). The proportion of fe- Figure 1 Firms in Azerbaijan Have the Lowest Participation of Females in Their Ownership Percentage of female participation in ownership 70 60 50 ECA Regional average WORLD BANK GROUP Percent 40 30 20 10 0 n vo a p. o ia p. ia na Bu n Ta ria za an an a ia zb nia n ey ia ia ia ry ia ne nd ia s a p. ru ni ni Ky dov ja gr tio ta Sl erb en on rg at en tv an Re Re Re ga rk so vi t st a ai la ai ba to ua is is la ne ro La lg eo ra go kh m ov m kr un Tu ed Po Ko Re erb jik ek ol Be ak ch yz S Es Al th C te de Ro Ar G U Sl ze M ac H rg ov ze Li of on Az Fe Ka er M U C p. M H n R ia FY d ss an Ru ia sn Bo Source: Enterprise Surveys. Figure 2 Characteristics of the Firms Interviewed Sector Size Location Large Lankaran & Aransk & (100 employees) Kuba- Gorno- 18% Khachmaz Shirvan 10% 16% Other Retail Small services 32% (5­19 Ganja- 37% employees) Kazakh & 45% Shaki- Zaqatala 17% Medium (20­99 Baku & employees) Manufacturing Apsheron 37% 32% Peninsula 57% Source: Enterprise Surveys. male permanent workers in the total work- small firms. Small firms are on aver- force is also low in Azerbaijan compared with age 12 years old compared to the regional average (table 2). Within Azer- The proportion of medium and large firms (17 and 24 baijan, female permanent workers are most female permanent years, respectively). represented in the retail sector (42 percent of Almost fifty percent of firms in the workforce), followed by manufacturing workers in the total Azerbaijan are closed shareholding (37 percent) and other services (20 percent). workforce is low in companies. The next most common A typical firm3 in Azerbaijan is more than form of firms' legal status is sole pro- 14 years of age. However, close to 75 percent Azerbaijan compared prietorship (33 percent). After Be- of the firms are below the average age, and with the regional larus, Azerbaijan has the highest about 50 percent are 10 years old or less. Re- proportion of government/state par- tail firms are younger than firms in other sec- average. ticipation in ownership in ECA tors by around four years and so are the (table 1); government ownership is Table 1 How Does Azerbaijan 2009 Compare within Eastern Europe and Central Asia? Descending ranking Ranking 1 assigned to the largest value (out of 29 countries) % of Firms Formally Registered when Started Operations in the Country 29 Private Domestic Ownership (%)* 19 Private Foreign Ownership (%)* 15 Government/State Ownership (%)* 2 % of Firms with Female Participation in Ownership 29 Bank Finance for Investment (%) 25 % of Exporter Firms 28 Domestic Sales (% of Sales) 3 % of Firms with Internationally Recognized Quality Certification 16 % of Firms with Annual Financial Statement Reviewed by External Auditor 16 Capacity Utilization (%) 21 % of Firms Using Their Own Web Site 27 % of Firms Using Email to Communicate with Clients/Suppliers 28 Ascending ranking Ranking 1 assigned to the smallest value (out of 29 countries) Value of Collateral Needed for a Loan (% of the Loan Amount) 5 Number of Power Outages in a Typical Month 17 Senior Management Time Spent in Dealing with Requirements of Government Regulation (%) 2 Average Number of Visits or Required Meetings with Tax Officials 24 Incidence of Graft Index ** 28 Losses Due to Theft, Robbery, Vandalism, and Arson against the Firm (% of Sales) 8 Source: Enterprise Surveys. 2 typically concentrated in large firms and in the manufactur- By regional standards, use of a firm's own Web site and ing sector. An average firm in Azerbaijan uses more tempo- email to communicate with clients is low in Azerbaijan rary workers and fewer permanent workers than the rest of (table 3). In fact, Azerbaijan ranks third to last and second the ECA region (table 2). In Azerbaijan, government own- to last in these measures, respectively. For example, only 22 ership in private firms is more than twice the regional aver- percent of the firms use their own Web site, compared with age (3 vs. 1.2 percent). As we might expect, government 49 percent in the whole region. Azerbaijan firms also stand ownership in Azerbaijan is particularly high in the manu- out in the region for the disparity between large firms and facturing sector (5.8 percent) compared with 0.3 percent in the small and medium firms in email and Web site usage retail; it is also higher among large firms (15.7 percent) com- (figure 3). Azerbaijan is slightly below the ECA regional av- pared to small and medium-size firms (1.1 and 2.8 percent). erage in the use of internationally recognized certificates (table 3). The low prevalence of Web site and email usage How Do Businesses Operate in Azerbaijan? suggest a technology gap between Azerbaijan and the rest of Use of bank financing for investment in Azerbaijan is low by ECA. regional standards, even though the amount of collateral re- quired (as a percentage of loan amount) is low compared to What Constrains Firms in Azerbaijan? that in the rest of the region (table 3). Within Azerbaijan, use Azerbaijani firms face many constraints. When asked to of bank financing for investment is particularly low among choose the biggest obstacle facing the establishment among firms with female participation in ownership (3 vs. 16 percent 15 obstacles presented, 23 percent of firms chose access to for firms entirely male-owned), firms with some government finance and 22 percent of firms chose tax rates. As men- ownership (they do not use bank financing at all), and firms tioned above, very few firms are integrated into global trade with foreign owners (3 vs. 16 percent for domestically and the Doing Business 2009 Trading across Borders rank of owned). These firm groups tend to rely more on internal fi- 174 out of 181 corroborates the low prevalence of exporter nancing for purchases of fixed assets. Somewhat surprisingly, firms. Transparency International's 2008 ranking of Azer- there is not much difference in the use of baijan at 158 out of 180 in their Cor- bank financing or other sources of finance ruption Perceptions Index confirms the between small and large firms. Use of firm's own Web Enterprise Survey data Incidence of After Uzbekistan, Azerbaijan has the site and email to com- graft index rank of 28 (out of 29 ECA smallest proportion of exporters in the re- countries) (table 1); corruption is a tan- gion. The percentage of exporter firms is municate with clients is gible constraint for the private sector. four, well below the regional average of low in Azerbaijan. Various subgroups of Azerbaijani 22 percent. Only a small fraction (1.3 firms experience tax and regulatory bur- percent) of a typical firm's sales are di- den differently. Medium firms experience rectly exported, compared with 7 percent for the ECA re- significantly higher number of visits or required meetings gion (table 3). Exporting directly in Azerbaijan is mainly with tax officials per year compared to small and large firms restricted to large firms that export 5.6 percent of their out- (3.2 vs. 1.9 and 1.5). Unsurprisingly, firms with government put compared with less than 0.1 percent for small firms and participation in ownership face on average one fewer visit per 2.4 percent for medium firms. year. Also firms where the top manager is female have signif- Table 2 The "Average Firm" in Azerbaijan 2009 Azerbaijan ECA EU-10 Age (years) 14.1 14.0 14.1 % of Firms Formally Registered When Started Operations in the Country 85.1 96.8 98.7 Most Common Legal Form Closed Closed Closed Shareholding Co. Shareholding Co. Shareholding Co. Private Domestic Ownership (%)* 90.3 91.3 90.2 Private Foreign Ownership (%)* 6.5 6.2 7.5 Government/State Ownership (%)* 3.0 1.2 0.5 % of Firms with Female Participation in Ownership 10.8 36.7 39.1 % of Firms with Female in Top Management Position 4.7 19.1 22.7 Experience of the Top Manager (Years) 13.7 16.1 17.1 Average Number of Temporary Workers 7.8 5.7 3.4 Average Number of Permanent, Full-Time Workers 37.1 44.0 37.3 % of Full-Time Female Workers 30.3 38.7 40.5 Source: Enterprise Surveys. 3 Table 3 Choices by the "Average Firm" in Azerbaijan 2009 Azerbaijan ECA EU-10 Internal Finance for Investment (%) 67.5 62.2 62.3 Bank Finance for Investment (%) 14.4 23.8 26.7 Value of Collateral Needed for a Loan (% of the Loan Amount) 102.4 132.8 124.6 Loans Requiring Collateral (%) 87.2 81.1 74.3 % of Firms with a Checking or Savings Account 75.9 88.9 85.2 % of Exporter Firms 4.3 21.8 28.3 Domestic Sales (% of Sales) 98.2 91.0 88.6 Sales Exported Directly (% Sales) 1.3 7.0 9.2 Sales Exported Indirectly (% Sales) 0.4 2.0 2.2 Sales That Are Prepaid (%) 29.0 22.9 10.9 Sales Sold on Credit (%) 23.4 49.4 66.5 % of Firms with Internationally Recognized Quality Certification 18.2 19.9 25.6 % of Firms with Annual Financial Statement Reviewed by External Auditor 37.3 37.9 38.7 Capacity Utilization (%) 70.5 73.7 81.3 % of Firms Using Their Own Web Site 21.7 48.5 63.4 % of Firms Using Email to Communicate with Clients/Suppliers 40.3 73.2 88.5 Source: Enterprise Surveys. icantly less visits than male-managed Almost one-third of firms report hav- counterparts: 2.3 vs. 1.6. While the over- ing to bribe public officials in order to all average of senior management time Medium firms experi- "get things done" regarding procedures spent dealing with requirements of gov- ence significantly such as customs, licenses, and services. ernment regulation is low compared to Predictably firms with government par- ECA (table 4), the average significantly higher number of visits ticipation in ownership report signifi- varies by regions within Azerbaijan (fig- or required meetings cantly less of this type of corruption: 11 ure 4). Interestingly, domestically owned vs. 34 percent for fully private firms. firms spent twice as much time compared with tax officials per Large firms report significantly less cor- to foreign-owned; also retail and services year compared to small ruption compared to small and medium- firms spend twice as much time as size firms: 12 percent vs. 31 and 41 manufacturers. and large firms. percent. This particular type of corrup- Corruption is pervasive in Azerbaijan, tion also varies significantly by geo- and firms report some of the highest levels graphic region (figure 4). An inverse of bribery and corruption throughout ECA. Forty-three per- pattern is evident in this figure, as regions with higher re- cent of Azerbaijani firms report having to give bribes to tax ported bribery of public officials have lower percentages of inspectors, only Uzbekistan has a higher percentage (52 per- senior management time spent complying with regulatory cent). Thirty-five percent of firms report having to provide burden. Conventional crime, as opposed to corruption, does bribes in order to obtain an operating license. Only Ukraine, not appear to be a major issue for firms in Azerbaijan rela- Tajikistan, and Uzbekistan report higher percentages. tive to ECA (table 4), although Azerbaijani firms pay higher security costs as a percentage of annual sales (1.9 percent) than most countries. Only 3 other countries have higher Figure 3 Larger Firms Use of Technology Is percentages: Kyrgyz Republic (2.4 percent), FYR Macedonia Closer to Regional Standards (2.5 percent), and Rep. of Kosovo (8.1 percent). 100 Use own Web site Use email to communicate Azerbaijan fares well in terms of infrastructure compared to 90 with clients the ECA region. For instance, the number of power outages is 80 70 lower than the ECA average (table 4). Only 4 percent and 12 Percent 60 percent of firms consider transportation and electricity as 50 40 major constraints; these are the smallest percentages among all 30 29 ECA countries. Despite these positive infrastructure indi- 20 10 cators, corruption is a large issue regarding the provision of 0 services. In all of ECA, Azerbaijani firms report the highest Azerbaijan ECA Azerbaijan ECA percentages of expected bribery in order to obtain multiple in- Small and medium firms Large firms frastructure services: phone connection, electrical connection, water connection, and construction permits. Source: Enterprise Surveys. 4 Table 4 Constraints on the "Average Firm" in Azerbaijan 2009 Azerbaijan ECA EU-10 Number of Power Outages in a Typical Month 3.5 5.8 2.5 Senior Management Time Spent in Dealing with Requirements of Government Regulation (%) 3.0 10.6 9.5 Average Number of Visits or Required Meetings with Tax Officials 2.3 1.7 1.1 % of Firms Expected to Pay Informal Payment to Public Officials (to Get Things Done) 32.0 16.8 7.4 Incidence of Graft Index** 26.0 9.9 4.7 Losses Due to Theft, Robbery, Vandalism, and Arson against the Firm (% of Sales) 0.3 0.5 0.4 % of Firms Paying for Security 62.0 57.7 62.0 Source: Enterprise Surveys. How Has the Business Environment Changed nancing for investment has significantly increase from 0 to over the Past Three Years? 11 percent. Sales sold on credit have significantly increased The Enterprise Surveys data provide the tools to monitor from 20 to 32 percent, and supplier credit financing has in- changes in the business environment across different rounds creased from 0 to 10 percent. Despite tax reforms, panel of surveys. In Azerbaijan, of 380 firms interviewed in 2009, firms report on average one more required visit or meeting 4 106 were also previously surveyed in 2005 . Since the same with tax officials per year, from 1.3 to 2.7. However, the per- firms are interviewed over time this subset of data is more centage of firms reporting bribes with these tax officials has appropriate to evaluate the evolution of significantly decreased over time, from the business environment and the impact 63 to 46 percent. of business environment reforms than the Capacity utilization Firms have also reported a significant full data sets for both years. Considering significantly decreased three-fold increase in internationally the full data sets would introduce effects recognized quality certification (from 12 that are the result of variations in the from 85 to 69 percent to 33 percent). However, despite this sample composition over the two years . 5 over the three year improvement in technology, capacity Therefore, the following analysis refers utilization significantly decreased from only to those firms that were interviewed period. 85 to 69 percent. in both rounds of surveys. To summarize, firms in Azerbaijan Improvements regarding access to face many challenges. Widespread cor- credit and corruption in tax collection are evident in the ruption and difficulty in trading across borders are two of the cross-year data (figure 5). Internal financing for investment most severe constraints on firms. However, over time, im- has significantly decreased (99 to 73 percent), while bank fi- provements in the business environment such as increased Figure 4 Time Spent Dealing with Regulations Figure 5 Access to Credit Increased Between and Bribery of Public Officials Vary by 2005 and 2009 Surveys Regions within Azerbaijan 100 90 70 80 60 70 50 60 Percent Percent 40 50 30 40 20 30 10 4.1 5.8 20 2.8 1.6 0 10 Aransk & Baku & Ganja-Kazakh Lankaran & 0 Gorno-Shirvan Apsheron & Shaki-Zaqatala Kuba-Khachmaz Internal Bank Sales sold Supplier Peninsula financing financing on credit credit % of firms expected to pay informal payment to public officials for investment for investment financing Senior management time spent dealing with requirements 2005 2009 Source: Enterprise Surveys. Source: Enterprise Surveys. 5 availability of credit and some reduction of corruption have full sample. Firms with fewer than five employees may be included among been observed. Streamlining regulation in order to diminish the firms surveyed in both years. The analysis presented is purely descrip- tive and does not aim at establishing causality between reforms and their in- opportunities for bribe collection and expanding the oppor- tended effects. tunities for international trade can be future reforms aimed at * The ownership variables represent the average ownership composi- improving Azerbaijan's business environment. tion within a firm. These variables do not represent the ownership compo- sition across firms. Notes ** Incidence of Graft Index is the proportion of instances in which firms 1. The Enterprise Surveys, implemented in Eastern Europe and Central were either expected or requested to pay a gift or informal payment over the Asia countries, are also known as Business Environment and Enterprise Per- number of total solicitations for public services, licenses or permits for that formance Surveys (BEEPS) and are jointly conducted by the World Bank country. The Graft Index is defined in Gonzalez, Alvaro S., Ernesto Lopez- and the European Bank for Reconstruction and Development for this geo- Cordova, J. and E. Valladares, Elio, The Incidence of Graft on Developing- graphic region. Country Firms. World Bank Policy Research Working Paper Series, 2007. 2. This figure presents the unweighted distributions by size, sector, and lo- ECA includes Albania 2009, Armenia 2009, Azerbaijan 2009, Belarus cation of the firms interviewed without any inferences to the whole economy. 2009, Bosnia and Herzegovina 2009, Bulgaria 2009, Croatia 2009, Czech 3. The term "Average Firm" is used to convey the average firm charac- Republic 2009, Estonia 2009, Georgia 2009, Hungary 2009, Kazakhstan teristics from the Azerbaijan 2009 Enterprise Survey. The sample of firms in- 2009, Republic of Kosovo 2009, Kyrgyz Republic 2009, Latvia 2009, Lithua- terviewed is representative of the manufacturing and services sectors of the nia 2009, FYR Macedonia 2009, Moldova 2009, Montenegro 2009, Poland economy. For more information on the survey methodology please consult 2009, Romania 2009, Russian Federation 2009, Serbia 2009, Slovak Re- http://www.enterprisesurveys.org/Methodology/. public 2009, Slovenia 2009, Tajikistan 2008, Turkey 2008, Ukraine 2008, 4. The information collected in 2005 refers to the characteristics of the and Uzbekistan 2008. firm at the moment of the survey or to fiscal year 2004. EU-10 includes 2009 data from Bulgaria, Czech Republic, Estonia, 5. The firms surveyed in both years may not be representative of the Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia. Azerbaijan's private nonagricultural economy since these are a subset of the The Enterprise Surveys measure the business environment in over 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