40840 Business environment in tajikistan as seen By small and medium enterprises, 2006 The content of this report is under copyright protection. This report may not be reproduced, copied or distributed, in whole or in part, in any form without mandatory citation of "Business En- vironment in Tajikistan as Seen by Small and Medium Enterprises, 2006." The opinions expressed in this report do not necessarily reflect those of the International Finance Corporation (IFC), the Swiss State Secretariat for Economic Affairs (SECO), or the World Bank Group (WBG). The information in this report is presented in good faith as general informational material and IFC, SECO, and WBG can not be held liable for any loss, expense and/or possible consequences arising from the publication of or the use of information contained in the report. All information and materials used in this report are property of IFC and are preserved in IFC archives. Business environment in tajikistan as seen By small and medium enterprises, 2006 CONTENT CONTENT Glossary..............................................................................................................................................vii foreword and acknowledGements.............................................................................................ix executive summary.............................................................................................................................xi 1. sme in tajikistan: overview of the sector, main trends and Business expectations.........................................................................................................1 1.1 the sme sector within the tajik economy......................................................................3 1.1.1 MACROECONOMIC OVERVIEW....................................................................................3 1.1.2 THE SME SECTOR IN THE ECONOMY..............................................................................4 1.1.3 INDIVIDUAL ENTREPRENEURS..........................................................................................6 1.1.4 DEHKAN FARMERS...........................................................................................................8 1.1.5 SMALL AND MEDIUM COMPANIES.................................................................................9 1.1.6 INVESTMENTS: MOSTLY INTERNAL FUNDS.....................................................................11 1.1.7 ENERGY SUPPLY: INSUFFICIENT.....................................................................................12 1.2 leGal environment and sme confidence....................................................................13 1.2.1 LEGAL AWARENESS.......................................................................................................13 1.2.2 ROLE OF THE STATE IN THE SUPPORT OF ENTREPRENEURSHIP....................................15 1.2.3 LEGAL DISPUTES.............................................................................................................15 1.2.4 EXPECTATIONS OF ENTREPRENEURS.............................................................................16 2. reGistration.................................................................................................................................19 2.1 reGistration: the leGal framework................................................................................21 2.2 reGistration of individual entrepreneurs...................................................................22 2.2.1 DIFFICULTY OF REGISTERING AS INDIVIDUAL ENTREPRENEUR....................................23 2.2.2 TIME SPENT ON REGISTRATION AS AN INDIVIDUAL ENTREPRENEUR..........................24 2.2.3 COST OF REGISTRATION OF INDIVIDUAL ENTREPRENEURS.........................................24 2.2.4 UNOFFICIAL PAYMENTS.................................................................................................25 2.3 reGistration of dehkan farms........................................................................................25 2.3.1 DIFFICULTY OF REGISTERING A DEHKAN FARM...........................................................27 2.3.2 TIME FRAMES FOR THE REGISTRATION OF DEHKAN FARMS.......................................27 2.3.3 COST OF REGISTRATION OF A DEHKAN FARM............................................................28 2.3.4 UNOFFICIAL PAYMENTS................................................................................................29 2.4 reGistration of leGal entities..........................................................................................29 2.4.1 DIFFICULTY OF REGISTRATION FOR LEGAL ENTITY.......................................................31 2.4.2 TIME FRAMES FOR REGISTRATION OF LEGAL ENTITIES: A LONG PROCESS...............32 2.4.3 COST OF REGISTRATION FOR LEGAL ENTITIES.............................................................34 2.4.4 UNOFFICIAL PAYMENTS FOR LEGAL ENTITIES STILL AN ISSUE......................................34 2.5 economic impact estimate...............................................................................................35 recommendations ...................................................................................................................36 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 iii CONTENT 3. licensinG.......................................................................................................................................43 3.1 licensinG: the leGal framework.....................................................................................45 3.2 licensinG coveraGe: improvements overall.............................................................46 3.3 licensinG procedure: a two-sided situation..............................................................48 3.3.1 DURATION OF LICENSING PROCESS: COMPLIANCE STILL TO BE ACHIEVED............50 3.3.2 COST OF LICENSING: STILL A RELEVANT BURDEN........................................................51 3.3.3 UNOFFICIAL PAYMENTS: STILL A COMMON WAY TO RESOLVE ISSUES.....................53 3.4 economic impact of licensinG......................................................................................54 3.5 duration of a license: a stronG deterrent to lonG-term investments...............55 3.6 access to information.....................................................................................................57 recommendations ...................................................................................................................59 4. permits...........................................................................................................................................69 4.1 permits: the leGal framework..........................................................................................71 4.2 overall assessment: procedures are most complicated for small and medium companies.................................................................................72 4.3 permit coveraGe and freQuency: staBle overall.....................................................73 4.3.1 OVERALL COVERAGE AND FREQUENCY STILL EXTREMELY WIDESPREAD................73 4.3.2 NUMBER OF PERMITS IS LINKED TO THE SIZE OF ACTIVITY...........................................75 4.4 issuinG process: unreGulated, opaQue and unnecessarily time-consuminG.............................................................................76 4.5 permits expenses...................................................................................................................77 4.6 economic impact of permits...........................................................................................78 4.7 access to information and unofficial payments....................................................78 4.7.1 DIFFICULTIES FACED WHILE OBTAINING PERMITS........................................................79 4.7.2 UNOFFICIAL WAYS TO SOLVE ISSUES ARE WIDESPREAD............................................80 recommendations ...................................................................................................................81 5. entrepreneurs and finance.....................................................................................................85 5.1 tajikistan's financial sector: an overview...............................................................87 5.1.1 LENDING: GROWING AT HIGH PACE, BUT STILL LIMITED............................................87 5.1.2 DEPOSITS: SIGNIFICANT DEVELOPMENT TO BE SUPPORTED BY AN INCREASE IN THE TRUST OF PEOPLE IN THE FINANCIAL SYSTEM.....................87 5.2 access to BankinG for small and medium Businesses still limited.......................88 5.2.1 LENDING: LIMITED DUE TO SELF-SELECTION PROCESS...............................................91 5.2.2 INDIVIDUAL ENTREPRENEURS: INCREASING LENDING................................................93 5.2.3 SMALL AND MEDIUM COMPANIES: IMPROVED LENDING.........................................93 5.2.4 DEHKAN FARMERS: LOW LEVEL OF APPLICATIONS....................................................94 5.2.5 LOAN DURATION: STILL TO BE IMPROVED...................................................................95 5.2.6 COLLATERAL: STILL A HINDERING FACTOR..................................................................96 5.2.7 INTEREST RATES: EXTREMELY HIGH................................................................................98 5.2.8 UNOFFICIAL WAYS OF SOLVING THE ISSUES: VERY COMMON..................................99 iv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 CONTENT 5.2.9 LOAN PROCESS: QUITE STREAMLINED..........................................................................99 recommendations ..................................................................................................................101 6. inspections.................................................................................................................................107 6.1 inspections: the leGal framework................................................................................109 6.2 coveraGe and freQuency of inspections remain critical issues for smes....112 6.3 who is inspected? the rationale and outcomes are still unclear.....................114 6.3.1 INSPECTIONS ARE NOT RISK BASED............................................................................114 6.3.2 MANY INSPECTIONS, FEW RESULTS.............................................................................114 6.3.3 TOO SHORT INSPECTIONS TO BE EFFECTIVE..............................................................116 6.3.4 UNOFFICIAL WAYS ARE IN MOST CASES THE EASIEST SOLUTION.............................116 6.4 inspections: a relevant Burden for smes...................................................................117 6.4.1 ...IN TERMS OF TIME.....................................................................................................117 6.4.2 ...AS WELL AS DIRECT COSTS......................................................................................118 6.4.3 ...LEADING TO AN OVERALL SIGNIFICANT ECONOMIC IMPACT............................119 6.5 amBiGuous and unclear norms create difficulties for appealinG...................121 6.6 outdated reQuirements and low leGal awareness make compliance more difficult.....................................................................................................................122 recommendations ..................................................................................................................126 7. taxation......................................................................................................................................129 7.1 review of the current tax system in tajikistan.........................................................132 7.2 taxation of individual entrepreneurs........................................................................134 7.2.1 THE STANDARD TAXATION SYSTEM.............................................................................134 7.2.2 THE PATENT TAXATION SYSTEM...................................................................................135 7.2.3 TAX ACCOUNTING AND REPORTING ARE QUITE PROBLEMATIC FOR INDIVIDUAL ENTREPRENEURS..............................................................................135 7.2.4 RETAIL TRADE TAX: CUMBERSOME ACCOUNTING AND REPORTING RESULTS IN UNOFFICIAL PAYMENTS.......................................................138 7.2.5 INDIVIDUAL ENTREPRENEUR: ADDITIONAL PAYMENTS ARE BURDENSOME.............139 7.2.6 TAX INSPECTIONS OF INDIVIDUAL ENTREPRENEURS ARE INEFFICIENT.....................139 7.3 taxation of small and medium companies...............................................................140 7.3.1 DIFFICULTIES RELATED TO TAX REPORTING AND CALCULATIONS...........................141 7.3.2 SMALL AND MEDIUM COMPANIES: THE SIMPLIFIED SYSTEM AND SOCIAL TAX IMPOSE A HEAVY BURDEN...........................................................143 7.3.3 ADDITIONAL PAYMENTS ARE HIGH FOR SMALL AND MEDIUM COMPANIES.........144 7.3.4 TAX INSPECTIONS FOR SMALL AND MEDIUM COMPANIES ARE NOT ALWAYS JUSTIFIED.......................................................................................145 7.4 taxation of dehkan farmers.........................................................................................145 7.4.1 DEHKAN FARMERS: LUMP SUM TAXATION AS A POSITIVE SYSTEM...........................146 7.4.2 TAX INSPECTIONS OF DEHKAN FARMS ARE LESS FREQUENT....................................146 7.5 tax evasion: a way to escape the system....................................................................147 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 v CONTENT 7.6 taxation system hinders Business Growth..................................................................148 recommendations ..................................................................................................................150 8. foreiGn trade and technical reGulation........................................................................155 8.1 tajikistan foreiGn trade: the context.........................................................................157 8.2 role of smes in foreiGn trade operations.................................................................158 8.2.1 ACCESS TO INTERNATIONAL MARKETS: HIGH COST OF TRANSPORTATION...........160 8.2.2 INSTITUTIONAL SUPPORT OF SME EXPORT IS NEEDED................................................161 8.2.3 COMPLICATED PROCEDURES LEAD TO LOW INVOLVEMENT OF SMES..................162 8.2.4 UNOFFICIAL SOLUTIONS DURING EXPORT PROCEDURES ARE COMMON.............165 8.3 technical reGulation: standardiZation and certification.................................165 8.3.1 STANDARDS AND CERTIFICATES IN TAJIKISTAN: THE BACKGROUND......................166 8.3.2 STANDARDS: OUTDATED..............................................................................................166 8.3.3 CERTIFICATION: EXCESSIVE FOR PRODUCERS AND TRADERS..................................167 8.3.4 CERTIFICATION PROCEDURE: COMPLICATED FOR SMES.........................................169 8.3.5 DIFFICULT ACCESS TO INFORMATION LEADING TO UNOFFICIAL WAYS OF SOLVING ISSUES...............................................................170 8.3.6 COST OF CERTIFICATION: UNEVEN DISTRIBUTION......................................................170 8.3.7 LONG DURATION OF OBTAINING CERTIFICATES: BURDENSOME FOR COMPANIES................................................................................170 8.3.8 DURATION OF CERTIFICATES: UNCLEAR SITUATION...................................................171 recommendations ..................................................................................................................172 9. methodoloGy of the survey.................................................................................................177 9.1 sample selection.................................................................................................................178 9.2 additional survey on unofficial solutions.............................................................182 9.3 indexes and definition used in the report..................................................................182 a. statistical appendixes: OVERVIEW OF THE SME SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS....................185 REGISTRATION..............................................................................................................................199 LICENSING....................................................................................................................................201 PERMITS.........................................................................................................................................203 ENTREPRENEURS AND FINANCE..................................................................................................207 INSPECTIONS.................................................................................................................................213 TAXATION......................................................................................................................................217 FOREIGN TRADE AND TECHNICAL REGULATION......................................................................221 references.........................................................................................................................................226 vi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 GLOSSARY GLOSSARY ADB Asian Development Bank AKF Aga Khan Foundation CAGR Compound Annual Growth Rate CIS Commonwealth of Independent States CPI Consumer Price Index DRS Districts of Republican Subordination DRS A Districts of Republican Subordination - Hissar Valley DRS B Districts of Republican Subordination - Rasht Valley EBRD European Bank of Reconstruction and Development FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investments FIAS Foreign Investment Advisory Service - the World Bank Group FMFB First Microfinance Bank of Tajikistan GBAO Gorno Badakhshan Autonomous Oblast GDP Gross Domestic Product IFC International Finance Corporation - the World Bank Group IMF International Monetary Fund IOM International Organization of Migration IRB Inspections Registration Book MFO Microfinance Organization MIGA Multilateral Investment Guarantee Agency - the World Bank Group MSDSP Mountain Societies Development Support Programme NBT National Bank of Tajikistan NDS National Development Strategy PWC Price Waterhouse Coopers PRS Poverty Reduction Strategy SECO Swiss State Secretariat for Economic Affairs SME Small and medium enterprises SQAM Standardization, Quality Assurance, Accreditation and Metrology TUCE Tajik Universal Commodity Exchange UNIDO United Nations Industrial Development Organization VAT Value Added Tax WB World Bank WTO World Trade Organizations Tajik Somoni to US dollar exchange rates used in the report (NBT rates): Average exchange rate for 2002: $1=3.00 somoni Average exchange rate for 2005: $1=3.19 somoni Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 vii viii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREWORD AND ACKNOWLEDGEMENTS The International Finance Corporation is pleased to present the results of its second SME survey in Tajikistan, conducted by the IFC Tajikistan Business Enabling Environment - SME Policy Project. The project has been implemented since 2003 with the financial support of the Swiss State Secretariat for Economic Affairs (SECO). This survey, which builds on IFC's previous survey conducted in 2003, provides a comprehensive tool to monitor the envi- ronment for doing business in the country by collecting the direct views of business representatives on the major regulatory procedures encountered during their activity. This survey report is part of the broader effort by IFC and SECO to improve the overall context in which SMEs are launched and operate. During the four years since its launch the project has benefited from close interaction with many public and private institu- tions operating in Tajikistan, as well as a number of international organizations. The project would like to thank the Govern- ment of Tajikistan, with whom the project signed a Memorandum of Understanding in November 2006. The project would also like to extend gratitude to the Executive Unit under the Office of the President of the Republic of Tajikistan, with which it developed a longstanding relationship, to the new State Investment Committee and, in particular, to the Department of Entrepreneurship Support, which has been a vital partner during the last several months of the project's work. Addition- ally, the project would like to acknowledge the commitment of the Ministries and Agencies that became project pilots in Inspections Law implementation: the Fire Authority under the Ministry of Internal Affairs, the Sanitary and Epidemiological Service under the Ministry of Health, and the Tax Committee under the Government of the Republic of Tajikistan. Finally, the project would like to express gratitude to the Ministry of Justice, the Ministry of Economical Development and Trade, the State Statistical Committee, the House of Representatives of the Republic of Tajikistan, the Chamber of Commerce and Industry of the Republic of Tajikistan, the National Association of Small and Medium Businesses, the Association of Dehkans (Farmers), the Center for Support of Entrepreneurship of the City of Dushanbe, and the Center for Statistical Re- search «Zerkalo» for their active support and a fruitful collaboration. Numerous individuals and organizations contributed generously to the preliminary review of this report, including: the World Bank Resident Mission in Tajikistan, the IFC Country Coordinator for investment activities and other IFC staff, the IMF Resident Representative, and the SECO National Program Officer. This survey is based on and reflects entrepreneurs' views of the business environment in Tajikistan, and as such the data presented do not necessarily reflect the views of IFC or SECO. At the same time, this report does not intend to provide an exhaustive account of all the issues faced by small businesses; rather, it offers an opportunity to examine the most critical administrative barriers hindering the development of the SME sector in Tajikistan. Electronic versions of this Report can be downloaded at http://www.ifc.org/tajikistan/sme while printed copies can be obtained at our offices in: International Finance Corporation International Finance Corporation Tajikistan Business Enabling Environment - SME Policy Project Private Enterprise Partnership 7 Abdullo Komandir Str. 36, Bolshaya Molchanovka, bld. # 1 Dushanbe 734001, Tajikistan Moscow 121069, Russia Tel: +992 48 701 1440 Tel: + 7 495 411 7555 Fax: + 992 48 701 1448 Fax: + 7 495 411 7556 Dushanbe, April 2007 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ix x Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY executive summary content of the report: analyZed procedures This report is a follow-up to the first survey of the business environment in Tajikistan conducted by IFC in 2003.1 It collects and analyzes the views of a representative sample of 2,500 Tajik entrepreneurs on a number of administrative procedures which they encounter either in establishing or running their businesses in 2005. The survey also includes the views of entrepreneurs on access to finance, which, although not an administrative procedure per se, represents a critical step in the SME lifecycle. In each of the covered areas, the report analyzes the legislative basis and subsequently provides an overall picture of the key issues emerging from both the survey data (coverage, length of the process, official and unofficial payments related to the procedure), and from the expert analysis of the legal framework. In order to provide the most updated overview of the issues in each of the areas, the report also provides legal and expert analysis of the post 2005 developments not covered by the survey data. Areas covered by this report are: · Registration; · Licensing; · Permits; · Access to finance; · Inspections; · Taxation; · Foreign trade and technical regulation. A set of recommendations to overcome the identified problems in these areas is developed at the end of each chapter. A table at the endofthissectionsummarizesthecriticalissues,keyrecommendations and their expected impact. Business environment in 2005 vs. 2002: overall improvement In the years between the two surveys, the government of Tajikistan has undertaken a set of reforms whose impact on the business environment is evident from the collected data. Reforms in the areas of registration and licensing have reduced the time and cost of starting a business. Clear steps have also been undertaken in the area of access to finance, where positive changes are evident despite the still critical overall situation. In particular, thanks to the micro lending 1 IFC (2004b) Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xi EXECUTIVE SUMMARY of MFO's, smaller sized borrowers can now have access to external funding. In addition to these positive results, a number of legislative acts have entered into force in 2006. Their effects were not captured by the present survey data, but the Law on Inspections and the reduction in the number of licensed activities are additional positive steps in the direction of an improved business environment. Their impact will be captured only when implementation is complete and the next survey will take into account these results. Despite these efforts, it is important to note that the abovementioned improvements need to be further strengthened and made permanent. On the one hand, it is essential to extend reforms into other areas. Permits are directly linked to inspections and licensing, and if not reformed, could undermine the already achieved results in these areas. Trade procedures and technical standards need to be reformed in conjunction to further simplify trade. Taxation system needs to be simplified in order to facilitate compliance and administrative control, as well as promote business growth. On the other hand, in order to consolidate the benefits of the reforms toward improved investment climate and business environment, it is crucial to monitor the implementation of the newly introduced legal framework. Survey data show that actual practices often differ drastically from the legislative provisions, and that strong regional differences exist. rankinG of reGulatory procedures: a Qualitative assessment In order to identify the most pressing issues for SMEs, the survey report identifies 2 main drivers for prioritization: · perceived complexity, the percentage of SMEs2 that claim a procedure is difficult/very difficult. In using this indicator, it is important to remain aware of entrepreneurs' adjustment to the institutional context, i.e., over time people tend to consider even a very complicated situation to be normal and adjust their behavior. However, in terms of a relative ranking, the impact of these adjustments should be evenly distributed across procedures; · coverage, the percentage of SMEs affected by the procedure. This indicator shows the relative importance of the procedure for 2 Among those going through each procedure. xii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY the SME sector as a whole. Coverage is a correct indicator of the relevance for compulsory procedures, that is, procedures that are mandatory in order to start or conduct a business activity. Nevertheless, this indicator may be biased by a self- selection process for procedures that are not mandatory (for example external trade). As some of the procedures are very complicated, they implicitly discourage SMEs from the activity which requires them.3 These two drivers are used to prioritize the regulatory procedures Chart I. REGULATORY BARRIERS FOR INDIVIDUAL ENTREPRENEURS mentioned above. Complexity is taken as the most relevant barrier to business development, while coverage is secondary. Moderate Problematic Critical In order to account for differences between types of surveyed coverage SMEs, and their relative weight in the overall economy, a separate ranking is developed for individual entrepreneurs, small and registration Above inspections medium companies and dehkan farmers, which represent the 80% taxation three typologies of businesses surveyed. permits Overall, it is interesting to note that the qualitative evaluation of 20%-80% technical Access to finance administrative procedures, based on SME perception, largely regulation confirms expert analysis of the survey data. Indeed procedures which SMEs ranked as most critical were the same ones that Below licensing export/import showed the highest administrative burden from a quantitative 20% standpoint. Difficulty individual entrepreneurs Moderate Complicated Very (below 40%) (40% to 60%) complicated (above 60%) Individual entrepreneurs face a business environment characterized by two critical administrative barriers: inspections and lack of access to finance, which are both very pervasive and complex. Chart II. REGULATORY BARRIERS FOR SMALL AND MEDIUM COMPANIES Secondary difficulties include import/export, which is considered Moderate Problematic Critical extremely complicated, and partially explains the limited coverage participation of individual entrepreneurs in foreign trade. registrationandtaxationareplacednextinorderofpriority,chiefly Above taxation inspections due to extensive coverage rather than to relative complexity. 80% small and medium companies permits 20%-80% technical regulation Access to finance Small and medium companies face the most complex business licensing environment, with a total of 4 procedures which rate as critically difficult. Below 20% registration export/import In addition to access to finance and inspections, small and medium companies face additional barriers in obtaining permits and licenses. Moderate Complicated Very Difficulty (below 40%) (40% to 60%) complicated (above 60%) 3 For those cases we used as an indicator of coverage the percentage of SMEs "willing to" instead of the ones accessing the procedure. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xiii EXECUTIVE SUMMARY taxation and export/import, due to coverage in the first case and complexityinthesecond,onceagainpose`secondary'difficulties Chart III. REGULATORY BARRIERS FOR DEHKAN FARMERS on a relative scale. Moderate Problematic Critical dehkan farmers coverage Although the agricultural sector in Tajikistan is characterized by inspections many issues,4 from an administrative viewpoint, dehkan farmers Above 80% taxation face a relatively simpler business environment than individual entrepreneurs and small and medium companies. Two areas appear as the most critical: access to finance, given 20%-80% permits registration Access to finance an extremely limited supply of affordable agricultural lending, and registration, given lengthy land allocation procedures averaging licensing 5 months. Below export/import 20% technical regulation inspections and taxation rank as complex, but not critical, procedures for dekhan farmers. Moderate Complicated Very Difficulty (below 40%) (40% to 60%) complicated (above 60%) overarchinG oBservations Three clear tendencies emerge from the survey, based on the qualitative assessment of the different administrative procedures and on the analysis presented in the following chapters. starting versus running a business First, although starting a business in tajikistan is not easy, the really complex effort is to run it over time. Lack of access to finance is the single procedure perceived as critical for all types of businesses, and significantly complicates business operations. Additional barriers are created through processes such as obtaining permits and licenses ­ typically barriers to entry, but coverage in Tajikistan is spread equally between start-ups and existing businesses. Further, survey results show that these procedures, performed by SMEs on an annual basis, are actually more difficult for existing businesses than for start-ups. An existing company is affected more significantly by lack of renewal of a license or permit than a start-up, given that it has already incurred a relevant amount of unrecoverable costs in case its activity is stopped. This raises the stakes for unofficial payments in a situation where procedures are complex, not standardized and non-transparent, while issuance time is not stipulated. Indeed the time and cost of obtaining a license or a permit is higher for existing businesses than for start- ups. For example, to obtain necessary permits, 27% of start-up and 36% of existing small and medium companies used unofficial payments. 4 For a thorough description of agricultural issues, see FAO/EBRD (2006). xiv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY making a company grow Second, survey results show that the business environment gets progressivelymoredifficultasacompanygrows.Surveyresultsshow that complex administrative procedures block business growth and development. Procedures including taxation, inspections, and access to finance serve as barriers to entrepreneurs wishing to expand their business, hire additional workers and pay more taxes, as their profits and revenues increase. In particular, the frequency of administrative procedures creates a "regulatory uncertainty" which naturally deters long-term investments. Typical examples of these procedures are the yearly renewals of licenses and permits. Given a lack of incentives for growth, small and medium companies make up less than 6% of all businesses in the country. Although small and medium companies should represent the backbone of the SME sector, the annual growth rate of small and medium companies was half that of individual entrepreneurs in 2002-2005. Indeed, as a small and medium company is, on average, nearly twice as likely to invest in its operations, hires 7 times as many employees and pays 14 times more in taxes than an individual entrepreneur, the business environment should facilitate its development. Dealing with officials Third, survey data shows that unofficial methods for solving issues Chart IV. IN MOST CASES ENTREPRENEURS SOLVE ISSUES WITH remain common for all procedures. The report distinguishes ADMINISTRATIVE PROCEDURES UNOFFICIALLY between unofficial payments and `other' broader informal % OF RESPONDENTS methods of thanking officials ­ such as gifts, meals, and other forms of non-cash payments. These relations undeniably distort each step of the regulatory process. Unofficial methods are used Unofficially 75 chiefly to speed up document processing time and to reduce Officially 18 the scope of regulation. For example, given that entrepreneurs receive an average of one inspection per month, which is high No need 6 even for the CIS region, about 30% of those inspections lasted less No answer 1 than 30 minutes. Interestingly, data from focus groups shows that entrepreneurs are used to the "convenience" of unofficial means for getting results, and are somewhat wary of the effect of new legislation or practices aimed at reducing the scope of corruption. This strengthens the assumption that unofficial solutions are also used as a substitute for official sanctions. Indeed, an unofficial solution for lack of a fire extinguisher, paid out once a year, is less costly for a business than purchasing the extinguisher. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xv EXECUTIVE SUMMARY Unofficial payments, as well as other forms of corruption, are present in 75% of regulatory processes, according to entrepreneurs surveyed for this report. The experiences of other countries show that corruption can only be reduced through comprehensive public sector reforms which set explicit goals and specific targets for reducing corruption. report summary 1. overview of the sme sector 1.1 From 2003 to 2006, the Tajik economy has enjoyed consistent growth and macroeconomic stability, which allowed it to partially recover from the effects of the collapse of the Soviet Union and resulting civil war. The SME sector benefited and contributed to this growth, with an increase in the number of active companies, growth in its contribution to GDP and share in overall employment. 1.2. Nevertheless, the sector is still characterized by some structural weaknesses: while its overall growth has been significant, the backbone of the sector continues to be comprised of individual entrepreneurs, i.e., sole proprietors operating micro-businesses, and dehkan farmers, i.e., owners of small scale private farms. While these two categories of enterprises enjoyed sustained growth, small and medium companies are still limited in number and face a more difficult business environment. 1.3. Overall business confidence remains good, although a few worrisome signals should not be underestimated: while most entrepreneurs expect the current economic situation to be sustainable, the share of respondents who say they would not restart their business, if given the choice again, has grown significantly with respect to the previous survey. This number is particularly high among small and medium companies, which further emphasizes barriers to their ability to grow and be successful in the current business environment. 1.4 Investment in fixed assets is declining: only one out of four entrepreneurs made investments in 2005. This is a sign of decreasing business confidence and a result of the difficulties Tajik SMEs face in getting access to funds. Most of the investments that did take place were funded by internal/informal sources rather than by the financial sector. 2. starting a business: registration 2.1 Registering a new business in Tajikistan has become easier, particularly for small businesses. The registration procedure was reformed in 2003 and now individual entrepreneurs can register in xvi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY less than a week, with limited costs. This result is particularly significant, given that de-facto all individual entrepreneurs are required to register on annual basis (while this should be de-jure, needed only for entrepreneurs operating under the simplified "patent-based" system). 2.2 Registration of legal entities5, on the other hand, has shown no improvement with respect to the previous report6: on average, the process takes over a month, is complex and time-consuming, and involves more than 5 government agencies. As a result, unofficial payments are a common solution and expenditure can be quite significant. 2.3 Registration for dehkan farmers is in essence quite similar to that of individual entrepreneurs, but with an additional pre-registration procedure: allocation of the land plot for the farm. This crucial step is extremely time-consuming and results in a total registration procedure that lasts about 5 months. As the land allocation procedure is not fully defined by legislation, it lacks uniformity and transparency, and thus also opens the door to unofficial payments as a tool to speed up the process. 3. licensing 3.1 Following the new licensing law, obtaining a license has become easier. Fewer businesses are now required to obtain a license, while the costs have remained stable. In particular, licenses have been almost completely eliminated for dehkan farmers. 3.2 The duration of licenses remains a critical issue: although the legislation establishes a minimum duration of 3 years, de-facto the average duration of a license in Tajikistan is less than one year, increasing both the costs of running a business and rent-seeking opportunities for officials. Such short-term validity periods present a critical issue in terms of providing incentives for investment and long- term growth. Survey results show that the process of license renewal is even more complicated and more prone to corruption than initial issuance. 3.3 small and medium companies bear the largest chunk of the licensing burden: more than half of all small and medium companies are required to obtain a license, and spend about a month doing so. As a result, they incur the highest costs and, in every fourth case, pay unofficially to complete the procedure. 5 Small and medium companies. 6 IFC (2004b). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xvii EXECUTIVE SUMMARY 4. permits 4.1 more than half of smes need to obtain permits prior to launching business activities. The permit system in Tajikistan is the result of two complementary forces: Soviet-era technical regulations, which provide the basis for the majority of permits, and new, market- oriented regulations that have led to somewhat chaotically added permits over the course of the past 15 years. The overall system has never gone through a proper rationalization, and as such represents a heavy and sometimes unnecessary burden for SMEs. 4.2 As to permit coverage, the opportunity cost of such a large number of permits (on average more than 3 per year per business) is questionable, in particular for businesses that have already been licensed. In addition, some permits also contradict the requirements of a market economy (i.e., permit to use energy). 4.3 At the same time, the permit issuance process is not properly regulated. The necessary paperwork, costs and the time it takes to issue a permit all show significant variance throughout different regions. In addition, unclear process requirements once again present an environment conducive to rent-seeking. 4.4 As mentioned in the case of licenses, duration is a critical issue. Survey data shows that existing businesses need to receive permits almost as frequently as do start-ups. Not only are existing businesses required to re-apply for permits, but time and processing costs are higher in cases of renewal. The most likely explanation for these differences is recourse to unofficial payments. 4.5 small and medium companies appear to be most affected by permits: coverage, costs and time needed to comply with permit regulations are significantly higher than for other SMEs and create a burden both for start-ups and existing businesses. 5. Access to finance 5.1 Tajikistan's financial sector is still in a development stage, both on the lending as well as on the deposit side. The number of intermediaries is significant, but the sector is highly concentrated and mainly dominated by local players. 5.2 The relationship between financial intermediaries and SMEs is still extremely limited: only one out of six businesses has a bank account, which does not necessarily imply a full-fledged banking relationship. Not only do individual entrepreneurs and dehkan farmers typically lack bank accounts, but small and medium companies often do not have bank accounts either. SMEs do not perceive banks as service providers: most interviewed entrepreneurs do not feel the need for xviii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY banking services. This partly reflects the limited trust in the financial sector, but also points to a lack of effort on the supply side to develop products and services to attract new customers. 5.3 Shallow relationships between banks and SMEs, in conjunction with the difficulty banks have attracting financing at competitive rates, implicitly limit the size of the lending market. In fact, as a result of the limited number of customers, banks do not possess the necessary information to evaluate the creditworthiness of their clients, while interest rates make bank lending extremely expensive. As a result, almost 75% of SMEs in need of external funding do not apply for loans. 5.4 Despite this, the lending process is quite efficient (lasting about 16 days) and acceptance rates of applicants are quite high (87%). This is a significant change with respect to 2002, testifying to changes in the way that banks operate, but is also partly a result of a self-selection process among the applicants themselves. The majority of potential applicants self-assess their likelihood of obtaining a loan, and if they feel they do not meet the requirements, do not apply. 5.5 lending conditions, including rates (on average between 35- 40%, given an average inflation rate of below 10%), loan duration (less than 1 year) and collateral requirements (on average 70% of the principal amount), combine to hinder the development of an efficient lending market. 5.6 Although the presence of a well developed microfinance sector partially addresses the needs of smaller sized borrowers, the overall situation is particularly critical for small and medium companies, which, in order to finance growth, require a well-functioning financial sector to support them in the medium-to-long term by providing funds at reasonable rates. 6. inspections 6.1 Once established, a Tajik business is likely to face government representatives in the form of inspections at least once a month. In 2005, inspections remained a pervasive phenomenon: although the average number of inspections declined with respect to 2002 (from 16 to 13), nearly all SMEs continue to receive at least one inspection per month. 6.2 Only 1 in 5 inspections results in an official sanction. On the one hand this testifies to limited use of risk management principles in selecting inspection targets, highlighting inefficiency. On the other hand, this points to a high likelihood of unofficial payments to resolve inspections-related issues. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xix EXECUTIVE SUMMARY 6.3 The limited effectiveness of the inspections system is also reflected in the short duration of site visits: individual entrepreneurs in particular report that about one-third of them last less than 30 minutes. 6.4 The overall impact of inspections is considerable. Direct and indirect costs of inspections can be estimated in the range of 7-8% of annual profits for individual entrepreneurs and small and medium companies. For dekhan farmers, however, the situation is better, as their total burden is just over 1% of annual profits. 6.5 The situation is likely to improve with full implementation of the new inspections law. The introduction of compliance-enhancing mechanisms and the clear definition of rights and responsibilities of entrepreneurs as well as of inspectors, should introduce transparency into the inspections process, improve compliance with regulations, and reduce the cost of doing business. 6.6 Inspection reform per se is nevertheless not sufficient to solve all of the issues. Broader public sector reform is required to revise the structure of the public sector, including a revision of officials' salaries combined with downsizing, review of the criteria for hiring public employees, and introduction of performance management systems. 7. taxation 7.1 SME taxation, although not particularly heavy in terms of tax rates, represents a serious obstacle for the sector's development in terms of compliance costs, imposing on businesses due to complicated tax administration procedures. 7.2 The simplified taxation systems, foreseen by the legislation for all typologies of SMEs, present serious drawbacks, which need to be addressed: · The patent system for individual entrepreneurs does not reduce administrative burden and eliminate unnecessary inspections; · The simplifiedsystemforlegalentities isnotadrasticsimplification of the reporting requirements from the standard system, and imposes a very similar taxation burden; · The unified tax for dehkan farmers does not allow businesses to reduce their tax burden in case of negative or limited results; 7.3 tax administration is cumbersome, requiring multiple reports and payments over the year. Taking into account the low level of tax and accounting literacy of most SMEs, the burden is particularly heavy. In addition, tax officials do not provide entrepreneurs with customer oriented support on tax issues, but rather make use of the frequent interactions with SMEs for rent seeking behavior. xx Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY 7.4 Tax compliance is mostly pursued through repeated tax audits. This is inefficient from the tax administration viewpoint, as it is mostly focused on small size companies rather than "big tickets," and corruption prone, leaving a high degree of discretion to the tax inspectors. 8. foreign trade and technical regulation 8.1 Trade is an essential component of the Tajik economy. Due to its size and level of economic development, Tajikistan relies on import to provide the economy with essential goods. export needs to complement imports in order to avoid macro-economic imbalances. 8.2 Complicated foreign trade procedures as well as high transportation costs represent two critical constraints for import/ export activities, resulting in lower competitiveness of exports as well as in price increases for imports. 8.3 As a result, sme participation in trade, already limited, is declining further. SMEs are almost excluded from exports (down to 0.4% versus 4% of 2002). Their contribution to import is somewhat higher, although declining significantly (from 19% in 2002 to 11% in 2005). 8.4 Standardization and certification requirements represent a major barrier to trade for the Tajik economy. Goods imported into Tajikistan need to be tested against and meet separate local quality requirements, as set by TajikStandart (unless certified by CIS countries). Export products meanwhile lack internationally recognized certificates required for introduction into key markets. 8.5 Certification procedures are widespread among individual entrepreneurs as well as small and medium companies (with 20% and 36% of respondents subject to the procedures, respectively). Overall coverage is significant, especially given the sectors of the economy affected (to a large extent trade and public catering). 8.6 Cost and time of certification procedures are quite burdensome, whiletheirdurationshouldreflectmorecloselythenatureofthegoods involved (e.g., permanent certificates for non-perishable goods). structure of the survey report The chapters analyze the following administrative procedures in detail: registration: the establishment of a business in legal terms. Analysis of the registration procedure includes all requirements to engage in a business activity, formally recognized by the state. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxi EXECUTIVE SUMMARY licensing: certain types of businesses cannot be started directly after registration, but require a license from the government, i.e., an authorization to carry out a particular type of business activity. permits: a government authorization for a specific activity in a particular location (i.e., fire permit to use a building for trade purposes). In this permits differ from licenses, which typically cover an activity repeated over time by the bearer, without particular regard to premises (practicing medicine, selling insurance). Access to finance: the relationship between SMEs and financial institutions is crucial for start-up and growth of companies, and, consequently, for the development of the private sector. inspections: when properly implemented, inspections represent a useful tool for regulating private sector compliance with standardized rules and procedures, to ensure the health and safety of company employees,thepublic,andtheenvironment.Amongotherobjectives, inspections aim to create a level playing field for competition, and ensure fair business practices. An inspections system has to balance the need for oversight with the burden placed on businesses on the one hand, and efficient use of public resources on the other. taxation: the overall tax burden is a critical issue for SMEs. In addition to tax rates, the cost of compliance with the tax regulations is equally important. The efficiency of tax administration and simplicity and transparency of tax rules are the key drivers used to limit the administrative burden and to ensure compliance. foreign trade and technical regulation: international trade is critical for a small country with limited resources like Tajikistan. This report analyzes import-export procedures together with a related issue: standardsandthecertificationprocess,i.e.,theprocessofcompliance of products and services with specific quality requirements. The end of each chapter presents recommendations for improve- ment, based on international practices to date. IFC, with SECO sup- port, has been implementing a business enabling environment im- provement project in Tajikistan since 2002. This project will continue to work together with the Government of Tajikistan as well as with other key stakeholders, including NGOs, international and donor organiza- tions in order to provide assistance in elaboration and implementa- tion of part of the recommendations found in this report. xxii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY registration issue recommendations expected impact long duration of · Introduce time limits for registration, which could apply to · Time limits for registration introduce a re- registration pro- single bodies as well as to the overall process. This could be sponsibility principle for public bodies, which cedures of legal achieved by: should increase efficiency by: entities due to - imposing a fixed consideration time for each step of the - Reduced registration time; high number of registration process by law, for example such as 1 working - Reduced unofficial payments. bodies involved day wherever a simple approval is needed (i.e. to obtain · Fewer steps are expected to reduce barrier and wide scope Statistical Code), and 5 working days where a thorough to entry for new companies. of intervention analysis is needed (i.e. State Registration); · Less intervention from state bodies would of each body - requiring the public bodies to substantiate delays, as well reduce the time and cost of registration for as to provide a detailed explanation for refusal of applica- legal entities. tions in order to allow the applicant to improve upon it; - introducing a maximum registration time, differentiated per typology of companies, in case a "one-stop-shop" princi- ple were to be introduced. · Reduce the number of steps needed to register a legal entity. This could be achieved by: - ensuring the implementation of the current legislation fore- seeing an exchange of records between registering bodies which would allow the companies to obtain a Statistical Code and a Taxpayer's Identification Number without the need to further apply to each of the bodies; - considering the possibility to consolidate the different iden- tification codes legal entities need to obtain (State Regis- tration Number, Statistical Code and a Taxpayer's Identifi- cation Number); · Introducing a full fledged "one-stop-shop" mechanism includ- ing all the State bodies involved in legal entities registration. The registering entity could fill in a single application and pro- vide at once all the necessary documents, which would be processed internally by the involved bodies; · Limit the breadth of arbitrary authority of each body in the decision making process, in particular by the bodies of justice, foreseeing simplified consideration process and specifying a limited set of cases of registration refusal (e.g., incomplete documentation, unlawful activity). unclear cost Introduce official processing costs for each step of registration Introducing and communicating to the pub- of registration by the different bodies. These costs, differentiated for each ty- lic the official costs related to each stage of procedures pology of business, should be officially disclosed in the public the registration would increase transparency information boards by each government body. of the process, decreasing unofficial solutions, and in turn reducing overall registration costs. non-transpar- Introduce a transparent mechanism for land allocation for de- Simplified and transparent land allocation ent and time hkan farms, which at the very least includes: mechanism would make registering dehkan consuming pro- · Uniform set of application documents; farms easier, reducing cost and time spent. cedure of land · Fixed terms for decision making by the different bodies in- plot allocation volved; for dehkan · Clear application fees. farmers annual reg- Implement a life-time registration for individual entrepreneurs By waiving a duration limit for certificates, in- istration for operating under certificates, which would reduce a recurrent dividual entrepreneurs opting for this type of individual cost for doing business. As the legislation does not foresee ex- registration would immediately benefit in terms entrepreneurs piration for certificates, this result could be simply achieved by of avoiding a recurrent burden, reducing time working under monitoring that the Tax Bodies do not include an expiration date and cost of re-registration. certificate in the certificate which they issue. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxiii EXECUTIVE SUMMARY licensing issue recommendations expected impact short dura- Extend the duration of licenses and introduce permanent By extending the validity period of licenses, tion of issued licenses. This can be achieved by: the government will further reduce the market licenses as · Introducing by law a minimum 5-year validity entry barrier, which in turn would increase the disincentive period for all licenses (as in most countries); number of active companies and the size of to long-term · Identifying licenses that can be issued once, long-term investments. Additionally, it would investments i.e., permanent licenses that are revoked only if reduce the immediate costs of doing busi- infringements are identified; ness, as well as time spent dealing with license · Enforce provisions of the law on duration of is- renewals. This time could be translated into sued licenses to avoid the current discrepancy greater profits, more taxes paid, and more in- between legal terms and practical ones. vestments. High financial Introduce the possibility, in particular for individual entrepre- · Payments by instalments would reduce the burden of neurs, to obtain long term licenses while at the same time pay- immediate burden for individuals lacking licensing proc- ing in yearly instalments. This would secure their rights for a longer access to funding, resulting in easier entry for ess, especially timeframe and reduce the financial burden, particularly heavy start-up businesses, leading to more compa- for smaller for cash-constrained individuals. nies active in the economy generating prof- scale busi- its and state tax revenues; nesses. · For the state budget: it would secure a more stable revenue flow over time, while reduc- ing the time needed to process new appli- cations. long period Reduce the duration of the license issuing process by enforcing The implemented measures would reduce the of application the existing 30-day limit and introducing transparency into the time spent by entrepreneurs dealing with the consideration decision process. This can be achieved by: procedure, leading to higher profits and high- increasing the · Introducing a "silence is consent" principle for all licensing er state tax revenues. A more transparent de- cost for busi- agencies, which would automatically grant a license in case cision-making process is expected to reduce nesses and no explicit refusal decision is made within a 30 day period; unofficial payments. unofficial solu- · Requiring licensing bodies to substantiate their refusal or delay tions of the application; · Introducing a monitoring system that allows ex-post verifica- tion of the average length of the licensing process; · Introducing a simplified process (with shorter timeframe, e.g., 15 days) for renewals and repeated applications after a re- fusal. unclear ra- Evaluate the need for a further reduction in licensed activities to Reduced number of activities subject to licens- tionale behind include only those activities which: ing will reduce expenses for entrepreneurs some licenses · Require strict governmental oversight to protect the health dealing with the procedure. Additionally, fur- and safety of citizens; ther entry into relevant sectors would have a · Deal with the allocation of scarce resources or with natural positive effect on private sector profits and tax monopolies; revenues. · Do not foresee specific permit requirements. unclear scope Reduce the scope for licensing suspension. In particular by: Reducing the scope for license suspension for license · Clearly defining for each licensing bodies a "closed list" of situ- would secure entrepreneurs' rights. As a re- suspension al- ations in which a license should be suspended; sult, entry costs would be reduced, leading to lowing broader · Evaluating the option to subject license suspension to court more active companies being active in the interpretation or approval. economy. Additionally, unofficial payments leading to rent- to licensing bodies would be reduced. seeking xxiv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY permits issue recommendations expected impact widespread Reduce permits coverage. This in turn can be achieved by: Reduced coverage of permits will decrease coverage of · Reviewing the number of permits currently issued in order to the entry cost for new businesses and cost of permits rationalize the existing legal basis according to the risk man- doing business for existing ones, with possible agement principles. The necessary steps in this process are: impact on the number of active companies - cancellation of outdated and anti-market permits; and positive contribution to the budget. - consolidation/elimination of redundant permits, i.e., over- lapping permits issued by different levels of the same agen- cy, or by different agencies; - elimination of permits covering areas already regulated by licensing; - elimination of permits for areas already covered by other administrative procedures (i.e., compulsory or voluntary certification). · Identifying by law the agencies allowed to issue permits. long applica- Streamline the application process. This can be achieved by: · Clear procedures would reduce the overall tion review · Introducing the "silence-is-consent" principle. Once an appli- burden of entrepreneurs in terms of time and process, cant for a permit submits the required paperwork, the failure money; leading to of an issuing agency to respond with a decision within a given · Transfer of responsibility from applicant to rent-seeking timeframe counts as an application approval; official would force the latter to examine opportunities · Introducing an administrative principle of application review documents in a timely manner, reducing the process, which limits the range of state intervention and clear- overall time of consideration; ly defines the required steps in case of refusal; · Clearly substantiated cases of refusal would · Specifying a uniform permits application procedure. improve the overall process and reduce entrepreneurs' dependence on unfair deci- sions of officials. cumbersome Reduce the burden of permit renewals. This can be achieved Simplified and less frequent renewal proce- and frequent by: dure would reduce the cost of doing business, permits renewal · Extending the validity period of issued permits, thus reducing while at the same time streamline the work of procedure for the need for repetitive renewals; public bodies. existing busi- · Designing a dedicated process with limited steps in case of no nesses changes in business activity. certain ac- Introduce the "one-stop-shop" principle of issuance of some The possibility to apply at a "one-stop-shop" tivities requiring permits (e.g. building permits), which will help to decrease the would reduce the overall burden for entrepre- multiple permits length of the process and increase the effectiveness of the pro- neurs in terms of time and cost spent and have from differ- cedure, both for entrepreneurs and for the state agencies. In a positive impact on transparency and reduc- ent agencies, particular, it would be advisable to adopt the one-stop-proce- tion of unofficial solutions between entrepre- resulting in dure for sectors requiring multiple permits. neurs and officials. delay of start of activity low legal Launch an information campaign to increase the legal aware- Introduction of standard rules and require- awareness ness of entrepreneurs and government officials, including semi- ments will bring clarity and will regulate the among entre- nars, publications and distribution of explanatory materials. procedure of obtaining permits, improve ac- preneurs and cessibility to information, decrease the oppor- government tunities for unofficial payments and increase officials the legal protection of entrepreneurs. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxv EXECUTIVE SUMMARY Entrepreneurs and finance issue recommendations expected impact Banks' limited Provide incentive systems for banks to reduce credit rationing to By reducing the credit risk faced by financial information to SMEs, by reducing their credit risk. This in turn can be achieved: institutions, three results are expected, which assess the · From the government side by: would reduce credit rationing and make clients' risks - Implementinganddevelopingimprovedpledgelegislation financial resources more easily available to constraining the measures and collateral enforcement regimes through: SMEs: lending market · introducing alternative dispute resolution mechanisms; · Increased amount of lending available and resulting · unified verification of collateral contracts in notary to SMEs (i.e., for the same credit risk, more in higher rates, offices to speed up and facilitate the lending process; lending available); high collateral · introducing the possibility of using land user certificates · Reduced interest rates, as a result of higher requirements, as collateral for loans. level of guarantees; or short-term - Establishing a national credit registry which would provide · Reduced collateral requirements, as a result lending banks with additional borrower information, facilitating of higher level of guarantees. bank verification of credit requirements and credit history of borrowers. · From the banking side by: - Enhancing internal credit risk analysis capabilities by training credit officials and introducing advanced credit analysis methodologies (e.g., credit rating tools); - Promoting alternative financing mechanisms which imply reduced credit risk such as leasing; · From the private sector side by: - Introducing credit insurance provided by business associations (i.e. the Italian CONFIDI), that, in exchange for a fee, could ensure part (up to 50%) of the principal amount provided to a specific SME. limited trust of Put in place policies to increase the confidence of the general Increased confidence in the financial sector population into public in the Tajikistan financial sector. This could be achieved: will foster its development in several ways, banking system · From the government side by: among which, by: of the country - Increasing the awareness of the population of the Fund for · Channeling financial resources to the Deposit Insurance, and strenghten its role for low/middle financial sector, i.e., increasing the share income households by introducing an upper limit to the of deposits, allowing for an increased coverage while increasing the threshold for full coverage; intermediary role between individuals and - Amending the banking legislation to introduce bank the SME sector; secrecy disclosure only on the basis of a court decision; · Narrowing the confidence gap between · From the commercial banking side by: SMEs and banks, allowing them to revert - Improving their internal controlling and auditing processes more frequently to banks in case of need. to eliminate unofficial payments from their branches; - Increasing accountability by introducing the principles of bank corporate governance and, over time require international rating companies to provide independent evaluation of their financial stability; - Promoting the creation of an Inter-banking Association to develop common standards and promote banking interests on different levels as well as promoting banking activities among the population. lack of practi- Support the development of banking services by creating a Allowing banks to develop closer relationships cal benefits "need for banks": with SMEs, which will in turn reduce the infor- for the popu- · From the government/NBT side by: mation asymmetry which creates a limit to the lation from - stimulating the use of "cashless" payment systems (e.g. by lending market. This in its turn would channel using banking introducing the possibility to direct debit charge bank ac- excess cash into the financial system, reducing services counts for the payment of local utilities); the funding constraints for banks. - conducting an awareness campaign addressed to com- municate the benefits of using banks for the general pub- lic; - reducing the 12% withholding tax on deposit interests to at- tract more deposits from individuals. This measure could be applied to deposits denominated in somoni only to provide incentives to invest in local currency. · From the commercial banking side by: - developing and disseminating informational materials on available banking products, including deposits, credit cards, payment systems and financing (including guide- lines on loan application procedures as well as samples of relevant forms and applications); xxvi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY inspections issue recommendations expected impact low awareness Disseminate among the wide public the provisions of the Inspec- Higher level of awareness of the Inspections of the entre- tions Law and in particular the detailed inspection process as Law and a standardized and transparent in- preneurs about envisaged by the new law. This in turn can be achieved by: spection process will empower entrepreneurs' introduced · Developing information campaigns via media addressed to vis-ŕ-vis inspectors by providing them with legislative a wide audience; some direct tools to reduce the burden of in- norms regulat- · Targeting specific audiences, i.e., business associations, busi- spections and at the same time warrant com- ing the process ness incubators, NGOs with specific training programs aimed pliance. of inspections, at raising their knowledge and making them able to support in particular the SMEs; newly intro- duced law on inspections low compli- Provide entrepreneurs with clear, up-to-date and easily avail- The elaboration of checklists at the agency ance of entre- able regulations/ instructions. This in turn can be achieved by level, based on up-to-date regulations, and preneurs with implementing the provisions of the Inspections Law: their dissemination, should increase aware- regulations to · Developing sector-specific checklists at each inspectorate ness and bring transparency to the inspection a great extent level, which incorporate all technical regulations; process. due to the lack · Making checklists and regulations available to entrepreneurs of available in advance in large-scale information campaigns and before information for inspections, so that entrepreneurs can be better prepared; entrepreneurs · Reviewing the regulations underlying inspections to align them with international best practices as well as with the Tajikistan institutional context; widespread Implement a risk-based system for selecting inspections targets. The definition of risk categories should drasti- coverage due Risk criteria need to be defined for each inspections agency in cally reduce the coverage of inspections and to the ab- accordance with specific risk parameters of the activities the change their very nature. Indeed, inspections sence of risk agency controls. This in turn can be achieved by: should not represent the norm, but rather, an management · Implementing the provisions of the Inspections Law requiring exception, unless specific reasons exist. A busi- approach dur- differentiation of inspected entities based on their potential ness should be inspected more frequently only ing planning, risks, and in particular the high risk category requiring higher if it belongs to a high risk category or if com- conducting and frequency inspections; pany-specific conditions exist. assessment of · Defining the risk-management principles within each category inspections of business (individual entrepreneurs, small and medium com- panies, and dehkan farmers), which would allow identification of businesses with higher likelihood of infringements ­ i.e., se- lection based on past infringement records, random selection mechanisms. poor profes- Revise the organizational structure, the professional qualifica- An improved organization of the key inspec- sional organi- tions, the incentive systems and the salary scale of inspector- torates should complement the introduction zation of the ates. This in turn can be achieved by: of risk-based principles of inspections. A lower inspectorates, · Rationalizing the number of inspectors to be allocated to number of highly skilled, professionally trained low qualifica- each agency and their geographical distribution, according and better rewarded inspectors should war- tion of inspec- to the number of entities to be inspected and the risk associ- rant improved outcomes of inspections, de- tors, insufficient ated to the inspected entities; spite the reduction in the number of inspec- remuneration · Submitting inspectors to regular training programs and profes- tions and reduction in unofficial payments, as sional tests to ensure professional skills and improve the effi- a result of an incentive system linking salaries ciency of the inspections process; with performances. · Reviewing the salaries of inspectors and introducing incentive systems linking salaries to performance Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxvii EXECUTIVE SUMMARY taxation issue recommendations expected impact complex Further simplify the taxation system for individual entrepreneurs By consolidating all taxes to be paid by indi- requirements working under patents, by introducing a comprehensive lump- vidual entrepreneurs into a patent, the ben- for social and sum system: efits would be two-fold: retail trade · Consolidating into the patent costs both the retail tax and so- · On entrepreneurs' side, would eliminate the tax payments cial tax payments; costs of unneeded inspections and unoffi- for individual · Revising the patent payments on a regular basis by consulta- cial payments. entrepreneurs tions with others stakeholders, for example within a framework · On the government side, it would drastically undermining of an annual workshop. reduce the number of inspectors. In addi- the simplicity of tion, lump sum patent payments would fa- patent system cilitate forecasting tax revenues. unclear and Introduce systematic and simplified tax accounting for: The introduced measures will increase the at- non-transparent · Individual entrepreneurs working under certificate; tractiveness of these systems, increasing the tax accounting · Small and medium companies taxable under simplified sys- number of tax payers and consequently in- for: tem. crease tax revenues of the state budget. · individual This could be achieved by: entrepreneurs · Introducing unified tax accounting and reporting, which under certifi- would allow submission of one single tax return; cate · Book-keeping for purposes of taxation based on simplified uni- · small and fied Book of Revenues; medium · Clearly defining the tax accounting procedures in Tax Code. companies no clear Strengthen the advantages of the simplified taxation for legal Furtherstrengtheningtheadvantagesofsimpli- advantages entities, by either streamlining tax administration procedures fied taxation would lead to small and medium of simplified (e.g., quarterly payments and unified reporting for all taxes) or companies choosing this system. Increased taxation system consider reducing the tax rate. Indeed, as it is now, the simplified share of enterprises working under simplified for small and tax is neither really simple, nor economically convenient. system would reduce the overall tax adminis- medium com- tration for tax bodies, resulting in a decrease panies of administrative costs. some of the Consider the possibility to eliminate taxes which represent an ob- Abolishing these kinds of taxes would create taxes hinder- stacle to business growth. A typical example of these taxes is the additional incentives for companies to invest ing the growth newly reformed road users' tax, which is calculated based on in business development and reduce the drive and investment costs, implicitly representing a disincentive for companies which towards "shadowing" of revenues and ex- opportunities of invest and generate long-term growth. penses. companies taxation of Further improve the taxation regime for dehkan farmers by in- Introduction of this measure would reduce the dehkan farm- troducing the option to reduce the tax burden for smaller sized tax and debt burden of the dehkan farms. ers not taking farms in cases of low profitability, which should be proved by Elimination of unnecessary pressure would mo- into account the farmer and subject to a tax audit. The decision to reduce tivate farmers to improve their performance. achieved pro- the tax burden should be made by a special commission of rep- ductivity resentatives from tax authorities, local governments, and local self-governments, in order to prevent unfair decision-making and corruption. high rate of Evaluate the opportunity to reduce social tax payments which Reduced social tax rate would reduce the la- social tax represent a disincentive to hire employees and push labor into bor cost and increase the level of employment the shadow market. by creating additional jobs. complex tax Streamline the tax administration. This can be achieved by: Effective tax administration system would re- administration, · Simplifying tax payments by consolidating them (providing the duce the corruption level, free government especially for option to pay more frequently on voluntary basis) and wher- resources from unnecessary tax procedures legal entities ever possible reduce the number of tax forms; and redirect them more efficiently. In addition under standard · Simplifying the taxation forms, reducing the number of pages it would reduce the costs for businesses due to taxation system and redundant information; consolidated number of necessary payments · Introducing risk based principles in planning and conducting and cost and time of interaction with tax bod- inspections, focusing the verifications on the businesses where ies. higher returns are expected; · Reducing the scope for tax inspections and clearly limit the arbitrary powers of tax inspectors. xxviii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY illegal pay- Abolish the practice of charging additional payments not fore- Abolishing illegal payments would increase ments from seen by the legislation. This can be achieved by: the profitability of entrepreneurs, resulting in businesses · Providing an opportunity to report illegal payments issues to increased tax revenues for the state. It would charged by higher authorities; also reduce corruption, resulting in an im- local govern- · Declaring "land improvement payments" illegal and sanc- proved business environment. ments ("land tioning officials that require them. improvement payments") limited ac- Provide tax consultation within business associations to allow Access to tax and accounting consultations counting access to tax consultations for member-businesses. would facilitate tax filing and accounting of literacy smaller scaled businesses. smes limited Increase the legal awareness of entrepreneurs through state The benefits of increasing entrepreneurs' le- awareness of and non-governmental structures to improve entrepreneurs' gal awareness would be reduction of unof- tax regulations access to information on taxation. ficial payments and of time required to deal with tax payment and inspections procedures, positively affecting entrepreneurs' profits and state tax revenues. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxix EXECUTIVE SUMMARY foreign trade and technical regulation issue recommendations expected impact complicated Simplify the export trade procedure by: Simplified procedures would increase the procedures · Eliminating 100% advance payment requirement for export; number of SMEs involved in foreign operations hindering · Reducing the number state bodies involved in processing of contributing to additional income generation involvement of documents to avoid unnecessary duplication. For instance: of national economy and increase in foreign smes in export - National Bank of Tajikistan confirms the presence of the trade turnover. operations necessary documents for export, even though the proce- dure has already been completed by the seller's bank; - custom procedures are repeated by directorate for cus- tom supervision and regional customs office. · Eliminating mandatory requirements for certain categories of export goods at Tajik Universal Commodity Exchange (TUCE). At very least, enforce that products not on the list in govern- ment resolution should not be subject to TUCE review. complicated Facilitate processing of imported goods by: Introduced measures would increase the trans- procedures · Creating Valuation Dispute Resolution Administrative Tribunal parency of the import procedures and reduce hindering to handle disputes on valuation methods during import; the time and cost burden for businesses. involvement of · Introducing acceptance of faxed import documents (e.g., smes in import letters of credit) in accordance with international practices. operations complicated Facilitate transportation of goods. This could be achieved by: Improved transportation would reduce the transporta- · Improving the domestic transport and customs regulations to- overall expenses of trade operations. tion regula- wards more transparency and simplification; tions hindering · Continuing dialogue with neighboring countries to simplify the growth of and to increase the transit volumes of the goods. foreign trade operations low awareness Develop and disseminate by customs services a binding sum- Availability of uniform requirements for foreign of the entre- mary descriptions on export/import procedures, necessary doc- trade procedures reduce the overall burden preneurs about uments to be submitted, costs, and timeframe for each step. for entrepreneurs in terms of time and cost major trade spent. procedures due to the lack of uniform infor- mation widespread Apply the risk-based approach by determining which goods Reduction of the coverage of certification certification and services need to be certified to exclude non-risky catego- would result in additional cost savings for en- of goods and ries from mandatory certification as well as by abolishing the trepreneurs. services being mandatory certification requirement for services. burdensome for smes outdated tech- Update the standard system by: Possibility for entrepreneurs to market their nical standard · Reviewing the list of standards and abolish the ones not nec- products in the conformity with international system with lim- essary on the grounds of health and safety in a market econ- standards. At the same time "maintenance ited integration omy; cost" for the bodies responsible for elaboration with worldwide · Considering the possibility to adopt international standards to of standards will be reduced. standards avoid "maintenance cost" of the system. Burdensome Reduce the need for double certification of import/export by: On the one hand, avoidance of double certifi- system of man- · Accepting the certificates of conformity from EU countries, cation during import would reduce the overall datory certifica- U.S.A., Japan to avoid double certification of imported burden for importers. On the other hand pos- tion hindering goods; sibility to certify Tajik commodities with inter- the develop- · Creating internationally required laboratory facilities to cer- nationally accepted standards would allow ment of foreign tify Tajik commodities according to internationally adopted Tajik exporters easier access to international trade standards to facilitate their export. markets. unequal posi- Accelerate WTO accession of Tajikistan by bringing the legisla- WTO accession would have a positive impact tion of tajik tion in line with requirements and institutionalization of business on the development of foreign trade in the exporters in participation in WTO accession process. country. foreign trade xxx Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 1. sme in tajikistan: overview of the sector, main trends and Business expectations SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1. sme in tajikistan: overview of the sector, main trends and Business expectations Economy of Tajikistan has seen stable growth in the last three main findinGs years, with an expanding SME sector that has contributed to a higher GDP and overall employment rates in the country. · The SME sector constituted 33% of employ- ment in 2005 and contributed to the over- This development, however, conceals a multi-faceted situation. whelming majority of the private sector. Individual entrepreneurs and dehkan farmers still represent the majority of the SME sector, both in terms of number of enterprises · The SME sector is developing unevenly. and employment. As the least structured typologies of business- While the number of individual entrepre- es, their rapid growth reflects an underlying weakness of the SME neurs and dehkan farms are growing rap- sector: while the number of individual entrepreneurs and dehkan idly, small and medium companies are still farmers increased significantly in 2005, their turnover slowed in very few and expanding at a moderate comparison to the previous year both in nominal and real terms. pace. In contrast, small and medium companies (i.e., legal entities) grew more slowly in number, showing the difficulties that entrepreneurs · 27% of SMEs made investments - mostly face in expanding and become more structured in the Tajik con- from internal funds. text. Nevertheless, existing companies experienced more stable growth and were able to sustain their turnover level in real terms, · Only 19% of entrepreneurs profess having a showing a higher resilience to the economic environment than good knowledge of the legislation regulat- their smaller counterparts. ing their activities. Investments into fixed assets have further decreased with respect · Very few entrepreneurs settle financial to2002:onlyaboutoneineveryfourSMEsinvested,mostlyfinanced conflicts through court. Those who de- by internal/family funds. Low level of investments could be in part cided to use the courts (less than 1%) had explained by lack of funding (see chapter "Entrepreneurs and Fi- a 50% chance of succeeding, but every nance"), but is also a signal of low business confidence. In fact, third plaintiff used unofficial payments to IFC survey of the business environment and business confidence achieve that result. has revealed that while entrepreneurs remain confident that the business environment in Tajikistan will improve, a growing share, · Entrepreneurs have positive expectations seen in particular among small and medium companies, would about the business environment within the be reluctant to restart their businesses given the existing climate. next 12 months ­ 70% of them think that it will improve. A low legal awareness among businesses and limited use of the court system for economic disputes remain key obstacles to in- · Almost one in every four respondents would creased growth in the sector. Although the government has made not restart his or her activity in the current substantial steps toward improving legislation regulating the SME business climate. sector, the effectiveness of these reforms is limited by the lack of awareness of most SMEs of these reforms. As a result, SMEs can- not make the best use of the improvements in the legislation or protect their rights adequately in case of conflicts. In addition, en- trepreneurs are still reluctant to make use of courts when disputes arise due to a non-transparent and time-consuming legal proc- ess; in most cases, issues are solved unofficially. These constraints need to be addressed quickly for the policy reforms to have their full intended effect. 2 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1.1 the sme sector within the tajik economy BOX 1.1. GOVERNMENT DEVELOPS REFORM 1.1.1 MACROECONOMIC OVERVIEW PROCESS 1 The GDP of Tajikistan has seen stable growth from 2002-2005 (av- In 2005, the President of Tajikistan initiated the erage annualized growth rate of 9.2% in real terms), reaching long-term, 10-year National Development 7.2 billion somoni ($2.3 billion) at the end of this period. Control Strategy of the Republic of Tajikistan (NDS) to of inflation (from 14.5% in 2002 to 7.1% in 2005) and a stable ex- improve living standards in the country. Based change rate both contributed to Tajikistan's overall macroeco- on the NDS, the government developed a mid- nomic stability,1 which in turn supported the steady growth. The term Poverty Reduction Strategy of the Republic main factors driving this growth were the recovery of the industrial of Tajikistan for 2007-2009 (PRS). production sector,2 development of the service sector,3 favorable prices for major exports (cotton and aluminum), and a substan- High unemployment rates, the limited size of the tial increase of remittances from migrant workers (the majority of domestic market and lack of foreign investment whom go to Russia).4 Nevertheless, the growing dependency of in the country increase the role that individual, the Tajik economy from remittances makes it vulnerable to politi- micro and small business entrepreneurs play in cal trends in the region.5 Tajikistan. Therefore, the main goals of the NDS/ PRS highlight the importance of developing this Table 1.1. MACROECONOMIC INDICATORS sector and attracting investment: · Elaboration of a new investment policy to indicator 2002 2005 ensure coordinated and consistent imple- Nominal GDP in billion somoni 3 7 mentation of effective measures, aimed at Nominal GDP per capita in somoni 517 1,041 attracting, supporting and promoting for- CPI inflation in % 15 7 eign direct investment; Real GDP growth in % 10 7 · Strengthening the legislative and legal Population, million 7 7 base for SME establishment, operations and Trade balance, million somoni -124 -323 liquidation; · Review of current norms with the goal of Export, million somoni 699 1,108 strengthening property rights; Import, million somoni 823 1,431 · Creating conditions for improving the qual- Exchange rate, 1 USD to somoni, end of period 3.00 3.19 ity of services rendered for SMEs; Source: NBT (2006) · Reduction of excessive administrative bar- riers; With population growth (2% a year on average) lagging behind · Provision of a state support system for micro the real GDP growth, GDP per capita enjoyed a substantial in- and small businesses. crease as well in this period. However, this favorable growth rate can also be explained by the Chart 1.1. REAL GDP IN 2005 DID NOT REACH fact that the economy is still recovering from the effects of the THE LEVEL OF 1990S collapse of the Soviet Union and the civil war. The GDP in 2005 was 100% only 62.1% of the 1991 level in real terms (see Chart 1.1). 62% 33% 1 More details on the macroeconomic development of Tajikistan can be found in IMF (2006). 2 Industrial production increased during 2002-2005 by 137%. 3 Such services like communications (especially mobile services), Internet, and 1991 1993 1995 1997 1999 2001 2003 2005 banking are growing very rapidly in Tajikistan. Source: State Statistical Committee of RT 4 Latest estimates indicate the number of migrants to have reached 800,000 (on estimate of IOM) and corresponding remittances to have reached $1 billion. 5 New Russian legislation imposed a quota for migrant workers, which allocated 600,000 working permits to Tajikistan (Asia-Plus, January 11, 2007). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 3 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS BOX 1.2. REGIONAL OVERVIEW OF THE TAJIK ECONOMY The Districts of Republican Subordination host 22% of the popu- lation and boast a diverse economy. DRS is home to about 20% IFC survey makes use of the following regional division: of the country's agricultural production, but also some large in- i) Dushanbe city (the Capital). dustries like TadAz (Tajik Aluminum Plant), and porcelain ceram- ii) Districts of the Republican Subordination (DRS) in the mid- ic works that make up more than 50% of the industrial output of dle of the country6; the country. Small and medium businesses are mostly concen- iii) Gorno-Badakhshan Autonomous Province (GBAO) in the trated in larger cities and districts (Tursunzade, Hissar valley). East of the country; iv) Khatlon province with two districts - Kurgan-tube and Kuly- Due to its very mountainous terrain (highest altitude is 7,495m ab in the South; at Ismoil Somoni Peak), GBAO is difficult to access and has a v) Sughd province in the North of the country. very low population density (3% of the total Tajik population). It is, therefore, the least developed region of the country with an Dushanbe - the capital of the country - is the most dynamically underdeveloped SME sector. developing region in terms of business activities and entrepre- neurship, accounting for more than 22% of the total number of Khatlon province accounts for about 35% of the country's pop- SMEs active in Tajikistan. ulation. About 576 enterprises are situated in this province, in- cluding agricultural farms, textile factories, meat-packing plants Number of citizens, in thousands and 11 industry giants like Joint Venture "Tajikazot" (plant for nitrogenous fertilizer), and OJSC "Transformator" (production of transformers). The lion's share of the country's cotton is pro- duced in Khatlon, as well as most of its non-cotton agricultural products like vegetable-growing, livestock-breeding, and poul- try farming (the province contributes 39% of Tajikistan's agricul- Sughd 2,060 DRS 1,531 tural product). 646 Dushanbe Sughd province is one of the most developed and industrialized GBAO 218 regions of the country contributing to 17% of industrial output of Khatlon 2,463 the economy. The least affected by the civil war, the province attracts a significant share of foreign direct investments (25% of all companies with foreign investments are situated in Sughd). Sughd hosts 30% of the population and has the highest popula- Source: State Statistical Committee (2006) tion density. Chart 1.2. SME CONTRIBUTION TO EMPLOYMENT INCREASES 1.1.2 THE SME SECTOR IN THE ECONOMY CONSISTENTLY % 33% The SME sector of Tajikistan is composed of three typologies of 28% 29% businesses: individual entrepreneurs (i.e., sole proprietors of an en- 25% terprise without any juridical status); dehkan farmers (i.e., owners of private agricultural farms); and small and medium companies (i.e., legal entities) which tend to be of a larger scale. The relevance of SMEs in the economy increased every year in 2002 2003 2004 2005 2002-2005: the share of employment provided by the SME sector reached about 700,000 employees, 7 or about 33% of the total Source: State Statistical Committee of RT 6 For better assessment of the region in IFC survey we divided it into two parts: a) DRS A (Hissar Valley), which is more developed and b) DRS B (Rasht Valley), which is less developed due to its mountainous terrain. 7 Employment figures provided by the State Statistical Committee of RT. However, the data include only the self-employment figures of individual entrepreneurs with- out taking into account possible hired employees. 4 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart 1.3. TAJIK SME8 SECTOR S CONTRIBUTION TO ' GDP Chart 1.4. ... BUT THERE IS ROOM FOR DEVELOPMENT OF THE SME SECTOR IS RELEVANT ... 78 73 60% 1 51% 50% 55 59 43% 49 38% 37 40 33 16% 20 24 14 18 20 10 3 6 Italy Mexico UK Tajikistan9 . . Uz- Russia bekistan Belarus Ukraine Latvia Tajikistan UK Estonia Russia Italy SME per 1000 of inhabitants SME share in Employment in % Source: Factiva (2006) Source: IFC MSMEs Database, State Statistical Committee of RT employment (see Chart1.2). In addition, the SME sector represent- Chart 1.5. ALTHOUGH LIMITED IN NUMBER SMALL AND , ed the vast majority of the private sector, which made up 43% of MEDIUM COMPANIES REPRESENT A RELEVANT COMPONENT OF THE SME SECTOR the GDP,with an average growth of 2.7% annually. % International comparison confirms the relevant contribution of 21 21 the SME sector to the GDP, which nevertheless can be partially 6 49 explained by the low overall development level of the Tajik econ- 40 omy (see Chart 1.3). 15 73 40 36 However, international comparison of the number of businesses per 1,000 inhabitants shows that there is still room for growth for Share Share Share in total number in total revenues in employment the SME sector, with a positive contribution to the GDP as well as of businesses volume to the country's employment (see Chart 1.4). Individual entrepreneurs Small and medium companies The agricultural nature of the Tajik economy is reflected in the em- ...Dehkan farmers ployment structure: almost 50% of employees in the SME sector work in dehkan farms, one third are employed as individual en- Source: State Statistical Committee; share in employment and revenues estimation based on survey data trepreneurs, while the remaining 15% are employed by small and medium companies (see Chart 1.5). Yet dehkan farms represent only about 20% of the SME sector revenues, with individual entre- Chart 1.6. DISTRIBUTION OF SMES IS UNEVEN preneurs and small and medium companies equally sharing the 42 remaining 80%.10 29 22 23 25 Although more entrepreneurs are active in Sughd and Khatlon, Dushanbe and the Districts of Republican Subordination have a 12 higher percentage of small and medium businesses per capita 18 17 12 (see Chart 1.6). 2 Dushanbe DRS Khatlon province . GBAO Sughd Regional distribution in % Number of businesses per 1,000 inhabitants Source: State Statistical Committee of RT 8 TheseaggregatedatareflectdifferentdefinitionsofSMEsusedindifferentcountries and do not always include individual entrepreneurs, as in the case of Tajikistan. 9 For Tajikistan data on private sector contribution are used. 10 Employment structure and revenues estimated on the basis of our survey data. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 5 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1.1.3 INDIVIDUAL ENTREPRENEURS An individual entrepreneur is an individual (sole proprietor) who is BOX 1.3. DEFINITION OF SME involved in a business activity without forming a legal entity and operates it at his/her own risk. The terms "small enterprise" and "medium-sized enterprise" are used in this report as defined by Individual entrepreneurs can register and run their business on two the State Statistical Committee of RT: i) small different legal bases11: enterprise: a business with an average of fewer · A simplified system (patent), used by the majority of entrepre- than 50 employees in the reporting period; ii) neurs,12 which provides simplified taxation and accounting medium-sized enterprise: a business with an av- systems, but poses constraints in terms of types of activities, erage of 51 to 200 employees in the reporting location (only outdoors), and employment structure. It also period. requires repeated registration renewals; · A more structured legal form (certificate), providing addition- al flexibility at the expense of stricter fiscal and accounting requirements. Chart 1.7. NUMBER OF BUSINESSES RUN BY INDIVIDUAL ENTRE - The number of individual entrepreneurs has grown significantly PRENEURS # from 2002 to 2005 (average annual growth - CAGR13 of 8%), and OF ENTREPRENEURS , `000S CAGR 8% at the beginning of 2006 accounted for about 90,000 entities (see 89 Chart 1.7). As such, they represent the largest category of SMEs in 71 Tajikistan both in terms of numbers as well as share of revenues. Table 1.2 illustrates "typical" Tajik individual entrepreneur. Table 1.2. THE "TYPICAL" TAJIK INDIVIDUAL ENTREPRENEUR 2002 2005 Average annual turnover 17,000 somoni $5,340 Source: State Statistical Committee of RT Average annual profit 4,000 somoni $1,250 Number of employees 2 Average monthly salary paid 122 somoni $38 Chart 1.8. INDIVIDUAL ENTREPRENEURS ARE MAINLY PRESENT Individual entrepreneurs are mostly present in Sughd province INDUSHANBE AND UGHD S and Dushanbe (see Chart 1.8). Since imported goods and serv- 37 ices are usually delivered first to Khodjend (capital of Sughd prov- 31 27 ince) and Dushanbe and then distributed to other regions, trade is very dynamic in these two regions. As a result, there is a high con- 18 21 centration of individual entrepreneurs involved in trade in Sughd 10 and Dushanbe. 11 13 8 3 According to the survey, individual entrepreneurs achieved lower volumes of turnover in 2005 by 4.1%, as compared to the previous Dushanbe DRS Khatlon province GBAO Sughd . year. The rapid increase in the number of individual entrepreneurs Regional distribution in % could push the competition among them and pose a limit for fur- Number of businesses per 1,000 inhabitants ther growth of individual activities. Source: State Statistical Committee of RT 11 More detailed explanations of the different legal bases for patent and certificate entrepreneurs will be provided in the Chapters 2 and 7. 12 About 90% of surveyed individual entrepreneurs use patents (see Chapter 2). 13 Compound Annual Growth Rate (CAGR) - represents the average annual growth over a period (for more details see Chapter 9). 6 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Revenues vary greatly across regions, with Dushanbe and Sughd province seeing the highest revenues: an individual entrepreneur in Dushanbe has a turnover that is 10 times larger than one in DRS (see Chart 1.9). These figures reflect the fact that Dushanbe 1 and Sughd province are the most industrial and developed re- gions of the country, with higher purchasing power than the rest of Tajikistan. In particular, individual entrepreneurs are mostly in- volved in trade and therefore more affected by the local pur- chasing power. Chart 1.9. STRONGER PERFORMANCE OF INDIVIDUAL ENTREPRENEURS IN DUSHANBE AND UGHD S 39 37 34,500 30 29 26 24 21,200 23 12,800 9,400 10,800 6,900 3,200 of B of A GBAO district prov- ince) Sughd Districts Districts (Khatlon province Republican Republican province) Dushanbe Kurgan-Tube Kulyab Subordination Subordination district (Khatlon . Annual turnover in somoni Annual profitability in % Although Dushanbe and Sughd have higher revenues and profit Chart 1.10. TRADE IS THE PREVAILING SECTOR FOR ACTIV - in absolute terms,14 individual entrepreneurs in DRS and GBAO ex- ITY OF INDIVIDUAL ENTREPRENEURS perience higher profitability.15 The high profitability could be due 2% Other to: 2% Production · Lower competition in these regions, allowing businesses to 6% Transport achieve better performances; 6% Consumer services · Reduced pressure from state agencies (especially fiscal bod- ies) in these regions, which results in a lower taxation burden for businesses. 11% Public catering Intermsofeconomicsectors,individualentrepreneursareinvolved predominantly in activities that require minimum investment and 73% Trade bring very fast returns and in particular in trade (see Chart 1.10). Only a small number of individual entrepreneurs are involved in a manufacturing activity, which implies a larger initial investment 14For more details see Statistical Appendix. 15Profitability ­ is a company's ability to generate revenues in excess of the costs. Profitability is expressed as a percentage of revenues, while profits are expressed in money (absolute) terms. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 7 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS and longer-term returns, but might also lead to a future expansion of the business activity. Individual entrepreneurs employ, on average, 2 employees on a permanent basis, providing them with an average monthly salary of 122 somoni ($38). 1.1.4 DEHKAN FARMERS A dehkan farm is an enterprise involved in the production and sale of agricultural products. Dehkan farmers operate as individual en- trepreneurs16 according to the State Registration Certificate.17 Dehkan farms are the most dynamically growing typology of busi- ness, both in terms of number of businesses and employment lev- els (see Chart 1.11). From 2002 to 2005, dehkan farmers saw an annual growth rate (CAGR) of about 19% in both number of enti- ties and employment. This dynamic growth is, to a great extent, due to government reforms in the agricultural sector aimed at transforming former large-scale, state-owned farms into smaller, privately owned enterprises. According to official statistics, the highest concentration of de- hkan farmers is in the Khatlon province, with 7 dehkan farms per 1,000 inhabitants (see Chart 1.12). This can be explained by the fact that Khatlon province is the major region of agricultural pro- duction of the country (see Box 1.2). Chart 1.11. DEHKAN FARMERS ARE GROWING FAST BOTH IN TERMS OF NUMBER OF BUSINESSES AND EMPLOYMENT # OF BUSINESSES, `000S CAGR 18.7% # OF EMPLOYEES , `000S CAGR 18.8% 26 545 15 325 2002 2005 2002 2005 Source: State Statistical Committee of RT 16 For more details on the registration procedures, see the Chapter 2. 17 A farm can also be organized in the form of a business partnership or a production co-operative, but these categories of business are not granted a simplified regis- tration process and as such do not fall into the dehkan farm definition. For informa- tion on the registration of business partnerships and production co-operatives, see the section on registering legal entities in the Chapter 2. 8 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Dehkan farms represent 21% of total SME sector businesses. Data Chart 1.12. DEHKAN FARMERS ARE MAINLY PRESENT IN from our survey allows us to draw a picture of the typical dehkan KHATLON AND DRS farmer operating in Tajikistan as shown in Table 1.3. 39 40 1 Table 1.3. THE "TYPICAL" TAJIK DEHKAN FARMER 7 Average turnover per year 30,900 somoni $9,660 20 Average annual profit 5,790 somoni $1,809 4 Number of employees: Permanent basis 13 Number of employees: Seasonal basis 13 3 Average monthly salary paid 48 somoni $15 1 1 Dehkan farmers were not able to increase their turnover volumes DRS Khatlon GBAO Sughd . with respect to the previous year.18 This could be due to: province province · High indebtedness of the agricultural sector (especially debts Regional distribution in % of cotton seeding farms)19; Number of businesses per 1,000 inhabitants · Low and unstable yield (especially of cotton)20; Source: State Statistical Committee of RT · Low price of cotton. On average, turnover of dehkan farmers reached 30,900 somoni Chart 1.13. BEST PERFORMANCE OF DEHKAN FARMS SEEN ($9,660) in 2005. The highest turnover volumes were reached by IN UGHD AND S KHATLON21 the dehkan farms in Sughd and Khatlon regions, which are char- 40.4 acterized by larger land plots. While the ones in the DRS region 48,962 see the highest profitability ratio in monetary terms, their revenues 33.7 lag behind more agriculturally developed regions like Khatlon and Sughd provinces (see Chart 1.13).22 23.7 27,579 26.0 Due to the high labor intensity in the agricultural sector, the aver- 25,688 age dehkan farm employed 13 employees on a permanent ba- sis. In addition to the permanent workforce, dehkan farmers em- ployed about 13 employees on seasonal basis. Employees were 8,688 remunerated with 48 somoni ($15) per month, 25% higher than the official average salary in the total agriculture sector, which amounted to 38 somoni per month in 2005.23 the of of of district province district province province 1.1.5 SMALL AND MEDIUM COMPANIES Republican Districts Subordination Kurgan-Tube Kulyab Khatlon Khatlon Sughd . A small and medium company is a privately owned legal entity with employment levels between 1 and 200 employees.24 Annual turnover in somoni Annual profitability in % Only about 7,000 small and medium companies were registered in Tajikistan at the beginning of 2006, corresponding to 5.7% of 18They reported to have achieved only about 97% of 2004 level's. 19For more details, see World Bank (2006a). 20The yield of cotton, which represents the highest share of agricultural revenues, decreased in 2005 by 24% with respect to 2004. 21GBAO is not taken into consideration given the low number of answers. 22For more details see Statistical Appendix. 23see State Statistical Committee (2006). 24Our definition refers to the definition provided by the State Statistical Committee, which does not consider any limit in terms of annual turnover. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 9 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart 1.14. THE GROWTH OF SMALL AND MEDIUM COMPANIES REMAINS MODERATE IN TERMS OF NUMBER OF BUSINESSES AND EMPLOYMENT # OF BUSINESSES , `000S CAGR 4.0% # OF EMPLOYEES , `000S CAGR 5.2% 7 71 6 61 2002 2005 2002 2005 Source: State Statistical Committee of RT the entire SME sector. Furthermore, their annual growth (4%) is the Chart 1.15. SMALL AND MEDIUM COMPANIES ARE MAINLY least dynamic among the three typologies of private businesses PRESENT IN DUSHANBE AND UGHD S (see Chart 1.14). This illustrates the low number of entrepreneurs 39 who feel the need to give their business a more structured form by incorporating it. 4 Regionally, the highest concentration of small and medium com- 20 18 panies per 1,000 inhabitants is in Dushanbe, followed by Sughd 12 province (see Chart 1.15). 0.3 Table 1.4. THE "TYPICAL" TAJIK SMALL AND MEDIUM COMPANY 0.8 1 0.3 1 Average turnover per year 216,000 somoni $67,500 Average annual profit 16,690 somoni $5,216 Dush- anbe DRS Number of employees: Permanent basis 15 Khatlon GBAO Sughd . province province Number of employees: Seasonal basis 6 Regional distribution in % Average monthly salary paid 120 somoni $37 Number of businesses per 1,000 inhabitants Source: State Statistical Committee of RT Table 1.4 illustrates a "typical" small and medium company. It can be noted that the data on employment provided in our sample Chart 1.16. SMALL AND MEDIUM COMPANIES ARE MAINLY (15 employees) is significantly higher than the one provided by of- ENGAGED IN TRADE AND COMMERCE ficial statistics (10 employees), which can be explained by the ex- 39% 4% Other istence of a "black" labor market unreported by official data. On General 6% Services commercial activity average, small and medium companies employed 15 employees 7% Agriculture on a permanent basis and 6 on seasonal terms. The average sal- ary provided by companies amounted to 120 somoni ($37) ­ 40% more than the average monthly salary in the country. 13% Industry Partially reflecting the situation of individual entrepreneurs, small and medium companies in Tajikistan are mainly active in tertiary25 sectors of the economy, i.e. general commercial activity26 and 13% Construction trade (more than 55% - see Chart 1.16). Industry represents 13% of the overall sector, construction (particularly active sector of the 18% Trade 25The tertiary sector of the economy is the service industry. This sector provides serv- ices to the general population and to businesses. Activities associated with this sector include retail and wholesale trade, transportation and distribution, enter- tainment, restaurants, tourism, insurance, banking, health care, etc. 26General commercial activity include: i) intermediary services by sale of goods, securities, currency; ii) intermediary services in the field of transportation, housing and communal services; iii) advertising, marketing research and audit. 10 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS economy in the recent years) and agriculture account for about Chart 1.17. BEST PERFORMANCE OF SMALL AND MEDIUM 20%. In order to secure stable growth for the economy, a further COMPANIES IN DUSHANBE AND UGHD27 S diversification into other sectors would be advisable. 294,765 1 In 2005, the turnover of small and medium companies reached 216,000 somoni ($67,500), 8% higher than the previous year and 221,284 practically the same in real terms. As for individual entrepreneurs, 20 the strongest performance of companies is seen in the Dushanbe 119,623 16 and Sughd provinces (see Chart 1.17). 13 Although companies state the lowest profitability (15%), their prof- its (19,690 somoni - $5,216) are the highest among the three ty- pologies of business thanks to the larger size: the turnover of small and medium companies is about 10 times larger than that of an Other regions Sughd Dushanbe province individual entrepreneur. . Annual turnover in somoni Annual profitability in % 1.1.6 INVESTMENTS: MOSTLY INTERNAL FUNDS Entrepreneurs very seldom make investments into fixed assets. Ac- Chart 1.18. INVESTMENTS MADE IN 2005, cording to the survey, only 27% of the respondents made some BY TYPOLOGIES OF BUSINESS investment in 2005 (see Chart 1.18). This figure has worsened in % OF RESPONDENTS comparison to 2002, when about 40% of entrepreneurs made in- vestments into fixed assets. 72 53 83 The majority of entrepreneurs still use personal savings to conduct any investment. Only a small amount of entrepreneurs use bank- ing/MFO loans to finance their investments into fixed capital. This situation is linked to the complicated access to external funding 28 47 17 for SMEs. . Individual Small and medium entrepreneurs companies Dehkan farmers It is especially crucial for small and medium companies, since . Invested Not invested every second company (47.2%) made investment in 2005. Among those every third invested in building a new facility or production Chart 1.19. INVESTMENTS MAINLY FUNDED BY PERSONAL unit. But still personal savings represent their major source of fund- SAVINGS28 ing for the investment (see Chart 1.19). Broader access to external % OF RESPONDENTS funding could stimulate faster growth of the companies contribut- Personal savings 87 ing additionally to the economical development of the country (for more details see Chapter 5). Non-banking loan (friends, relatives) 11 Banking loan 5 Loans from MFO 3 Other 3 Futures companies 2 Direct investment (local or foreign 1 27The category "Other regions" include ­ GBAO, Khatlon province and DRS. Only investor) 30% of small and medium companies are present in these regions. Due to this 0.1 fact, a very small amount of companies from these regions were included in our State funds sample. 28Respondents could have chosen several answers. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 11 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1.1.7 ENERGY SUPPLY: INSUFFICIENT BOX 1.4. ENERGY DEFICITS ARE IN WINTER In order to ensure efficient development of the economy, a reli- "Due to seasonal specifics, Tajikistan's energy able and continuous energy supply is essential. For the time being, system produces less energy in the winter than the Tajik economy lacks a sufficient energy supply and, especially in the summer. The daily energy consumption during the winter, supply is rationed throughout most of the coun- in the wintertime amounts to 60-68 million KWh try (see Box 1.4). The energy gap is caused on the one hand by -- meaning that in the period of cold weather increasing energy consumption and, on the other hand, by in- (October-March), the overall need for energy tensive energy usage due to low energy tariffs and energy losses amounts to 10.8 billion KWh. As the overall ener- (see Box 1.5). gy production of hydro power plants in Tajikistan is about 6.8 billion KWh, this implies an energy The Tajik economy is indeed among the most energy intensive deficit of 4 billion KWh. While a small portion of ones (see Chart 1.20), mainly due to the lack of modernization of this deficit is covered by energy import to the its technical infrastructure. Without proper measures to address northern part of the country from Uzbekistan energy efficiency, the risk is that the energy gap will increase fur- (about 600 million KWh), insufficient volumes of ther (see Chart 1.21), despite the efforts undertaken by the gov- available energy create the need for introduc- ernment to increase energy supply through the construction of ing rationing measures of energy supply effect- new hydro-power plants. ing consumers and industries." The impact of lack of reliable energy supply is extremely relevant: Asia-plus, dd. January 25, 2007. economic activities are often interrupted and disrupted, generat- ing substantial losses for businesses. BOX 1.5. COMPARISON OF ENERGY USAGE IN DIFFERENT COUNTRIES Two main drivers characterize energy consumption in Tajikistan: on the one hand technology is outdated and requires higher level of power, on the other hand tariffs for electricity, main energy source, are very low and cover only about 30-40% of the cost. As a result energy usage is excessive: in order to produces $1 of GDP Tajikistan needs almost 3 times more energy than Armenia (see Chart 1.20). A gradual increase of energy tariffs is essential to maintain and upgrade the generation and transmission facilities, while steps need to be taken in order to improve energy consumption by both stakeholders and enterprises. At the same time, the govern- ment must address the social implications of a price increase in energy. Steps for increasing energy efficiency are also important taking into account the expectation that energy consumption will grow with development of the economy. It is estimated that with the current level of energy consumption, to reach the GDP level of Kyrgyzstan, Tajikistan will need to generate about 3,500 kWh per capita which is 2.5 times higher than current consumption in Kyrgyzstan (see Chart 1.21). Chart 1.20. ENERGY INTENSITY OF AJIK ECONOMY IS HIGH29 T Chart 1.21. ENERGY CONSUMPTION IS LIKELY TO INCREASE REQUIRING KWH/$ MEASURES IN ENERGY EFFICIENCY 0,43 0,47 0,49 0,53 KWH/PER CAPITA 0.19 0.21 0,3 5,642 3,418 3,144 3,626 1,428 1,421 2,240 Kyr- Kyr- Armenia Poland Kaza- Kaza- gyzstan Belarus Russia khstan Tajikistan Armenia Poland gyzstan Belarus Russia khstan Tajikistan Source: IEA (2006) Source: IEA (2006) 29Energy intensity measured by division of Total Primary Energy Supply to GDP at purchasing power parity. 12 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1.2 leGal environment and sme confidence 1.2.1 LEGAL AWARENESS 1 During 2002-2005, the Republic of Tajikistan adopted many new Chart 1.22. SMES' AWARENESS OF NEW LEGISLATION laws, regulations and normative acts, many of which regulated IS QUITE LIMITED the activity of small and medium business. The IFC survey focused % OF RESPONDENTS on the knowledge of the general public regarding four relevant legislative changes (see Box 1.6). 49 84 81 86 As the survey reveals, the share of entrepreneurs aware of the 51 adoption of certain norms remains extremely low. In particular, 16 19 14 only about half of SMEs were aware of the introduction of the dd. 1, dd. 17, dd. new Tax Code, which impacted 100% of business. Less than 20% 2005 2005 2004 Col- Mov- 2005 1, Licens- May of 1, of businesses are aware of the remaining legislation, which by its Code January Code On" "On dd. Property" nature is more specific and affects fewer businesses (see Chart Tax Law March January Law lateral ing" 1.22). . . Custom able Aware Not aware The perceived influence of these norms on the activities of en- Chart 1.23. LEGISLATION CHANGES HAVE DIFFERENT trepreneurs is very different. Taxation and licensing, the most fre- IMPACT ON SMES quent procedures that entrepreneurs face in their day-to-day % OF RESPONDENTS AWARE OF THOSE LEGISLATIVE ACTS activities, have an overall positive perceived impact (see Chart 1.23). On the other hand, the new Custom Code as well the Law Tax Code, 60 10 30 "On Collateral of Movable Property" are perceived to have less dd. January 1, 2005 impact on businesses, possibly as a result of the low number of en- Law "On Licensing" trepreneurs engaging in external trade30 or seeking external fund- dd. May 17, 2004 55 5 40 ing from banks or microfinance organizations.31 Custom Code, dd. January 1, 2005 44 8 48 The introduction of numerous new laws and regulations, despite their attempts to improve the business environment, cannot be Law " On Collateral of effective unless entrepreneurs are aware of them and can use Movable Property", 44 10 46 . . . dd. March 1, 2005 the regulations in their daily activity. Positive influence Negative No influence BOX 1.6. MAJOR LEGISLATIVE ACTS RELATED TO BUSINESS ENABLING ENVIRONMENT INTRODUCED DURING 2004-2005 tax code dd. custom code dd. law "on licensing of certain kinds law "on collateral of movable january 1, 2005 january 1, 2005 of activities" dd. may 17, 2004 properties" dd. march 1, 2005 Regulation on conducting Bringing legislation in line Unified regulation of licensing Creation of a legislative basis for tax inspections; with international custom procedures; pledging movable property; Reduction of the rates of standards; Reducing the number of activi- Establishment of a unified state reg- some taxes; Bringing legislation in line ties that are subject to licensing; istry of the pledged movable prop- Creation of a unified tax for with intergovernmental Determination on validity of li- erty. agricultural producers; agreements among CIS censes, the duration of consid- Benefits for import of goods countries for simplification eration of the application. and equipment on account of the custom regulation; of nominal capital. Exclusion of the double cus- toms levy. 30For more details, see the Chapter 8. 31For more details, see the Chapter 5. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 13 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart 1.24. SMES' AWARENESS OF LEGISLATION REMAINS MODERATE BUT IS INCREASING , %OF RESPONDENTS % OF ENTREPRENEURS HAVING FAIRLY GOOD KNOWLEDGE OF LEGISLATION .. 34 12 1 6 3 30 Do not know 13 26 21 Know poorly . 59 18 59 15 51 12 Know in genera . 34 26 Know fairly well 15 . . Individual Small and medium Dehkan farmers Individual Small and medium Dehkan farmers entrepreneurs companies entrepreneurs companies 2002 2005 The survey attempted to study the awareness of entrepreneurs "... I came across situations in which changes in the legislation were not effectively transmitted about regulations, legal norms and laws that regulate their activi- to government officials in the various regions in ty. Among the typologies of SMEs represented, companies have a which our company operates. Even at the same state body, we faced different rules according better knowledge of the legislation. Yet even the majority of these to each region... " still have only cursory or poor understanding (see Chart 1.24). - Entrepreneur, focus group participant However, the share of entrepreneurs who now have a fairly good knowledge of the legislation increased in 2005. This could be evi- dence of increasing efforts by entrepreneurs to become more aware of the legislation, as well as efforts by the government and international organizations to distribute information and promote awareness. It needs to be noted, however, that limited knowledge of the leg- Chart 1.25. MASS MEDIA ARE MAIN SOURCE islation is common not only to entrepreneurs, but to government OF INFORMATION ON CHANGES OF LEGISLATION officials as well. Entrepreneurs involved in focus groups pointed % OF RESPONDENTS out this fact quite clearly. Frequently changing legislation and lim- Mass 41 ited availability of training and legal materials are the most com- media 40 mon causes for this lack of awareness from the officials' side. Friends and 40 colleagues 39 State 10 As in 2002, mass media (41%) and friends/colleagues (40%) remain bodies 11 the major sources of information for entrepreneurs in responding Lawyers/Law firms 43 to changes in legislation (see Chart 1.25). Only a small share of Professional entrepreneurs (10%) use the information provided by state bodies, association 42 and even fewer seek outside sources like law firms and profes- Other 1 2 sional/business associations. State bodies should use mass media more actively to inform the population/business on changes hap- . . 0% 20% 40% 60% pening in the regulatory environment. Mass media could also be better used as a public platform for broader discussions. 2002 2005 14 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 1.2.2 ROLE OF THE STATE IN THE SUPPORT OF ENTREPRENEURSHIP The existence of a central state body that advocates the inter- ests of entrepreneurship which supports policy changes might be BOX 1.7. SUPPORT OF THE SME SECTOR BY THE 1 significant in developing and strengthening the business environ- GOVERNMENT ment. The role of the interest representative for the support of en- trepreneurs in Tajikistan has been the State Agency for Antimo- The government attaches importance to the nopoly Policy and Support of Entrepreneurship (see Box 1.7). development of entrepreneurship in the coun- try and undertakes active efforts to improve This Agency has followed the guidelines based on the objectives the business environment for entrepreneurs. of the State Program for Support of Entrepreneurship for 2002- Therefore, the government adopted a Law "On 200532: Licensing" in May 2004, the Strategy of the De- · To improve legislation related to SME development; velopment of Entrepreneurship in RT until 2015 · To create a well-developed SME financing, lending, and in- in December 2004, the Law "On Inspections of surance system; Business Entities" in July 2006, as well as others · To develop business support infrastructure. (see more details in chapters "Licensing" and "Inspections"). As this report was being prepared, the government had recently abolished the Antimonopoly Agency and assigned its role of sup- The State Agency for Antimonopoly Policy and porting entrepreneurship to a specific department within the State Support of Entrepreneurship has played an im- Committee on Investment and Management of the State Prop- portant role in this process. Following the gov- erty of RT.33 It is expected that the new Committee will take over ernment reorganization in November 2006, the the role of the previous agency supporting the development of Agency was abolished and its functions of sup- entrepreneurship in general and the SME sector specifically by: porting entrepreneurship were transfered to the · Continuing the development policy of entrepreneurship; State Committee on Investment and Manage- · Promoting improvement of the investment climate in general ment of the State Property of RT (see more de- and entrepreneurship in particular; tails further in text). · Analyzing the existing regulatory problems hindering the de- velopment of the entrepreneurship and elaborating concrete measure for their elimination; · Coordinates the dialogue among all stakeholders to strength- en the role of the private sector in economy. 1.2.3 LEGAL DISPUTES Less than 1 in every 100 entrepreneurs have ever used courts to settle economic disputes. This low number is likely related to the limited trust of people towards courts in general. The widespread corruption in the courts is also confirmed by the survey conducted by the Strategic Research Center under the President of the Re- public of Tajikistan. According to that survey, courts, along with the administration of local authorities and law-enforcement bod- 32In particular, the Agency was closely involved in the development and adoption of the Law "On Inspection." Furthermore, the Agency was involved in the working group that developed the new Tax and Custom Codes. 33Decree of President "On Enhancement of the Structure of Central Bodies of Execu- tive Authorities of the Republic of Tajikistan" No.9, dated November 30, 2006. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 15 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart 1.26. EXPECTATIONS FOR CHANGE OF THE BUSINESS ies, are considered to be the most corrupt bodies in the coun- ENVIRONMENT OVER THE NEXT 12 MONTHS try.34 % OF RESPONDENTS The main reasons for disputes were: In the country · Nonfeasance of payments; · Nonfeasance of terms of delivery; 56 Will improve · "Imposition" of unjustified obligations.35 70 The low level of court applications can be due to several factors: Will remain 34 the same 14 · Influential businessmen/officials can receive decisions in their Will favor, irrespective of the merits of their case; 10 worsen 16 · The procedures are very non-transparent, allowing for unof- 2002 2005 ficial payments during the process; · The process can become very lengthy, and therefore unac- ceptable for dynamic entrepreneurship; In the region of entrepreneur's activity · The process can become very costly, so entrepreneurs risk go- ing through the entire process and losing more money in the 52 long run. Will improve 62 1.2.4 EXPECTATIONS OF ENTREPRENEURS 37 Will remain Most entrepreneurs are optimistic that the business environment in the same 18 Tajikistan will improve in the next 12 months (see Chart 1.26). These Will 11 worsen 20 expectations could be due to: 2002 2005 · General economical growth and macroeconomic stability in Tajikistan; Chart 1.27. EXPECTATION FOR CHANGE OF THE BUSINESS · Expected increase of consumption among the population ENVIRONMENT OVER THE 12 MONTHS BY REGIONS , due to the rise in incomes and a higher demand for goods %OF RESPONDENTS WHO THINK THE SITUATION WILL IMPROVE and services; · Expectation of further reform of administrative procedures, Districts of Republican 74 Subordination 58 meaning a lower regulatory burden for entrepreneurs. Kulyab district 66 (Khatlon province) 54 The best expectations by region are seen in DRS and Kulyab (see Gorno-Badakhshan Au- 57 Chart 1.27). This could be explained by the planning of some tonomous Province 34 large-scale investments in these two regions, as well as specific Sughd province 56 investments in the Kulyab region in concurrence with the 2700th 46 anniversary of the city.36 48 Dushanbe 52 Kurgan-Tube district (Khat- 48 lon province) 59 . . 0% 20% 40% 60% 80% 34For more details see Strategic Research Center (2006). 35 2002 2005 Though more than a half of entrepreneurs succeeded with their lawsuits, every third successful plaintiff used unofficial payments to rule the decision of the court favorably. 36In particular huge investments in the TadAz aluminium plant (DRS) and building of a new aluminium plant in the south of the Khantlon province (Kulyab district) were planned by Russian Aluminium Consortium "RUSAL." Additionally there are some investment projects in building/completing Hydro Power Plants in these regions. 16 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Although the overall expectations of entrepreneurs are positive, our survey did reveal a rise in the number of entrepreneurs who "... It is true that there are a lot of positive trends remain dissatisfied with the situation (see Chart 1.28). and changes introduced by the government. But still, it is nerve-wracking, takes so much effort 1 and so many sleepless nights to deal with offi- In particular, every fourth entrepreneur (25%) would not start his/ cials that sometimes I think of quitting..." her business again based on his/her experiences. This figure rep- - Owner of a small company, focus group resents an increase from 2002 (15%), and may be due to grow- participant ing pressure from state bodies and the "price" that entrepreneurs have to pay for achieving good performance. The increase is particularly significant for small and medium com- panies and dehkan farmers. The main reasons behind this sharp decline in confidence could be: · For small and medium companies - the increased regulatory burden (which will be further analyzed in the next chapters of the report); · For dehkan farmers, the relative "immaturity" of the sector­ most farms are newly established in their first stage of devel- opment as private businesses and lacking a well-developed infrastructure system that can support them in delivering products to the market. In subsequent chapters we analyze the administrative procedures faced by SMEs during their business activities in more detail in or- der to find possible explanations to the trends observed in the SME sector. Chart 1.28. NUMBER OF ENTREPRENEURS WHO WOULD START THEIR BUSINESS AGAIN BASED ON THEIR EXPERIENCE IS DECREASING % OF RESPONDENTS Individual entrepreneurs Small and medium companies Dehkan farmers 4 10 2 10 13 4 10 10 23 25 24 26 88 86 73 65 63 66 . . . 2002 2005 2002 2005 2002 2005 Yes No Do not know . . . Yes No Do not know . . . Yes No Do not know Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 17 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 18 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 2. reGistration REGISTRATION 2. reGistration In recent years, the registration process in Tajikistan has under- main findinGs gone a number of reforms that impacted the SME sector in differ- ent ways. As a result, the current situation differs for each of the · Registration for individual entrepreneurs three typologies of business included in the SME sector. has drastically improved with respect to 2002. As a result it is easier and requires: Registration is now a simple 2-step procedure for individual entre- a. A duration of 5 business days (versus preneurs, which can be completed within a week with a limited 13 in 2002); amount of financial resources. This is particularly important, given b. A cost of 117 somoni ($37), including that de facto individual entrepreneurs renew their registration both official and unofficial payments every year. (a decrease from 178 somoni, or $64, in 2002); legal entities, on the other hand, face a more complicated and c. A total impact estimated at about 4% not always transparent procedure that involves multiple steps at of their annual profits. various agencies. This necessarily extends the time needed to start up their business activities, resulting in additional costs in both · Registration for legal entities is still an ex- official and unofficial payments as well as lost business opportuni- pensive and time-consuming process, ties. which requires, on average: a. A duration of 25 business days, as in dehkan farmers register as individual entrepreneurs,1 with the ad- 2002; ditional requirement of obtaining the right to use the land as a b. A cost of 745 somoni ($233) including prospective farm. This is a largely non-transparent step represent- both official and unofficial payments ing a significant barrier to entry for a potential farmer by increas- (versus 487 somoni, or $176, in 2002); ing the amount of time and cost (unofficial) for farmers wishing to c. A total impact estimated at more start up a new activity. In fact the current situation is significantly than 10% of their annual profits. worse than in 2002 in terms of the duration process. · Registration for dehkan farmers is improv- The complexity and opaqueness of the registration procedure ing, but is still somewhat complicated and appears to be the main drivers of unofficial payments: in fact, the time consuming, requiring: entrepreneurs resorting most frequently to unofficial payments are a. A duration of 78 business days, as in legal entities, who not only face a very complicated procedure, 2002; but also offer the most interesting rent-seeking opportunities for b. A cost of 269 somoni ($84) (versus 419 officials. somoni, or $151, in 2002); c. A total impact estimated at almost 30% of their annual profits. · The registration procedure for dehkan farmers and legal entities is not fully de- fined or standardized by the government. This leads to large regional differences, both in terms of duration and costs. · Unofficial payments are still very frequent, reported by about 25% of respondents: the highest frequency is among legal entities (44%) versus dehkan farmers (27%). 1 Unless they decide to operate as legal entities, in which case they are consid- ered companies in the field of agriculture. 20 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION 2.1 reGistration: the leGal framework Registration with the relevant state bodies is the first step that all entrepreneurs must take to legalize their status as a business. Al- though it is a common requirement for all SMEs, it is not a com- mon procedure for each typology of business. Currently, there is a different registration system for individual entrepreneurs, dehkan farmers, and legal entities. 2 Registration is governed in Tajikistan by a set of legal acts, most of which have been recently introduced to unify the legislation of state registration of business entities: · Registration of individual entrepreneurs is mainly regulated by the Procedure for "Issuing a Patent and an Individual Entrepreneur Certificate to Individuals, Operating without Forming a Legal Entity"; · Registration of dehkan farms is regulated mainly by the Law "On a Dehkan Farm"; · Registration of legal entities is regulated mainly by the Law "On the State Registration of a Legal Entity". Some additional aspects are also regulated by other legislative acts (see Box 2.1.). This survey covers the registration procedure in its various stages. The first step, state registration, legalizes the start of the entrepre- neur's operations with the authorized state body. To be legalized businesses then must follow post-registration procedures to file records with the relevant agencies, for the purposes of taxation, statistics, and filing.2 In addition, dehkan farmers must also obtain a land user's right certificate (pre-registration) they can register with the state. BOX 2.1. MAIN NORMATIVE ACTS REGULATING THE REGISTRATION PROCESS IN TAJIKISTAN Codes: 1. The Civil Code ­ came into force January 1, 2000; 2. The Tax Code ­ came into force January 1, 2005. Laws and Decrees: 1. Law No.46 "On the State Protection and Support to Entrepreneurship in RT," May 10, 2002; 2. Law No.48 "On a Dehkan Farm," May 10, 2002; 3. Law No.5 "On the State Registration of a Legal Entity," April 22, 2003; 4. The Procedure No.140 for "Issuing a Patent and an Individual Entrepreneur Certificate to Individuals, Operating without Forming a Legal Entity," approved by the Government of RT March 31, 2004. 2 E.g., in order to issue a seal or stamp, to open a bank account, etc. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 21 REGISTRATION 2.2 reGistration of individual entrepreneurs Chart 2.1. REGISTRATION OF AN INDIVIDUAL ENTREPRENEUR Registration of an individual entrepreneur is the simplest process among the various systems in Tajikistan and is regulated by the State Procedure for "Issuing a Patent and an Individual Entrepreneur registration Post-Registration Certificate to Individuals, Operating without Forming a Legal En- tity," and by the Civil and Tax Codes. The process consists of two steps (see Chart 2.1). TAX BODIES SOCIAL SECURITY FUND State registration 1. Application; 1. Application; 2. Passport; 2. Passport; Entrepreneur needs to obtain a patent or certificate from the tax 3. Document certifying the Certified copies of: payment of the cost of authorities (i.e., state registration). This is done by appearing per- 3. Certificate of state regis- patent or certificate of tration or patent; sonally at the place of registration3 with necessary documents state registration; 4. Permit to conduct com- 4. 2 photos. mercial activity; listed in Chart 2.1. 5. Employment contract of individuals (only for certificate holders). Post-registration After state registration, the individual entrepreneurs must get reg- istered at the Social Security Fund4 as a taxpayer of social taxes.5 As mentioned in the chapter 1, individual entrepreneurs can reg- ister their business with the state by filing for either a patent or cer- tificate. The registration process is the same for both documents. However there are certain differences in rights provided to a cer- tificate holder versus a patent holder (see Table 2.1.): · A patent holder can conduct only 49 activities set by legisla- tion, while a certificate holder can conduct any type of activ- ity not prohibited by the legislation6; · An individual entrepreneur can not usually hire employees if he or she is patent holder, but can cooperate in activities with another individual entrepreneur who also possesses a patent; · A patent holder is only allowed to conduct business activity outside (e.g., bazaar), while a certificate holder is allowed to conduct business anywhere (i.e., indoors and outdoors). While registration for patent holders is granted up to one year, certificate holders should be granted permanent registration. In practice, as confirmed by survey data, also certificate holders register every year. According to the survey data, all respondents operating on the patent basis stated that they hired on average 1 employee. This 3 Article 24 of the Civil Code of RT. 4 At the time of preparation of the report Social Security Fund was renamed into State Agency for Social Security and Pension. 5 "The Guidelines for Accepting, Accounting and Spending the Resources of the Social Security Fund of RT," approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 6 Decree of the Government of the Republic of Tajikistan No. 140 dd. March 31, 2004. 22 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION Table 2.1. Patent and Certificate - Main differences patent Certificate According to the Civil Code (Article 24), a According to the Tax Code of RT (Article 137), an patent issued by the tax body is an official individual entrepreneur (who has not formed a legal document certifying the State Registration entity) can register with the state based on a cer- of an individual as an individual entre- tificate to engage in any business activity that is not preneur giving him the right to engage in prohibited by the legislation. A certificate is a docu- Legal basis7 specific business activity, as long as it is not ment certifying the state registration of a citizen as 2 carried out indoors. Additionally patent is an individual entrepreneur. a confirmation of the payment of the in- come tax (see chapter 7). The activities which can be conducted under a patent were reduced from 110 to 49. Type of activity Only the activity indicated in the patent Any activity not prohibited by the legislation Form of activity Individual only Both individual and hiring of manpower Region of operation Only in the region indicated in the patent On all territories of the republic without limitations Hired staff No Yes Foreign-economic activity No Yes Although the legislation does not provide any provi- Duration from 15 days up to 1 year sion on duration, in practice certificate is issued for 1 year Location Outdoors (i.e., bazaars, streets, etc.) Anywhere could be explained by the fact mentioned above: these individu- al entrepreneurs were cooperating with other individual entrepre- Chart 2.2. REGISTRATION OF INDIVIDUAL ENTREPRENEURS IS neurs who were patent holders, too. Another explanation for this RELATIVELY SIMPLE could be that individual entrepreneurs may have counted their family members supporting them as employees, or finally they % OF INDIVIDUAL ENTREPRENEURS UNDERGOING REGISTRATION hired employees without processing the required documents (un- official employment). 11 64 32 4 2.2.1 DIFFICULTY OF REGISTERING AS INDIVIDUAL ENTREPRENEUR 75% 50% 25% 0% 25% 50% Survey data confirm that the new legislation has simplified the Very Rather Very Rather complicated complicated registration process: only a third of the individual entrepreneurs easy easy finds the registration process either complicated or very compli- cated. This result is quite remarkable when taking into account 7 As set out in the Procedure "Issuing a Patent and Certificate of an Individual Entre- preneur to Natural Persons Operating Without Forming a Legal Entity," approved by Decree No.104 of the Government of RT on March 31, 2004. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 23 REGISTRATION Chart 2.3. DURATION OF THE REGISTRATION PROCESS FOR the limited legal awareness and limited legal literacy of individual INDIVIDUAL ENTREPRENEURS DECREASED CONSIDERABLY entrepreneurs (see Chart 2.2). BUSINESS DAYS 13 2.2.2 TIME SPENT ON REGISTRATION AS AN INDIVIDUAL ENTREPRE- NEUR 5 The law defines a time frame of 13 days from the application date to complete the registration process as an individual entrepre- neur. In particular: · registration with the tax bodies should be completed within 2002 2005 3 days8; · filing as an individual entrepreneur at the Social Security Fund should take a maximum of 10 days.9 Chart 2.4. COST OF REGISTRATION OF INDIVIDUAL Chart 2.3 shows that the entire registration procedure for an indi- ENTREPRENEURS IS DECREASING .10 vidual entrepreneur lasts on average 5 business days (including SOMONI the time to collect the documentation needed to support the ap- 178 728 plication). This is a dramatic improvement with respect to 2002. 117 85 2.2.3 COST OF REGISTRATION OF INDIVIDUAL ENTREPRENEURS 2002 2005 Maximum Minimum official The law officially defines the cost of registration for individual en- official cost for cost for patent patent in 2005 in 2005 trepreneurs operating under patents or certificates (see Box 2.2). (per year) (per year) For patent holders the cost can vary depending on the activity BOX 2.2. THE OFFICIAL PRICE OF AN INDIVIDUAL ENTREPRENEURS REGISTRATION 1. For entrepreneurs operating on the basis of a patent: cost is determined by the duration of a patent (from 15 days to 1 year) and a regional coefficient.11 For example, if an individual decides to sell newspapers, magazines, books and educa- tional articles for 1 month in Dushanbe, the patent will cost 8.1 somoni ($2.53) per month. This amount consists of: i) patent cost - 8 somoni ($2.5) per month and ii) the regional coefficient of 1.15% of the patent cost equivalent to 0.1 somoni ($0.03).12 2. For entrepreneurs operating on the basis of a certificate: registration is equal to the minimum monthly wage (MMW) or 20 somoni ($5.88) starting from 2006.13 The registration fee increased remarkably in comparison to 2002, where it amounted to 6% of MMW or 0.42 somoni ($0.14).14 The legislation does not specify whether filing a record at the Social Security Fund should be subject to payment, nor define its cost. 8 Aricle 9 of the Law of RT "On the State Protection and Support to the Side of Entre- preneurship in RT." 9 "The Guidelines for Accepting, Accounting and Spending the Resources of the Social Security Fund of RT," approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 10Maximum official cost for a patent is for transportation activity (taxi), minimum cost for dry cleaning. 11Regional coefficient varies from 0.8% to 1.15%. 12Decree of the Government of the Republic of Tajikistan No. 216 dd. May, 10 2000. 13Law of RT No. 115 dd. 26 December 2005. 14Point 14 of the state fee rates set by Decree of the Government No. 587 dd. No- vember 29, 1993. 24 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION and region,15 while the cost of certificate is linked to the minimum Chart 2.5. REGIONAL DIFFERENCE OF REGISTRATION COSTS monthly wage (MMW).16 It should be noted that the two costs FOR RETAIL TRADE IS MAINLY DUE TO UNOFFICIAL PAYMENTS should not be compared, as registration cost for certificates is a 43% pure registration cost, while patent cost also includes the income 36% tax. 27% 21% 21% According to the data (see Chart 2.4), on average, individual 18% entrepreneurs spent 117 somoni ($37) on the whole registration process, including all official and unofficial payments. This indica- 160 125 107 98 82 77 53 2 tor shows a sharp decline with respect to 2002. 10% B A The cost of the registration of individual entrepreneurs varies great- district tion Repub- ly from region to region, even for the same type of activity. As (Khatlon Dushanbe province) province) Province province of Republi- Subordina- of Chart 2.5 shows, the cost of registration in the field of retail trade Kurgan-Tube district Kulyab Autonomous shows sharp differences between Dushanbe and the Districts of Sughd Subordination (Khatlon Districts lican Districts Republican Subordination. The difference in unofficial payments Gorno-Badakhshan Cost of registration in somoni can is the main reason behind such a gap. . Unofficial payments in % 2.2.4 UNOFFICIAL PAYMENTS As the survey reveals (see Chart 2.6), unofficial payments still play a role in the registration process: 25% of respondents admitted "... Frankly speaking, it is more convenient for having made unofficial payments during registration procedures. me to pay 5 or 10 somoni to speed up issuing One of the most common reasons for unofficial payments men- the certificate and save time..." tioned by entrepreneurs is to speed up the processing of docu- - Entrepreneur, focus-group participant ments. 2.3 reGistration of dehkan farms Legislation dedicates a special status to dehkan farms and pro- Chart 2.6. UNOFFICIAL PAYMENTS ARE DECREASING BUT vides them with the same rights of any other business entities in- STILL COMMON . volved in entrepreneurship (see Box 2.3). % OF INDIVIDUAL ENTREPRENEURS WHO MADE UNOFFICIAL PAYMENTS 33 24% of dehkan farmers in the survey sample registered their activ- 25 ity in 2005. Registration of dehkan farms is regulated by the Law of RT "On a Dehkan Farm." Dehkan farms operate as individual entrepreneur 2002 2005 registered on a certificate basis,17 with an additional requirement of pre-registering their land. However, registration of dehkan farms is not completely aligned with individual entrepreneurs and post- 14 For more details see Chapter 7. 16 1 MMW ­ from January 1, 2004: 7 somoni ($2.2); from January 1, 2005: 12 somoni ($3.8); from January 1, 2006: 20 somoni ($6.3). 17 Dehkan farmers can also choose to be organized in the form of a business part- nership or a production co-operative, but are then classified as legal entities and lose the rights of the simplified registration process. For information on registering business partnerships and production co-operatives, see section on registering of the legal entities. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 25 REGISTRATION registration procedures for dehkan farmers must be performed at BOX 2.3. EXTRACT FROM THE LAW OF RT "ON A 3 different bodies: bodies of statistics, Social Security Fund, and DEHKAN FARM" local self-government (Jamoat) (see Chart 2.7). Article 5. Dehkan farm as a form of business Pre-Registration activity Dehkan farms are established on a piece of land. Acquiring this Dehkan farm is a unit of the economical system land for use as a farm is referred to as the pre-registration stage, possessing equal rights along with commercial and involves 2 steps: organizations and individual entrepreneurs. · The first is for the head of the rayon (city) to grant a piece of land for organizing a dehkan farm; · The second step involves obtaining a land user's right certifi- cate from the Raykomzem, the state body in charge of land use. State registration State registration of a dehkan farm is done by application from the dehkan farm. After the registration with the tax bodies, the dehkan farm is given the State Registration Certificate. Chart 2.7. REGISTRATION OF A DEHKAN FARM STATE PRE-REGISTRATION REGISTRA- POST-REGISTRATION PROCEDURES TION Head of Regional land rayon committee OPTION 1: AS AN INDIVIDUAL ENTREPRENEUR (IE) (city) (Raykomzem) Application 1. Application; for decision 2. Confirmation of land Bodies Social Security of land plot plot allocation; Tax bodies of Statistics* Fund Jamoat allocation 3. Project of land-utili- zation by land plot allocation; 4. Land tenure bound- 1. Application; 1. Application; 1. Application; 1. Confirmation of ary plan; 2. Passport; Copies of: 2. Passport; land plot alloca- 5. Certificate for land Copies of: 2. Confirmation of Certified copies of: tion; plot. 3. Certificate of State land plot alloca- 3. Certificate of state 2. Certificate of land registration; tion; registration; use right; 4. Land user's right 3. Decision on 4. OKPO code; 3. Certificate of state certificate; creation of Dehkan 5. Licenses, if neces- registration. 5. Certificate of land farm. sary; use right; 6. Employment con- 6. Information about * If dehkan farm tract of individuals. number of staff, is created on a chairman and partnership basis, a chief accountant. copy of agreement of partnership is also required. OPTION 2: AS A LEGAL ENTITY (See Chart 2.13) 26 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION Post-Registration Post-registration consists of 3 steps: "...It is not only me who faces difficulties obtain- · At the bodies of statistics: after obtaining the Registration Cer- ing the decision of the local executive authority (Khukumat) and getting the certificate for land tificate at the tax bodies, a dehkan farm must also register at use. It is this entire procedure that takes much the statistics bodies at the location of the farm to get the sta- time and efforts..." tistical code for the general classification of enterprises and - Entrepreneur, a focus-group participant organizations ("OKPO" code)18; · At the Social Security Fund: after obtaining the OKPO code, dehkan farms must apply to the Social Security Fund to be 2 registered as a taxpayer19 and receive an Individual Taxpay- er's Code; · At the Jamoat: dehkan farms must also register in the finan- Chart 2.8. REGISTRATION PROCEDURE FOR DEHKAN FARM - cial records of the local administration. ERS IS COMPLICATED % OF DEHKAN FARMERS UNDERGOING REGISTRATION 2.3.1 DIFFICULTY OF REGISTERING A DEHKAN FARM 5 53 35 8 As the survey shows, registration of a dehkan farm still remains problematic: 43% of dehkan farmers think that the procedure is 75% 50% 25% 0% 25% 50% either complicated or very complicated (see Chart 2.8). The dif- ficulty of the registration procedure can be explained by ambigu- Very Rather Very Rather easy easy complicated complicated ous legislation and non-transparent and time consuming process, including the paperwork to be filled at different bodies described in Chart 2.7. Table 2.2. Official time frames for registration 2.3.2 TIME FRAMES FOR THE REGISTRATION OF DEHKAN FARMS of a dehkan farm The legislation does not regulate the time frames for every stage process Bodies time frames, days of the registration process for dehkan farmers (see Table 2.2). Time Head of Rayon (city) 30 limits are set only for the Head of the Rayon to grant the land Pre-registration (within one month)20and for registering at the Social Security Fund Regional land committee not specified21 (within 10 days after submission of the application). State registra- tion Tax Bodies not specified22 According to the survey, registration of a dehkan farm in Tajikistan Bodies of Statistics not specified23 takes, on average, 78 business days. This situation has worsened Post-registration procedures with respect to 2002 (see Chart 2.9). Social Security Fund 10 Survey respondents cite the pre-registration process as the main Chart 2.9. PRE-REGISTRATION INCREASES THE TOTAL TIME cause of the long duration in registering a dehkan farm. The pro- SPENT FOR REGISTRATION OF DEHKAN FARM cedure of obtaining land can at times take several months, and BUSINESS DAYS is due to the difficulty in gaining approvals and preparing all nec- 78 18 Article 16 of the Law of RT "On a Dehkan Farm." 36 19 The Guidelines for "Accepting, Accounting and Spending the Resources of the Social Security Fund of RT," approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 20 Law of RT No.48 dd. May 10, 2002. 2002 2005 21 There is no official information. 22 A dehkan farm must apply for state registration at the tax bodies within 30 calen- dar days after receiving the land use certificate (Article 45 of the Tax Code). But there is no information on the time frame for the government bodies to complete registration after receiving the application. 23 Legislation does not specify the time frames for completion of the registration. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 27 REGISTRATION essary documents. It is also caused by the absence of a legally established time frame for obtaining the Land User's Right Certifi- cate and the low legal awareness of farmers (for example, when preparing the required documents). 2.3.3 COST OF REGISTRATION OF A DEHKAN FARM Chart 2.10. COST OF REGISTRATION OF A DEHKAN FARM IS The survey results show that the average cost of registering a de- DECLINING hkan farm in 2005 is 269 somoni ($84), including official and unof- SOMONI ficial payments (see Chart 2.10). This indicator decreased greatly 419 as compared to 2002,24 most likely due to government reforms that reduced the examination requirement by a notary office. Previously, a farmer had to prepare and present the documents required for registration at the Ministry of Justice, as well as register 269 the farm at a notary office. The legislation does stipulate some costs of the procedure: 1. State registration of a dehkan farm at the tax bodies is free of charge25; 2002 2005 2. Issuance of the registration OKPO card costs 3 times the mini- mum monthly wage (60 somoni or $19)26; 3. Processing the Land Use Certificate is subject to the following payments27: · for dehkan farms organized on the lands of reformed agri- cultural institutions and companies ­ 37.24 somoni ($12); · for dehkan farms organized on other pieces of land ­ 75.14 somoni ($23). Chart 2.11. REGISTRATION COSTS OF A DEHKAN FARM Nevertheless, despite these improvements, the legislation does DIFFER HIGHLY ACCORDING TO THE REGION28 not define the official cost of every step of the registration proc- SOMONI ess for dehkan farmers. The cost to apply for a decision from the Kurgan-Tube rayon is not specified, for example. district (Khatlon 240 province) The unclear and ambiguous legislation regarding registration Sughd province 218 costs for dehkan farms is reflected on the regional level. Costs to register a farm varied widely among the provinces of Tajikistan. Others 415 According to the survey results, farmers paid most to register in the Kurgan-Tube district of Khatlon province and in Sughd province (see Chart 2.11). 24 See "Registration" in IFC (2004b). 25 Article 26 of the Law of RT "On a Dehkan Farm." 26 Regulation "On the State Register of Enterprises, Institutions and Organizations of RT," approved by Decree of the Cabinet of Ministers of RT No. 387 dd. December 30, 1991. 27 Regulation "On the Procedure for Processing and Issuing the Certificates of the Right to the Use of Land, Certificate for a Piece of Land and Their Cost," approved by Decree of the Government of RT No. 478 dd. December 3, 2004. 28 Category "Others" include Kulyab district and Districts of Republican Subordina- tion. 28 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION 2.3.4 UNOFFICIAL PAYMENTS The number of dehkan farmers who reported making unofficial Chart 2.12. THE PRACTICE OF UNOFFICIAL PAYMENTS FOR payments is remarkably low in 2005 (see Chart 2.12). About 27% DEHKAN FARMERS IS DECREASING of the entrepreneurs who registered their farms in 2005 turned to % OF DEHKAN FARMERS WHO MADE UNOFFICIAL PAYMENTS unofficial payments versus 57% in 2002. Although this figure rep- 57 resents a clear improvement with respect to the previous survey, it should be mentioned that this result can be in part due to the 27 unclear definitions of the official cost of certain steps of registra- 2 tion for dehkan farmers: as a result entrepreneurs cannot always distinguish between official and unofficial payments. 2.4 reGistration of leGal entities 2002 2005 Legal entities face the most complicated registration procedure among the business types surveyed. This procedure is regulated BOX 2.4. LEGAL FORMS OF LEGAL ENTITIES by the Law "On the State Registration of a Legal Entity," which was adopted in 2003. The following legal organizational forms exist in the country: Chart 2.13 presents the process as pictured by the Law (i.e., "de 1. a business partnership (full partnership and jure") as well as it is applied in practice (i.e., "de facto"). a partnership in commendam); 2. a company (limited liability company Two major highlights of the new Law "On the State Registration of ­ LLC, joint-stock company ­ OJSC, CJSC, a Legal Entity" that have significantly influenced the registration additional responsibility company, affili- procedure should be mentioned here: ated and depending company); · On the positive side, the new law reduced the number of 3. agriculture and manufacturing coopera- bodies involved in the registration procedure: in particular tives. prior to the adoption of the law, examination of constitutive The results of the survey are based on the an- documents and state registration was conducted in separate swers provided by: LLC, OJSC, CJSC, affiliated bodies ­ bodies of justice and notary respectively, while after companies, agriculture and manufacturing adoption of this law, these two procedures are conducted in cooperatives. bodies of justice only; · On the negative side, the new law increased the term of the state registration, which is the first step of the overall registra- tion process described in Chart 2.13: the time limit for state registration was increased from 5 to 10 days. State Registration Legal entities must obtain their State Registration Certificate at the local state justice bodies,29 with the exception of legal entities with foreign investments and financial institutions which must carry out their state registration in the central office for the Ministry of Jus- tice located in Dushanbe. 29 Registration of other legal entities is carried out in justice bodies located in the centre of oblasts. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 29 REGISTRATION Chart 2.13. REGISTRATION OF A LEGAL ENTITY DE JURE VS DE FACTO30 : - . - State registration Post-Registration Social Automatic process via notification 1 Bodies of 2a statistics security Fund Require presence in person Bodies of Jamoat LE Bank (only for de-jure Justice agribusiness) Tax bodies Department of 3 4 2b Internal Affairs 1 2 3 4a Bodies of Bodies of Social 5 6 Justice statistics security Fund Tax bodies de-facto Jamoat Bank (only for 4b Department of agribusiness) Internal Affairs a. de-jure: 1. Legal entity (LE) applies to body of justice to obtain the Certificate on State registration. Body of justice registers the LE and issues the Certificate on State registration. Body of justice informs bodies of statistics and tax bodies on state registration of LE. Body of statistics gives LE the OKPO code of the general classification of enterprises and organizations. Tax body issues the Individual Taxpayer's Code. Body of statistics and Tax body notify the LE about assign- ment of OKPO code and Individual Taxpayer`s code. 2. After that LE can apply simultaneously to Social Security Fund and Department of Internal Affairs. Social Security Fund registers LE as the payer of social taxes and issues an informational letter. Department of Internal Affairs gives a permit to obtain of a stamp and seal. 3. Next step is opening a bank account. After that LE (with exception of a business partnership or a production co-operative) can start its activity. 4. Business partnership or production co-operative after opening a bank account should be additionally registered in the Jamoat. B. de-facto: 1. LE applies to body of justice to obtain the Certificate on State registration. Body of justice registers the LE and issues the Certificate on State registration. 2. After this LE applies itself to body of statistics to obtain the OKPO code of the general classification of enterprises and organizations. Body of statistics issues the OKPO code for LE. 3. LE applies to Social Security Fund and gets registered as a payer of social taxes. LE is given an information letter. 4. After this, LE can apply to Tax body and/or Department of Internal Affairs. Tax body issues the Individual Taxpayer`s code. Department of Internal Affairs gives a permit for obtaining of a stamp and seal. 5. Next step is opening a bank account. After that LE (with exception of a business partnership or a production co-operative) can start its activity. 6. Business partnership or production co-operative after opening a bank account should be additionally registered in the Jamoat (local self-government). Post-Registration Legal entities must then register at some or all of 6 state bodies indicated in Chart 2.13, depending on the legal form of the legal entity (see Box 2.4): 1. At the bodies of statistics: legal entities must obtain the OKPO code of the general classification of enterprises and organi- zations; 2. At the Social Security Fund: after obtaining the OKPO code, the legal entity must register with the Social Security Fund as a taxpayer; 30 For list of documents necessary to register a legal entity see Attachment 2.1. 30 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION 3. At the tax bodies: registration at the tax bodies is done if the OKPO code and confirmation letter from the Social Security Fund are available. Every legal entity must get registered at the tax bodies as a taxpayer in the place of its location, at the location of the immovable property and vehicles belonging to it, and in the location of each of its separated divisions to obtain the Individual Taxpayer's Code; 4. At the Department of Internal Affairs: registration can be done at any stage after the state registration and before registering 2 at a bank, to obtain an official seal and stamp31; 5. At the bank: the legal entity applies for opening a bank ac- count to deposit its capital; 6. At the Jamoat (agribusiness only): agricultural goods produc- ers organized in the form of business partnerships or produc- tion co-operatives must also register at the Jamoat, or local governing body. 2.4.1 DIFFICULTY OF REGISTRATION FOR LEGAL ENTITY BOX 2.5. NON-OBSERVANCE OF "ONE-STOP- The registration process for legal entities in Tajikistan is very compli- SHOP" ELEMENTS IN TAJIKISTAN cated, hindering the start-up of business activities. The bodies of justice regularly forward informa- In fact, although Tajik legislation currently stipulates some aspects tion on the registration of a legal entity to the of "one-stop-shop" registration (e.g., the bodies of statistics and bodies of statistics and tax bodies in its district. tax should provide an OKPO and Individual Taxpayer's Number32 respectively, based on the information provided by the bodies of The bodies of statistics must, based on the infor- justice), in practice, however, this is not done, and entrepreneurs mation provided by the bodies of justice, give must apply separately to the tax and statistics bodies with the rel- the legal entity the statistical code (OKPO) and evant information (see Box 2.5 and Chart 2.13). send a written notification to the entrepreneur. However, entrepreneurs have one month to reg- The complexity of the registration process for legal entities is fur- ister at the tax bodies after receiving the State ther proved by our survey results (see Chart 2.14). Of the 22% of Registration Certificate. Without the OKPO code, legal entities that established their business in 2005, almost 60% they cannot get registered at the tax bodies or view registration as either complicated or very complicated. In- open a bank account. Therefore, they must go terviews with entrepreneurs showed that at the very beginning to the statistics bodies to "speed up" receipt of of the registration process, they encountered the most difficulties. the statistical code. These included limited access to information on the registration Chart 2.14. REGISTRATION PROCESS OF LEGAL ENTITIES IS COMPLICATED % OF SMALL AND MEDIUM COMPANIES UNDERGOING REGISTRATION 7 37 53 3 50% 25% 0% 25% 50% 75% Very Rather Very Rather easy easy complicated complicated 31Seal used for financial documents of the entity; stamp used for correspondence. 32Articles 9 and 15 of the Law "On the State Registration of a Legal Entity, Articles 45 and 47 of the Tax Code of RT. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 31 REGISTRATION process, the large number of the documents required, and am- BOX 2.6. STATE REGISTRATION IS AN INEFFICIENT biguous requirements for each step in the process. AND COMPLEX PROCESS The registration of small and medium companies remains a com- · Departments of Bodies of Justice conducting plicated administrative barrier. The absence of clear and specific state registration are situated only in: concepts of cost and duration of certain procedures (e.g., reg- - Dushanbe, where legal entities from Dush- istration at the Social Security Fund) makes the procedure even anbe and DRS are registered; more difficult. - Central cities of provinces (Khorog, Kur- gan-Tube, Khudjent), where legal entities One of the possible ways to simplify the procedure could be the from GBAO, Khatlon and Sughd province introduction of a "one-stop shop" principle,33 which will consoli- are registered. date the various state agencies into one registering body. This will That implies entrepreneurs from remote areas allow businesses to get registered faster with fewer expenses, and needs to go to respective central cities cov- reduces opportunities for graft and bribery (see Attachment 2.3 ering up to 300 km, with obvious related time in the Annex). and financial expenses. · Necessity to have several identification codes 2.4.2 TIME FRAMES FOR REGISTRATION OF LEGAL ENTITIES: (Number of state registration, Individual Iden- A LONG PROCESS tification Number of Taxpayer and Statistical Code). The legislation does not fully define the time frame to register a legal entity (see Table 2.3) and as such, the process can be ex- tremely complex and time consuming. According to survey data, it took the same time to register a legal entity in 2005 as in 2002: more than one month (see Chart 2.15). Such a long time frame does not encourage development and formation of small and medium business representing a serious barrier to entry and has direct consequences on the economy. Chart 2.15. DURATION OF REGISTRATION OF LEGAL ENTITIES Table 2.3. Official time frames for registration of legal entities DID NOT BECOME FASTER BUSINESS DAYS procedure Bodies time frames, days State Registration Bodies of Justice 10 25 25 Bodies of Statistics not specified34 Tax Bodies 1035 Post-Registration Proce- dures Social Security Fund 10 Bodies of Internal Affairs not specified Banks not specified 2002 2005 33 A one-stop shop is any institution that unifies government officials from different departments in one location to provide information and/or services to its citizens (see Attachment 2.3). 34 The bodies of statistics must file information about the registration of the legal en- tity into the state register of enterprises and organizations, and is also obliged to give the legal entity the statistical code (OKPO) and notify the entity in writing. The legislation, however, does not envisage the time frame to complete the proce- dure of creating a record for a legal entity. 35 A legal entity must apply for registration at the tax bodies within 30 calendar days after registering at the bodies of justice (Article 45 of the Tax Code). But there is no corresponding time limit for the tax bodies to register the entity after receiving the application. 32 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION The absence of a uniform, legally established time frame explains Chart 2.16. DURATION OF THE REGISTRATION PROCESS FOR the high regional differences in the duration of the registration A SMALL AND MEDIUM COMPANY REGIONAL DIFFERENCES36 : procedure: the fastest time to register a legal entity was in Sughd business days province (20 days), while the longest one was in the Districts of the District of Repub- Republican Subordination (40 days). This long duration is due to lican Subordina- 40 the fact that according to current legislation all legal entities from tion A Dushanbe 21 DRS get registered in Dushanbe that adds up to time and finan- cial cost of entrepreneurs, especially from remote areas (see Box Sughd province 20 2.6 and Chart 2.16.). Additionally the differences of duration of Other regions 16 on average 2 registration characterize the status of the business environment in 25 business days the region, in particular, the relations between entrepreneurs and certain officials and bodies involved in registration. BOX 2.7. EXAMPLE OF DECLARATIVE PRINCIPLE IN THE REGISTRATION PROCESS37 The declarative principle of registration introduced in Uzbekistan is a process of state registration based on the consideration of provided documents. This process does not foresee a comprehensive examination of documents for compliance with cur- rent legislation. Registering bodies only consider the sections of documents relevant to their control. Preparation of the nec- essary documents for state registration can be done either by founder himself or by hired consulting company, Chamber of Commerce and Industry, other persons. Founder bears full responsibility for the authenticity of provided documents and their compliance with current legislation. Refusal of state registration can be due to: for all legal entities: · application to an irrelevant registering authority; · presentation of an incomplete set of documents; · the firm name in constituent documents or stamp design do not correspond to the name specified in the certificate confirm- ing its uniqueness; · the legal form of business declared in the constituent documents or the stamp design do not correspond to the legal forms provided by the legislation; · constituent documents include types of activity prohibited by the legislation; · the authorized capital specified in the constituent documents does not match the authorized capital size established by the legislation for that type of business entity. additionally for entities with foreign investments: · the share of foreign investments does not correspond to the share size established by the legislation for entities with foreign investments; · the list of founders does not include a foreign legal entity. additionally for bazaars: · failure to pay at least 30% of the authorized capital amount specified in the constituent documents; · the list of founders of the market does not include the local government holding at least 51 percent of the shares. Provided documents are studied only to check their inconsistency with cases of refusal. Refusal of state registration except above mentioned cases is not allowed. 36Due to the small number of registered companies in GBAO, Kulyab district, Kur- gan-Tube district and DRS B, these regions are grouped under "Other regions" for statistical purposes. 37See IFC (2006b). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 33 REGISTRATION Furthermore the long registration period is due to thorough exami- nation of documents by the bodies of justice during very thorough examination of provided documents. Entrepreneurs think that of- ficials drag out the process and can even refuse the state regis- tration on any pretext, opening opportunities for rent-seeking. It is recommended therefore to introduce the declarative principle of registration to streamline the process and reduce the authority of officials to refuse the state registration (see Box 2.7). 2.4.3 COST OF REGISTRATION FOR LEGAL ENTITIES Chart 2.17. COST OF REGISTRATION FOR A SMALL AND From March 2004, the fees for several stages of registration of a MEDIUM COMPANY IN 2005 . 2002 VS legal entity are defined by the Law38 and are linked to the mini- SOMONI mum monthly wage (MMW). This means that every increase of the 745 MMW also increases the cost of registration (see Attachment 2.4 In 2005 the official in Annex). For the time being the following fees are set by legisla- 487 cost of registration tion: of a legal entity at the bodies of 1. Fee for state registration by the bodies of justice amounts to justice and statistics only equaled 33 30 MMW; times the minimum 2. Obtaining the statistical code (OKPO) by the bodies of statis- wage, or 396 somoni ($124) tics and issuing a registration card costs 3 times the MMW.39 2002 2005 However, the costs for registering at other bodies are not set forth in the legislation, and as such, are open to higher unofficial pay- ments. Accordingly, registration as a legal entity is the most ex- pensive for entrepreneurs. Legal entities spent 745 somoni ($233) to register in 2005, including "... When I wanted to register my enterprise, my friends advised me to turn to a law company official and unofficial payments (see Chart 2.17). This indicator is providing assistance with the registration. As a 83% higher than that in 2002, and supports the assumption that result, the registration might have been a little registering bodies increase the pressure on legal entities. expensive for me, but I did not have to go from one door to another..." The registration cost also varies depending on the region. Entre- - Entrepreneur, focus-group participant preneurs who registered their business in Dushanbe pay more. This may be due to the greater number of entrepreneurs in the coun- try's capital who hire legal firms to take care of their registration procedures. 2.4.4 UNOFFICIAL PAYMENTS FOR LEGAL ENTITIES: STILL AN ISSUE The data on unofficial payments also prove that registration of legal entities is a difficult procedure with a large amount of inter- 38Law of RT No. 19 "On the State Due" dd. February 28, 2004. Prior to the law, the costs to register with the state were approved by the Government of the Republic of Tajikistan. For example, Decree No. 587 of the government of RT on November 29, 1993. 39Regulation "On the State Register of Enterprises, Institutions and Organizations of RT," approved by Decree of the Cabinet of Ministers of RT No. 387 dd. December 30, 1991. 34 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION vention from state bodies' side. According to the survey, almost Chart 2.18. UNOFFICIAL PAYMENTS DURING REGISTRATION 44% of the entrepreneurs who tried to register their businesses in ARE COMMON FOR LEGAL ENTITIES 2005 had to turn to unofficial payments. Remarkable is the fact % OF SMALL AND MEDIUM COMPANIES WHO MADE UNOFFICIAL PAYMENTS that this figure did not change in comparison to 2002 (see Chart 2.18) proving that legislative changes do not always work in prac- 44 44 tice. In general, legal entities begin their operation after obtaining the State Registration Certificate, except for activities that require a 2 license or a permit. chapter 3 and chapter 4 provide a more detailed description of 2002 2005 the procedures linked to the start of business activity. 2.5 economic impact estimate According to the approach described in Box 2.8, SMEs lose be- tween 4% and 27% of their annual profit to undergo the registra- BOX 2.8. ESTIMATE OF THE OPPORTUNITY COST tion process (see Chart 2.19). LOST DURING THE REGISTRATION PROCEDURE Though losses for individual entrepreneurs are relatively modest, Registration process creates direct costs for new- their repetitive nature (due to the fact that individual entrepre- ly established businesses in the form of expenses neurs need to register every year anew) represent a significant (official and unofficial payments) they need to burden for them. It is also remarkable that dehkan farmers lose a bear. At the same time, due to the long regis- significant share of their annual profits due to the very long reg- tration process businesses lose the opportunity istration process. In money terms small and medium companies to gain additional profits. These losses are calcu- bear the highest burden.40 lated as additional "opportunity costs." Overall Chart 2.19. ECONOMIC IMPACT OF THE REGISTRATION BURDEN RANGES BETWEEN 4% economic impact is equal to: AND 27% OF ANNUAL PROFITS C = E + (PA*d/dt), SOMONI where: 4% 11% 27% of annual of annual of annual profits profits profits · C- economic impact in money terms; · E - official and unofficial expenses for registra- tion; · PA - annual profits, net of profit tax; 2,200 · d - business days per year; · dt- business days spent for registration. 1,550 175 Individual Small and medium Dehkan farmers entrepreneurs companies 40Attachment 2.2 provides a detailed calculation for a specific sector. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 35 REGISTRATION recommendations 1. Introduce time limits for registration, which could apply to single bodies as well as to the overall process. This could be achieved by: 1.1 Imposing by law a fixed consideration time for each step of the registration process: within 1 working day wher- ever a simple approval is needed (i.e., to obtain Statistical Code), while within 5 working days where a thorough analysis is needed (i.e., State Registration); 1.2 Requiring the public bodies to substantiate delays, as well as to provide a detailed explanations for refusal of applications in order to allow the applicant to improve upon it; 1.3 Introducing a maximum registration time, differentiated per typology of companies, in case a "one-stop-shop" principle was to be introduced. Expected impact Time limits for registration introduce a responsibility principle for public bodies, which should increase efficiency by: · Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profits, employment and tax revenues; · Reduced costs, in particular unofficial ones, resulting in cheaper entry of new companies. 2. Introduce official processing costs for each step of registration by the different bodies. These costs should be differ- entiated for each typology of business and officially disclosed in the informational boards in each bodies. Expected impact Introducing and communicating to the public the official costs involved in each stage of the registration process would increase transparency of the process and in turn decrease unofficial solutions, overall reducing registration costs. This would in turn result in: · Reduced costs, in particular unofficial ones, resulting in cheaper entry of new companies, with positive impact on profits, employment and tax revenues; · Higher number of registered businesses, reducing the size of the informal sector in the economy. 3. Further streamline the registration process for individual entrepreneurs, by creating a "one-stop-shop" which would integrate Tax Bodies and Social Security. This could be obtained by providing the Tax Authority with the responsibility to collect the information needed by the Social Security Fund the start-up of an individual entrepreneur's activity. Expected impact A further consolidation of the stages needed to register an individual entrepreneur would be particularly beneficial given the repetitiveness of the process (on a yearly basis for patent holders). This would in turn result in: · Higher number of registered businesses, reducing the size of the informal sector in the economy; · Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profits, employment and tax revenues; · Reduced costs, in particular unofficial ones, resulting in cheaper entry of new companies. 4. Implement a life-time registration for individual entrepreneurs operating under certificates, which would reduce a recurrent cost for doing business. As the legislation does not foresees expiration for certificates, this result could 36 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION be simply achieved by monitoring that the Tax Bodies do not include an expiration date in the certificate which they issue. Expected impact By waiving a duration limit for certificates, individual entrepreneurs opting out for this typology of registration would obtain an immediate benefit by avoiding a recurrent burden. This in turn would imply: · Reduced time and cost on a yearly basis for certificate holders, with positive impact on profits, employment 2 and tax revenues; · Provision of an incentive to individual entrepreneurs to operate under a certificate status, beneficial for the public budget in terms of higher revenues and transparency of the accounting. 5. Reduce the number of steps needed to register a legal entity (e.g., applying the so-called "one-stop-shop" princi- ple) and limit the discretionality of each body in the decision making process. This could be achieved by: 5.1 Ensuring the implementation of the current legislation foreseeing an exchange of records between registering bodies which would allow the companies to obtain a Statistical Code and a Taxpayer's Identification Number without the need to further apply to each of the bodies; 5.2 Introducing a full fledged "one-stop-shop" mechanism including all the State bodies involved in legal entities registration. The registering entity could fill in a single application and provide at once all the necessary docu- ments, which would be processed internally by the involved bodies; 5.3 Introducing the declarative principle in the registration process by the bodies of justice, foreseeing simplified consideration process and specifying a limited set of cases for refusing registration (e.g., incomplete documen- tation, unlawful activity). Expected impact A lower number of steps is expected to reduce a barrier to entry for new companies, resulting in: · Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profits, employment and tax revenues; · Reduced costs, in particular unofficial ones, resulting in cheaper entry of new companies. 6.Introduce a single identification number for legal entities, to be used at the bodies of justice as well as statistical and tax bodies. The single identification number could be assigned by the first body processing the registration docu- ments and communicated to the other ones along the process. Expected impact Introducing a single identification number would simplify the registration process, by reducing the need to apply to different bodies (see Recommendation 5), while at the same time it would also facilitate the identification of the companies for State purposes, including tax and social security payments administration. 7. Introduction of a transparent mechanism for land allocation for the creation of dehkan farms, which foresees, at the minimum: · Fixed terms for decision making; · Clear application fees. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 37 REGISTRATION Expected impact Simplified land allocation mechanism would make registering dehkan farms easier, which would allow dehkan farm- ers to dedicate more time for tillage resulting in increased possibilities for good yield. 8. Increasing the legal awareness of entrepreneurs through the related state and non-governmental structures, and improving entrepreneurs' access to information on the registration procedure. To increase awareness campaign entrepreneurs it is recommended to introduce a uniform set of documents required for the registration (preferably not more than one or two forms). Expected impact Improved access to information, especially outside the Dushanbe region, could improve registration procedures, allowing for growth in the number of local companies. This in turn would have an immediate impact on the local economy, supporting development of local entrepreneurship. 38 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION annex attachment 2.1. list of documents for the legal entities registration procedure. 1. In bodies of justice: · Application; · Statute; · Decision,which encompasses: creation of legal entity; confirmation of constituent documents; assignment of the head of executive organ of legal entity; 2 · Documents confirming legal address and location; · Receipt or copy of warrant for payment of state due. 2. In bodies of statistics: · Certificate of state registration (copy); · Statute (copy). 3. In Social Security Fund: · Certificate of state registration (copy); · OKPO code (copy); · Statute (copy). 4. In Tax bodies: · Certified statute (copy); · Certified Certificate of state registration (copy); · OKPO code (copy); · Reference from Social Security Fund Information about number of staff, chairman and chief accountant (copy). 5. In Department of Internal Affairs: · Statute (copy); · Certificate of state registration (copy). 6. In bank: · Application; · Certified statute (copy); · Certificate of state registration (copy); · Two cards with signature samples and imprint of the seal (copy). 7. In Jamoat (only for agribusiness) · Certificate for the right to use the land. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 39 REGISTRATION attachment 2.2. example of the opportunity cost calculation for small and medium company We took the example of one sector of the economy: retail trade. 1. The amount paid during the registration An enterprise operating in retail trade on average spent 785 somoni ($245) for the entire registration process (76% of GDP per capita), including all official and unofficial payments. 2. Loss of profits Time spent on the registration process is lost opportunity for a newly established enterprise to gain income. According to survey results, entrepreneurs operating in retail trade gained income of 20,420 somoni ($6,381) in one year. If a firm operated a complete month instead of going through the long registration process, it could earn 1,700 somoni ($531) (20,420/12*1=1,700). The total amount lost by the enterprise during the registration process is thus 2,485 somoni ($777). 3. Taxes to the country budget VAT (the rate is 20% of the turnover) In 2005 the sale turnover in retail trade made 290,600 somoni ($90,812) (or 24,215 somoni/$7,567 per month). Based on that figure, the state budget does not receive 4,840 somoni ($1,512) in VAT from those enterprises that spent a whole month to register their activity (24,215*0.25=4,840). Tax for motorways use (the rate is 0.5% of the turnover of a retail enterprise) The budget loss in this case amounts to 120 somoni ($38), the calculation is similar to the calculation for the VAT. Profit tax (the rate is 20% of the profits) Going by the calculation of the monthly profits, the loss of the state budget from the profit tax will amount to 340 somoni ($106) (or 20% of 1,700 somoni). The total loss for the budget is, therefore, 5,300 somoni ($1,656), i.e: 4,840 + 120 + 340. This figure is 5 times as large as the GDP per capita. 4. Creating jobs On average, a trade enterprise employs 8 people at the average salary of 115 somoni ($36). The total amount of the unpaid salary is 920 somoni ($288), accordingly. 40 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION Attachment 2.3. Simplification of the registration Process by introducing a "one-stop-shop" principle In 2002, a "one-stop-shop" principle was introduced in the Ukrainian city of Ivano-Frankovsk to simplify the registra- tion process. This meant that all of the 8 state bodies involved in registering a business were moved to one office (the Registration Chamber). There is an information center that addresses questions that entrepreneurs have about the registration process, as well as other government services for the private sector. So, a person who wants to register his business comes to this office, submits all necessary documents, and after a cer- 2 tain time, gets his business (entity) registered. Rather than visiting each of the 8 agencies three times (for a minimum of 24 visits), the entrepreneur now only needs to come to the Registration Chamber three times (to find out what documentation is required, to submit that documentation, and to receive the registration). Thanks to this one-stop-shop principle: · The number of local businesses registered in Ivano-Frankovsk increased by 113%; · The duration of the registration process decreased from 28 days to only 10 days; · The cost of registration fell by 65%; · There was increased transparency, due to much clearer and publicly available information, which reduced the opportunities for graft and bribery; · An additional factor to contribute the increased transparency was the presence of local business associations in the Registration Chamber. Chart 2.20. SCHEME OF HOW THE ONE STOP SHOP PRINCIPLE WORKS " - - " 1. Registration 3. Statistics Department 2. Tax police Department Registration Chamber Information Center 4. Permit Service under the Ministry of Internal Affairs 9. Tax registration 5. Unemployment inspection in 10 days Social Insurance Fund 8. Pension 7. Temporary 6. Casualty Social Fund Disability Social Insurance Fund Insurance Fund Registration Chamber Representatives Service Center of public organiza- tion · Bank · Notary · Copying · Other Source: Buryy V./Morford Z./Snider P. (2002) Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 41 REGISTRATION attachment 2.4. cost of registration of legal entities Chart 2.21. COST OF STATE REGISTRATION OF LEGAL ENTITIES Registration without foreign investments Legislation distinguishes the registra- 700 tion fees for legal entities with and 100 without foreign investments. The amount to be paid is linked to the minimum monthly wage (MMW). This in turn has some negative impact, in- creasing the amount to be paid in real terms. For instance a company regis- 360 tering without foreign investments has 300 to pay 15 MMW in 2005 and 2006. The MMW in 2005 was set to 12 somoni, so 210 the registering entitity would pay 180 30 30 somoni ($56). In 2006 the MMW was 180 increased to 20 somoni, so the reg- 15 15 istering entity would pay 300 somoni ($94) a remarkable increase of 66% with respect to 2005. Decree of PRT Law of RT Decree of PRT Law of RT Decree of PRT #1173 #19 #1403 #115 #1716 dd November 4, dd February 28, dd November 4, dd December 26, dd March 20, 2003 2004 2004 2005 2006 . Minimum Monthly Wages Registration fee, in somoni Registration with foreign investments 3500 500 1200 700 1000 600 100 100 50 50 Decree of PRT Law of RT Decree of PRT Law of RT Decree of PRT #1173 #19 #1403 #115 #1716 dd November 4, dd February 28, dd November 4, dd December 26, dd March 20, 2003 2004 2004 2005 2006 . Minimum Monthly Wages Registration fee, in somoni 42 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 3. licensinG LICENSING 3. licensinG Licensing procedures in Tajikistan have undergone numerous main findinGs revisions in recent years, including a significant reduction in the number of activities requiring a license. The Law on Licensing "de · The number of businesses that needed to jure" came into force in January 2005, but "de facto" only in Sep- obtain a license has declined significantly tember 2005 after the adoption of the specific regulation, which (from 27% in 2002 to 16% in 2005), reflect- defined the various elements needed to implement the changes ing the reduction in the number of activities outlined by the law.2 Further amendments to the licensing law subject to licensing (from 1000 to 66). were introduced in July 2006. · About half of the respondents (45.5%) find While the survey is based on 2005 data and cannot capture all obtaining licenses a very difficult process. the effects of the reforms so far, the data does show an overall improvement in the licensing environment. However, some prob- · Duration of the application process and the lematic areas were identified that might need further actions from cost of licenses are highly variable: the legislative as well as the procedural viewpoint. - Individual entrepreneurs spend on av- The duration of licenses appears to be the most pressing issue: erage 289 somoni ($90) and 9 working licenses are issued for too short a time to allow for any reasonable days to apply for a license, for a total long-term investment. This has the most implication for medium- impact estimated at about 11% of their sized businesses, which, by their nature require more long-term in- annual profits1; vestments than individual entrepreneurs. The duration of licenses has also been addressed with the new amendments to the law, - Small and medium companies spend but in this case the limits were further reduced rather than extend- on average 717 somoni ($224) and 25 ed. Overall the issue needs further consideration. In addition, sur- working days, for a total impact estimat- vey data show an average duration incompatible even with the ed at about 13% of their annual profits legislation in force at the time of the survey. (28% wait longer than the 30-day limit defined by the legislation); The list of licensed activities might still be streamlined. A careful analysis shows that activities presenting limited or no risks to health - Dehkan farmers spend on average 82 and safety are still subject to licensing (e.g., evaluation and assess- somoni ($26) and 9 working days, for a mentactivity). Inaddition,specificsectorsoftheeconomysuchas total impact estimated at about 4% of tourism, which might be critical to foster the country's economic their annual profits. development, are burdened by licensing requirements which are difficult to motivate according to market economy principles. · Duration of licenses: on average a license is valid for only 10 months. However this con- Finally, the overall situation seems to be the most complicated tradicts to the legislation. for legal entities, which need to obtain the most licenses, face the longest wait times and pay the highest official and unofficial · Unofficial ways of solving the issues play a payments. This shows that government officials use the licensing significant role in obtaining a license. About process as a means of rent-seeking, which is especially significant 40% of entrepreneurs used unofficial ways given the constant need to renew short-term licenses. This situa- to obtain a license. tion needs to be specifically addressed in order to facilitate the development of larger-scale enterprises that would fuel the eco- nomic growth of the country. 1 This profit equivalent also includes "additional" opportunity costs (see more details further in the chapter). 2 e.g., the licensing bodies responsible for each type of licensed activity. 44 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING 3.1 licensinG: the leGal framework A license is a special permit issued by a state body authorizing a business to carry out a certain activity under specific terms and BOX 3.1. EXTRACT FROM THE LAW ON LICENSING conditions. As such, when a business is subject to licensing require- OF CERTAIN KINDS OF ACTIVITIES6 ments, it must obtain the specific license before starting its activi- ties. Article 1. Basic Definitions The basic normative-legal acts regulating the licensing proce- A license is a special permit to carry out a spe- dure in the Republic of Tajikistan are the Law "On Licensing of cific activity with obligatory observation of the Certain Kinds of Activities3" (hereafter "the Law") and Regulation license terms and conditions, issued by a licens- "On Specifics of Licensing of Certain Kinds of Activities4" (hereaf- ing body to a legal entity or an individual entre- ter "the Regulation"), which covers detailed provisions outlined preneur; by the Law. 3 The activity subject to license is an activity that This unified legal framework represents a great improvement from requires obtaining a license before conducting 2002, when licensing was regulated by more than 43 sectoral laws the activity in accordance with the Law on Li- and more than 40 by-laws.5 In particular the new legislative basis censing; also defines some basic procedural steps required to obtain a li- cense, steps that were not clearly specified under the previous Licensing is the series of actions related to issuing norms (e.g., which application documents are needed, the cost and renewing licenses, suspension and resump- of obtaining a license). tion of license validity, cancellation of a license and control by the licensing bodies over the ob- the law regulates the relations arising from licensing of certain servation of the license terms and conditions by activities and ensures observation of the standards and require- license holders in their operation. ments to protect the interests and safety of the citizens, the com- munity and the state. The Law contains: Article 4: Criteria for Defining the Activities Sub- ject to Licensing · General provisions for the licensing of certain activities; · List of the activities subject to licensing; The activities subject to licensing are referred to · Time frames for considering the application for a license; as those activities which, when carried out, can · Validity period of a license and its extension; potentially harm the rights, legal interests and · Licensing fees; health of the citizens, defense and security of · Procedure for suspension and cancellation of a license. the state, or cultural heritage of the peoples of the Republic of Tajikistan. These activities can be the regulation defines: regulated only through licensing. · Licensing bodies for each activity subject to licensing; · Detailed procedure for obtaining licenses; · Authorities of the licensing bodies; · Procedure for overseeing the terms and conditions of a li- cense; · Provisions on inspections procedures, including rights and du- 3 Law adopted on May 17, 2004 and further amended in July 28, 2006 by the Law No. 195 "On Introducing Amendments to the Law on Licensing of Certain Kinds of Activities." 4 No. 337 approved by the Decree of the Government of RT September 1, 2005. 5 See IFC (2004b). 6 The Regulation also describes some inspection requirements (i.e., grounds to conduct an inspection, frequency and duration of inspections). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 45 LICENSING ties of a license holder during inspection7; · Additional licensing conditions for specific activities subject to licensing. 3.2 licensinG coveraGe: improvements overall Chart 3.1. NUMBER OF ACTIVITIES SUBJECT TO The specific economic activities requiring a license as well as the LICENSING DECLINED AFTER ADOPTION OF THE AW L criteria to subject an activity to licensing requirements are de- fined by the Law (see Box 3.1) . In addition the Law distinguishes 1000 between general activities subject to licensing, and special ones that require greater monitoring. After the adoption of the Law on Licensing and its amendments 114 in 2006, the number of activities subject to licensing has declined 66 to 66 (versus more than 1,000 in 2002). Although the current situ- ation represents a significant improvement, this sharp reduction Before the Law After adoption of After was partly obtained by merging several types of activities into (until May 2004) the Law amending (from May 2004) the Law one,8 and its real impact is somehow reduced with respect to the (July 2006) expected one (see list of the activities subject to licensing in At- tachment 3.4). The survey data confirm a significant decline in coverage: 16.4% of respondents needed to obtain a license in 2005, compared to 27% in 2002 (see Chart 3.2). Two comments are nevertheless necessary: · During the transitional period between the adoption of the Law (May 2004) and issuance of dedicated regulations (Sep- tember 2005), entrepreneurs faced difficulties renewing old BOX 3.2. COMPARISON OF TWO TYPES Specific General OF ACTIVITIES REQUIRING A LICENSE Validity Less than three years Five years Application free 10X minimum wage9 4X minimum wage License cost 25X minimum wage 10X minimum wage The Law identifies 2 General activities subject to licensing (59 types): private medical activity, passengers groups of activities and cargo transporting by motor vehicles, tourism related activities, etc. requiring licenses, distin- Special activities subject to licensing (7 types)10: credit organizations, activities in the guished by the duration field of manufacturing and selling ethyl alcohol, works and services in the field of nu- as well as issuing costs. clear power, mining and geological excavations, etc. 7 Article 1 of the Law of RT `'On Licensing of Certain Kinds of Activities," May 17, 2004. 8 For instance, according to the amendments to the Licensing Law in 2006, geodesic and cartographical activities are incorporated into one kind of licensing activity, while before they were separate (#195, July 28, 2006). Manufacture, storage, and use of industrial explosives are incorporated into one kind of licensing activity, though prior to amendments they represented 3 separate categories of activities (#195, July 28, 2006). 9 In accordance with Article 103 of the Labor Code of RT, May 15, 1997, the minimum wage is the minimum monthly monetary payment to the employee in accordance with the working hours established by the Labor Code and the performance of established duties. The size of the minimum wage is periodically established by a Presidential Decree, and is currently 20 somoni by Decree #1716, March 20, 2006. 10For more details see Attachment 3.3. 46 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING licenses, and licensing bodies were reluctant to issue new Chart 3.2. SHARE OF SMES THAT UNDERWENT LICENSING : ones. This likely resulted in a reduction of the number of entre- DECREASING preneurs who applied to obtain licenses.11 · Survey data do not take into account the provisions of the % OF RESPONDENTS latest amendments to the licensing law in 2006, which further decreased the number of activities subject to licensing from Individual 17 entrepreneurs 28 114 to 66. Small and medium 55 Legal entities are the types of businesses most affected by licens- companies 64 ing: more than half (55%) of small and medium companies had to obtain a license (see Chart 3.2). This high percentage can be Dehkan 3 farmers 6 explained by the fact that legislation dictates that most of the activities requiring a license can only be carried out by legal enti- SMEs on 16 . . ties, not individual entrepreneurs.12 Only specific activities in the average 27 agricultural sector (i.e., production of tobacco, private veterinary 3 service) that represent a possible risk for the health and safety of 2002 2005 consumers are subject to licensing. The majority of dehkan farm- ers do not engage in these types of activities, and therefore only a small percentage of them needed to obtain a license.13 Overall, there is still room for further reduction in the number of activities subject to licensing, as some international benchmarks as well as examples from Tajikistan's economy show (see Box 3.3 and Box 3.8).14 In fact, the percentage of businesses undergoing a licensing pro- Chart 3.3. TAJIKISTAN RANKS IN THE MIDDLE AMONG SELECTED cedure ranks Tajikistan as average with respect to other CIS coun- CIS COUNTRIES BY LICENSING COVERAGE tries (see Chart 3.3). Nevertheless both Ukraine and Belarus are % OF RESPONDENTS in the process of further reforming their licensing regulation while Uzbekistan and Georgia are more developed in this context. Belarus 36 Additionally, analysis of the legislation shows that the list of li- Ukraine 21 censed activities still includes many activities presenting neither Tajikistan 16 risk category nor other justification to be subject to licensing (e.g., activity dealing with evaluation and assessment, pawn-shops, Georgia 6 patent attorneys). However, many of these activities impact a large number of SMEs or have a particular relevance for the coun- Uzbekistan 4 try's future development. Box 3.3 clearly describes the case for Internet cafes, which are requested a license for activity in the Source: IFC (2004c), IFC (2005a), IFC (2005b), IFC (2007a) area of electrical communication.15 11Licensing bodies temporarily suspended issuing licenses until the adoption of the Regulation. 12For instance, pharmaceutical activity can be conducted only by legal entities (the Law "On Drugs and Pharmaceutical Activities" of August 6, 2001, Article 30), as well as trade of narcotics, psychotropic substances and precursors (the Law "On Narcotics, Psychotropic Substances and Precursors" of December 10, 1999, Article 10). 13In particular, no start-up dehkan farmer obtained a license in 2005. 14See also Attachment 3.2, describing the licensing legislation in the selected CIS countries. 15Electrical communication refers to any transmission or reception of signs, signals, written texts, pictures, sounds or any information via wire, radio optical or other electromagnetic systems. (Law "On Electrical Communication," May 10, 2002). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 47 LICENSING A clear example of an unnecessary license is tourism: although BOX 3.3. SHOULD INTERNET CAFES tourism is considered a priority development area by the Govern- BE LICENSED? ment,16 in order to start up an activity in this sector it is necessary to obtain a license. This also represents a contradiction with the Relief International has launched a Schools On- principles of market economy. line program funded by the United States Depart- ment of State to facilitate access to the Internet An additional issue needs to be mentioned. In many cases re- at 24 schools in the Republic of Tajikistan. The quirements for licensing overlap with those for permits, creating a project started in December 2003 and includes double barrier regime which poses a serious obstacle to economic a long-term financial sustainability initiative that foresees transformation of computer classrooms activities without pursuing a specific public goal.17 For this reason into Internet cafes to cover associated electric- permit reform should be carried out in a complementary manner. ity and Internet provider services costs. A first step in order to address this issue would be to consider on a sectoral basis licensing and permit requirements to identify un- However, Tajikistan's State Communications necessary duplications and propose targeted interventions. Inspectorate ruled that when the schools will launch Internet cafes in their classrooms, they 3.3 licensinG procedure: a two-sided situation will need a license from the agency "since they will run the Internet cafes on a commercial ba- The procedure for issuing licenses is commonly defined for all li- sis and thus will have to receive a license ­ and censes. To obtain a license from a licensing body, the applicant pay a license fee." Such a situation contradicts must present: the very essence of licensing, which should not · A set of documents common to all licenses; target a commercial business but rather address · Additional documents/requirements specifically defined for concerns to human health and safety or the ef- each activity as set out in the Regulation (see Box 3.4). ficient use of scarce resources. Chart 3.4 shows an example of the license application procedure Source: FIAS (2006) for opening a drugstore business. BOX 3.4. EXAMPLE OF GENERAL AND SPECIFIC DOCUMENTS REQUIRED TO ISSUE A LICENSE18 General documents: 1. Application form for issuing a license; 2. Copies of constitutive documents and Certificate of the applicant's registration with the state; 3. Copy of the Certificate of the applicant's registration with the tax bodies; 4. Document certifying payment of the license fee. Specific documents Transportation activity: Private insurance activity: 1. Copy of the driver's license; 1. Technical and economic assessment of the activity of 2. Copy of the certificate of quality of a vehicle; the insurance organization; 3. Copy of log book of the vehicle; 2. Conditions and rules of insurance activity; 4. Copy of the rental agreement of the transport carrier 3. Information on insurance fees; and warranty (if transportation is not conducted with 4. List of management staff. own vehicle). 16"...Due to geographical characteristics and existing possibilities of Tajikistan, special attention is to be paid for development of textile industry, processing of mineral materials, and development of tourism...." (extract from the annual speech of the President of RT to Majlisi Oli, April 20, 2006). 17For instance legislation foresees both permit and license for pharmaceutical activities (Law "On Medicine and Pharmaceutical Activity" dd. August 6, 2001). Another example of overlapping is the architectural and town-planning activity requiring both permit and license for certain architectural works (Law "On Archi- tecture and Town-planning" dd. May 15, 1997). 18Regulation No.337 "On Specifics of Licensing of Certain Kinds of Activities." 48 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING Chart 3.4. OBTAINING A LICENSE TO SELL MEDICINES FROM THE TATE CIENTIFIC S S CENTRE OF EXAMINATION OF MEDICINES UNDER THE MINISTRY OF HEALTH Application fee With- 80 somoni in 30 days after the Rejection notification receipt (indicating the reasons for the rejection) The Application Decision of (with the necessary the licensing set of documents) body Notification of issuing the license Issuing the (indicating the Payment of license (within bank account Documents to be attached: the license 3 days after details · Application for issuing the license, indicating: fee - the payment and deadline · Name and the organizational and legal form, the legal 200 somoni of the license for paying 3 address and the location, the settlement account and fee) the license the bank office; fee) · Activity to be licensed and the term during which this activity will be carried out; · A copy of the Tax Registration Certificate; · Document certifying payment of the license fee for con- sidering the application; · Information on the employees' qualification; · Copies of the documents certifying the right to use the manufacturing premises; · Conclusion of the Sanitary Service and the Fire Surveil- lance Service; · Certificate of Conformity of the premises to the require- ments to pharmaceutical activity; · A copy of the diploma and the specialist's employment history; · A copy of the specialist certificate, proving that he can About carry out pharmaceutical activity. 15 documents in total Although licensing procedures should be clearly defined by the legislation, almost half (45.5%) of the respondents indicated that the procedures were complicated or very complicated (see Chart 3.5). This could be explained by the relative novelty of the procedures at the time of the survey as well as by the difficulty to obtain the proper information from each licensing body (see Box 3.10 further in text). Chart 3.5. ALMOST HALF OF SMES ASSESS LICENSING COMPLEX %OF RESPONDENTS UNDERGOING LICENSING Individual entrepreneurs 11 44 37 8 Small and medium companies 5 49 37 10 Dehkan farmers 7 39 47 7 75% . 50% 25% 50% 75% Very easy . 25% Rather easy . 0% Rather complicated . Very complicated Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 49 LICENSING Chart 3.6. LICENSING PROCESS FOR SMALL AND MEDIUM COMPA - 3.3.1 DURATION OF LICENSING PROCESS: COMPLIANCE STILL TO NIES IS THE LONGEST BE ACHIEVED % OF RESPONDENTS OBTAINING LICENSE Individual entrepreneurs According to the Law the licensing body must grant or deny the license and notify the applicant about its decision within 30 calen- 72% 9 business days dar days from the receipt of the application.19 on average 18% The survey data regarding the application procedure do not fully reflect compliance with the requirements imposed by the Law 7% (e.g., the 30-day requirement). Dehkan farmers and individual en- 3% trepreneurs spent on average 9 business days to obtain a license, while small and medium companies needed on average 25 busi- 1 to 7 8 to 22 23 to 40 above 40 days days days days ness days (see Chart 3.6). Small and medium companies This can be explained in a few different ways: · Legal entities might encounter more difficulties in applying for 41% 25 business days on average those licenses specifically requiring a legal-entity status; 31% · The requirements for legal entities are often more complex 20% than those for individual entrepreneurs (even when obtaining 8% the same license) and the collection of the documents as well as their analysis might require more time20; 1 to 7 8 to 22 23 to 40 above 40 days days days days · Legal entities might be specifically targeted for unofficial pay- ments. Thus by delaying the issuance of a license, officials can Dehkan farmers increase the pressure on them. 67% 9.3 business days on average This last point can be supported by the fact that start-ups, i.e., entrepreneurs who started their activity in 2005, spent less time 33% than existing businesses to obtain their licenses (see Chart 3.7). This result seems counterintuitive: existing businesses have already obtained at least one license and should be faster in dealing with 1 to 7 8 to 22 23 to 40 above 40 days days days days the process thanks to the experience they developed.21 However, existing companies are actually more dependent on Chart 3.7. DURATION receiving a certain license than start-ups, and as such might be OF THE LICENSING PROCESS IS LONGER more subject to deliberate delays in their application process to FOR EXISTING BUSINESSES increase rent-seeking opportunities, which result in unofficial pay- BUSINESS DAYS ments. Existing businesses 13 The difference can be better observed in some certain sectors of Start-ups 11 the economy such as retail trade, which is one of the most repre- sentative in the Tajik context (see Chart 3.8). 19Law "On Licensing of Certain Kinds of Activities," Article 10, Item 3. 20For example, for transport services an individual entrepreneur needs to provide only information about his car and himself. In contrast, a legal entity trying to get a license needs to provide more detailed information on the number of drivers, existence of medical and technical personnel, availability of the technical infra- structure for support of the vehicles, etc. Therefore, it takes longer to prepare this information and also for the licensing bodies to examine it. 21In fact, even taking into account the novelty of the licensing procedure intro- duced by the Law, it is not clear why start-ups should have an advantage in preparing and processing their documents. 50 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING In order to promote compliance with the 30-day time limit, a Chart 3.8. EXISTING BUSINESS IN RETAIL TRADE SPENT MORE simple mechanism has been introduced and successfully imple- TIME FOR LICENSING PROCESS THAN START UPS - mented in a number of countries, called the "silence is consent" principle (see Box 3.5). According to this principle: BUSINESS DAYS · Once an application has been officially filed, a maximum Existing 13 time limit is defined, within which the public administration businesses can formally: Start-ups 9 - Reject the application, motivating the reason for the act; - Request further documentation/clarification; · If the public administration does not perform any of the two "The Law sets specific norms for issuing licens- actions defined above after the time limit has elapsed (i.e., is es, but the licensing bodies under any pretext silent), the application will be considered implicitly approved drag out the license-issuing procedure..." and can be used as an authorization document (i.e., the - Entrepreneur, focus group participant public administration consent to the action). 3 BOX 3.5. PRINCIPLE "SILENCE IS CONSENT" IN SOME COUNTRIES Italy The principle "silence is consent" (silenzio assenso) was introduced within the Law "On Administrative Procedures" in Italy in 1990 to simplify administrative procedures and reduce the duration and number of direct interactions with state bodies. Ac- cording to this principle, if a state body does not reply negatively to the application it means that the applicant is authorized to conduct the applied action or activity. This rule currently applies to 194 different administrative procedures. Spain The principle "silence is consent" is set by the Law "On Administrative Procedures" of 1992. According to this rule, the state body has up to 6 months to respond to any request of the applicants (some licenses may require less time). If the state body does not respond, the applicant is vested with all rights to conduct the applied action or activity. Mexico The principle "silence is consent" was introduced in Mexico in 1995 by the Agreement "On Reduction of the Regulation of Entrepreneurship." As an example of this principle in action, City committees that oversee water usage and drainage systems have to consider an application within 19 days. If this committee does not reply, the principle "silence is consent" is in place. Applicant can conduct the applied action or activity. 3.3.2 COST OF LICENSING: STILL A RELEVANT BURDEN Chart 3.9. AVERAGE COST OF OBTAINING ALL LICENSES , BY TYPOLOGIES OF BUSINESS The cost of licensing varies by the typologies of business (see Chart SOMONI 3.9): 717 597 · Individual entrepreneurs spent 289 somoni ($90) for obtaining all necessary licenses (including official and unofficial pay- 288 289 322 ments); 82 · Small and medium companies spent 717 somoni ($224) for obtaining all necessary licenses (including official and unof- Individual Dehkan ficial payments); Small and entrepreneurs medium farmers · Dehkan farmers spent 82 somoni ($26) obtaining all necessary . . companies licenses (including official and unofficial payments). 2002 2005 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 51 LICENSING The costs of obtaining all the necessary licenses did not change "The licensing bodies treat legal entities with significantly in comparison to 2002 as far as individual entrepre- special attention. I own a small enterprise that neurs are concerned. Costs increased for small and medium com- provides transportation services. I spend much time and money to obtain the license because panies22 and declined significantly for dehkan farmers. Licensing the licensing body knows that there is no other fees for certain activities in the agricultural sector have been uni- choice for my firm except to obtain the license. An acquaintance of mine, an individual entre- fied in 2005, and, as a result, the overall cost for obtaining agricul- preneur who also provides transportation serv- tural licenses has decreased.23 This is indicative of the efforts of the ices, obtained the same license in 3 days, and he spent half as much..." Government to improve and reform the licensing regime. - Entrepreneur, focus group participant However, legal entities have had to make higher official and un- official payments. This confirms our conclusion that legal entities become more vulnerable before the licensing bodies in terms of getting/eliciting money. Chart 3.10. DISTRIBUTION OF THE COSTS INCURRED The cost of obtaining licenses can vary dramatically for SMEs, BYSMES DURING THE LICENSING PROCEDURE much like the time frame required to obtain one. In fact, although % OF RESPONDENT UNDERGOING LICENSING the average cost of licensing is about 365 somoni ($114) almost 35 25% of the licenses cost more than 400 somoni (see Chart 3.10). 25 The costs of the licensing procedure seem to be very different 17 even considering the same sector and typology of business (see 14 Chart 3.11). To obtain a license to conduct retail trade transac- 9 tions, 33% of individual entrepreneurs spent less than 100 somoni. At the same time, 24% of individual entrepreneurs spent more than 400 somoni for the same procedure. These figures confirm the assumptions that: below · Licensing procedures are not transparent; 100 100 to 200 200 to 400 400 to 800 above 800 somoni somoni somoni somoni somoni · Unofficial payments still prevail in the licensing procedure. Chart 3.11. DISTRIBUTION OF THE COSTS FOR LICENSING It should be noted that licensing costs could be significant in par- PROCEDURE FOR RETAIL TRADE BY INDIVIDUAL ENTREPRENEURS ticular for smaller sized businesses and start-up ones in particular, % OF RESPONDENT UNDERGOING LICENSING representing a significant barrier to entry. For this reason it would be advisable to introduce the possibility to pay on an installment 33 33 basis. 10 15 9 below 100 100 to 200 200 to 400 400 to 800 above 800 somoni somoni somoni somoni somoni 22Although it did not significantly change in real terms. 23For instance, the cost of the license to produce and process tobacco was 445 somoni ($150) in 2002 (Decision of the Government of RT No. 131, May 7, 1999). After the introduction of the Law, the unified fee equalled 14 times the minimum wage (in 2005 it would make 168 somoni, or $52.5). This fee applies to all general activities under which all agricultural activities are classified (see more details on specific activities in Annex), thus leading to significant decreases in obtaining licenses for products like tobacco. 52 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING 3.3.3 UNOFFICIAL PAYMENTS: STILL A COMMON WAY TO RESOLVE Chart 3.12. PRACTICE OF UNOFFICIAL PAYMENTS AMONG ISSUES COMPANIES ARE DECREASING % OF RESPONDENT UNDERGOING LICENSING WHO MADE UNOFFICIAL PAYMENTS Unofficial payments still play a significant role in obtaining a li- cense. There is a strong correlation between the share of unofficial Dehkan farmers 25 payments and the total cost of licenses, with 25% of respondents 17 acknowledging having made unofficial payments as a solution to Small and medium 24 companies 33 the problem of obtaining a license. This figure improves in com- Individual 26 parison to 2002, where 33% of entrepreneurs made unofficial pay- entrepreneurs 36 ments (see Chart 3.12). . . 2002 2005 However, unofficial payments are not the only way of solving is- Chart 3.13. UNOFFICIAL WAYS OF SOLVING ISSUES ARE sues. It is very common to use other methods such as presents, COMMON AMONG SMES lunch invitations, involving friends or relatives to solve issues. As the % OF RESPONDENT UNDERGOING LICENSING WHO MADE UNOFFICIAL PAYMENTS results show, these additional unofficial ways of solving the issues 3 are also common among small and medium businesses: 40% of 15 40 entrepreneurs made use of them (see Chart 3.13). 25 As the survey shows, the existing ("old") businesses use unofficial ways more frequently than start-ups when obtaining a license, as they are more vulnerable in case the license is denied (see Chart 3.14). According to the findings of the survey, none of the start-up Unofficial Other Overall unofficial payments unofficial ways ways of solving dehkan farmers underwent the licensing procedure in 2005. issues Remarkably, entrepreneurs pay different amounts for a license in Chart 3.14. EXISTING BUSINESSES RECUR MORE FREQUENTLY TO different state agencies, although legislation foresees a unified UNOFFICIAL WAYS OF SOLVING ISSUES state fee (see Chart 3.15). This again confirms non-transparent % OF RESPONDENT WHO MADE UNOFFICIAL PAYMENTS procedures and the existence of unofficial ways of solving the is- sues. Individual 26 entrepreneurs 36 Small and medium 49 . . companies 52 Start-ups Existing businesses Chart 3.15. AMOUNT SPENT FOR OBTAINING A LICENSE DIFFERS BY GOVERNMENTAL AGENCIES COST OF ONE LICENSE IN SOMONI 543 484 354 350 308 282 185 125 Ministry of Justice Ministry of Agri- Ministry of Industry State Scien- Ministry of Ministry of Health Ministry of Energy Ministry of Trans- culture tific Centre of the Economy and portation Medicine Trade Examination (Ministry of Health) Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 53 LICENSING 3.4 economic impact of licensinG SMEs undergoing the licensing procedure spend not only money BOX 3.6. ADDITIONAL COSTS INCURRED DURING for obtaining all necessary licenses, but a significant amount of ADMINISTRATIVE PROCEDURES time and human resources as well. To better demonstrate this ef- fect, we estimated the total loss of time and work in monetary Entrepreneurs spend not only financial resources terms (see Box 3.6). to deal with administrative procedures. In addi- tion, there is an opportunity cost related to the As a result, the total costs for businesses consist of two elements: time of employees performing administrative · Direct costs for obtaining all necessary licenses (including of- duties, as well as to the lost profits when the start ficial and unofficial payments); of an activity is stalled by the need to obtain the · Indirect costs caused by loss of labor resources redirected to necessary licenses. obtaining a license, and loss of potential profits for start-ups, which cannot begin operations without the necessary licens- In our economic impact estimates we include: es.24 According to our approach, licensing costs vary between 2% and For existing businesses: 16% of annual profits (see Chart 3.16).25 - Direct administrative costs: Eo + Eu; - Labor costs: w*d. In particular, legal entity start-ups appear to bear most of the li- For start-ups: censing costs: 3,100 somoni ($969), which equals 16% of the an- - Direct administrative costs: Eo + Eu; nual profits. - Lost profits: (P*s/b). Chart 3.16. ECONOMIC IMPACT OF THE LICENSING BURDEN RANGES BETWEEN 2% where: AND 16% OF ANNUAL PROFITS · Eo - official expenses SOMONI · Eu - unofficial expenses · d - business days of full-time employee time · dedicated to licensing procedure, 8% 10% 4% 16% 2% of annual of annual of annual of annual of annual · w - daily employee salary profits profits profits profits profits · P - annual profit losses, · s - days spent for the procedure · b - number of business days per year in the economy 3,100 800 315 395 90 . Individual . Small and medium com- entrepreneurs panies Dehkan farmers26 Existing businesses Start-ups 24Lion's share of the burden is represented by the "additional" costs in the form of lost profits. 25Calculation is made for SMEs which underwent licensing procedure. 26 Start-up dehkan farmers did not obtain any licenses in 2005. 54 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING 3.5 duration of a license: a stronG deterrent to lonG-term investments The duration of a license -- the time frame in which the licensee can carry out the licensed activity before re-applying -- is a rel- BOX 3.7. DURATION OF A LICENSE BEFORE AND evant aspect of licensing. AFTER AMENDMENTS TO THE LAW ON LICENSING validity law on amendments As mentioned above, the Law provides two different approaches licensing to (2004) the law on to determine the validity period of a license: licensing · The standard duration of a license is 5 years; (2006) · For specific activities the validity period of a license is not less General activi- Not less 5 years ties than than 3 years.27 5 years Special activi- Not less Not less than 3 ties than 3 years The legislation also provides an additional provision for individual years entrepreneurs operating without hired employees. The individual 3 For individual Same as From 1 to 5 entrepreneur can apply for a license valid from one to five years entrepreneurs29 above years (see Box 3.7).28 According to the findings, the average duration of a license in Chart 3.17. DURATION OF THE MOST ISSUED LICENSES DOES practice is 10.4 months (see Chart 3.17). This clearly does not re- NOT EXCEED ONE YEAR PERIOD flect the provisions of the Law on Licensing. Even before the 2006 amendments,29 licenses should have been valid for at least 5 years % OF RESPONDENTS UNDERGOING LICENSING for general activities (see Box 3.7). Individual entrepreneurs 84% average validity On one hand, this phenomenon could be due to the fact that 10 months the licensing bodies did not completely introduce the provisions of the new legislation into their day-to-day practices. On the other hand, it illustrates that the state bodies do not always comply with 6% 5% 4% 1% provisions of the law. A better assessment of the impact of the new legislation can be done in a follow-up survey. Small and medium companies The duration of licenses does not differ significantly among busi- 81% average validity 12.5 months ness typologies. Nevertheless, a direct correlation exists between the amount paid to obtain a license and the duration of it: in fact small and medium companies obtained the longest-lasting licens- es, while dehkan farmers got the shortest. 7% 1% 10% 1% By comparing licensing costs between start-ups and existing busi- Dehkan farmers nesses, we notice that the latter faced higher payments, clearly 100% average validity correlated to higher unofficial payments (see Chart 3.18). This is 8.3 months to testify that the short-term licenses not only defer long-term in- vestments, but also stimulate rent-seeking opportunities by gov- 27According to the Law "On Licensing" the specific activities include: banking ac- tivity, foreign currency exchange transactions, the activity in the field of electric up to 1 year 1-2 years 2-3 years 3-5 years more than 5 communication. 28Lawmakers used a flexible approach to offer individual entrepreneurs the choice years to apply for licenses valid between 1 and 5 years. For example, if a person wants to work as a taxi-driver for just one year, he may apply for a 1-year license as an individual entrepreneur and pay a fee equivalent to 2 minimum wages only, while a 5-year license would cost 10 minimum wages. 29Introduced in July 2006. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 55 LICENSING Chart 3.18. EXISTING SMALL AND MEDIUM COMPANIES ARE ernment officials. In fact, once established, a business is more de- UNDER MORE PRESSURE TO GET A LICENSE pendent on the renewal of the operating license rather than a SOMONI start-up. 619 A strong regional difference can also be observed, possibly due to the relationships that entrepreneurs and officials have built at 382 the local level (see Chart 3.19). SMEs that have better relation- 266 269 ships with local authorities are able to obtain licenses with longer validity periods. Additionally, this could be due to the fact that licensing officials are more flexible at the periphery rather than in . . Individual Small and central districts like Dushanbe and Khudjand. entrepreneurs medium companies Chart 3.19. DURATION OF A LICENSE DIFFERS REGIONALLY Start-ups Existing businesses MONTHS Kurgan-Tube district (Khatlon province) 16 Kulyab district (Khatlon province) 13 Districts of Republican Subordination 11 Sughd province 10 10.4 months Dushanbe 7 on average In a market economy, the duration of licenses plays a significant BOX 3.8. LICENSING PROCEDURES IN GEORGIA role for investment consideration. The length of time set by the Tajik legislation does not fully meet the requirements of a market According to the legislation of Georgia, licenses economy, as a long-term license would ensure a potential inves- are permanent for the majority of activities sub- tor an adequate time for return on his investments. In this con- ject to licensing. In case the licensee violates the text, a more flexible approach is required. The government par- requirements of the license, the regulating body tially addressed this issue for individual entrepreneurs, providing has the right to suspend the license. The licensee entrepreneurs with the choice to determine the duration of their then has 3 months to rectify the problem or risk licenses. This approach could be expanded for all typologies of having the license revoked. business, giving all entrepreneurs the option to apply for: · Medium and long-term licenses; Introduction of transparent and simplified proce- · Permanent licenses. dures allowed the licensing bodies of Georgia to reduce unofficial payments drastically. Conse- The businesses could themselves determine what they prefer ac- quently, 90% of the licensees did not make unof- cording to their strategies on the market, and not be deterred by ficial payments to obtain their licenses. the risk incurred in renewing short-term licenses. In this context, the experience of Georgia is very interesting (see Box 3.8). Source: IFC (2004a) An additional, complementary measure, would be to allow for payments in installments, on a yearly basis (see section 3.3.2) in or- der to facilitate market entry for those players with limited access to financial resources. So that they do not apply for short-term licenses simply on the basis of financial constraints. 56 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING According to the most recent amendments, the legislation de- fines a set of situations in which a license could be suspended or BOX 3.9. SUSPENSION AND CANCELLATION OF revoked (see Box 3.9). LICENSE In particular the law foresees that a license should be revoked According to the Law a license can be sus- only by court decision, unless payments for licensing fees are not pended in case of repeated or relevant viola- made. tions of license requirements. The license can be suspended only in extraordinary cases, when Nevertheless, the cases in which the license could be suspended there is a threat to consumers' health or to the are not precisely defined, leaving a certain degree of discretion- environment, and other options are not possible. ary power to licensing bodies. Clearly defining the cases of pos- The licensing body should set a time-frame (no sible suspension as well as entitling the court to suspend a license more than 3 months) for a licensee to eliminate would help secure entrepreneurs' right and facilitate business en- the violations. If the violations are not eliminated try. within a set term, the licensing body is obliged to 3 appeal to court for a license cancellation.30 3.6 access to information Legislation clearly defines the situations in which Obtaining information on the licensing process still remains difficult a license can be revoked: for entrepreneurs. · By a court decision, if the licensee violates the licensing requirements and if the cir- This is also confirmed by the survey findings (see Chart 3.20) as well cumstances leading to the suspension of as by a direct experiment conducted by the IFC team (see Box the license have not been eliminated within 3.10), which shows some reluctance from government bodies to the set timeframe (6 months); share complete informations on licensing requirements. · By the decision of the licensing body, if the licensee failed to pay the license fee within the set timeframe (3 days).31 Chart 3.20. PERCEIVED DIFFICULTY OF OBTAINING INFORMATION ON THE LICENSING PROCESS BY GOVERNMENTAL AGENCIES , % OF RESPONDENTS UNDERGOING LICENSING PROCEDURE Ministry of Economy and Trade 17% 50% 4% 29% Ministry of Education 6% 54% 17% 23% Ministry of Industry 19% 40% 3% 38% State Construction and Architecture Committee 4% 52% 11% 34% Ministry for Social Protection 19% 34% 21% 26% Ministry of Health 9% 44% 13% 35% State Scientific Centre of the Medicine Examination 5% 45% 14% 36% Ministry of Agriculture 7% 38% 16% 38% Transport Inspection (Ministry of Transportation) 8% 23% 38% 31% 75% . 25% 50% 75% Very easy .50% Rather easy . 25% 0% Very complicated . Rather complicated 30Law on Licensing, Article 6 and 14. 31Law on Licensing, Article 14. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 57 LICENSING BOX 3.10. EXPERIMENT ON OBTAINING INFORMATION IN SOME STATE BODIES IN JULY 2006 To evaluate the accessibility of information from the state, volunteers visited different state bodies and asked for details about the licensing procedure. Below are the main findings of this experiment. Ministry of Agriculture Different departments of the ministry issue certain licenses such as: private veterinary activity, manufacturing of to- bacco, production of ethyl spirit, etc. The central apparatus did not provide any information. It is necessary to apply directly to the relevant department that issues the licenses. Access to information depends on how one introduces himself. The volunteer who introduced himself as an employee of an international organization (in this case, IFC) was denied any access to the information and had to apply in writing. He was also told that the application would take one month. The volunteer who introduced himself as an entrepreneur obtained only general information (list of documents, official cost, etc.), which was outlined on an announcement board. The entrepreneur was advised to apply during a certain period (for instance, if an official plans his vacation, then before his leave). More detailed information about the proce- dure is hard to obtain. Other entrepreneurs informed the volunteer that there are faster ways to obtain the license ­ i.e., use of unofficial payments. Ministry of Health Protection Different departments of the ministry issue certain licenses such as: private medicine activity, technical service of medi- cal equipment, pharmaceutical activity, etc. The representative of the ministry refused to share any information. Ministry of Justice The ministry issues licenses for provision of juridical services, with the exception of representing the interests of individuals and legal entities in law-enforcement bodies and courts. It is very easy to obtain information in this state body. In the licensing unit (Room 20), the list of documents necessary for obtaining the license is displayed. There is a reminder to check the accuracy of all documents before submitting them, and a posting of the expected wait time for a license ­ 1 calendar month. The following documents are required in the ministry, although they are not required by the Law or Regulation: · 2 years experience as a lawyer in a company; · Reference from the Ministry of Internal Affairs on absence of convictions; · History of employment; · Photo (4x6 cm); · Copy of passport. Ministry of Economy and Trade The ministry issues licenses for tourism activity. It does not take longer than 10-15 minutes to obtain the list of requirements for a license in this activity. At one depart- ment, the applicant received the list of necessary documents, length of time of the application process, and a list of required documents. Many of these are not regulated by the Law or the Regulation: · Graduation Certificate of the short-term courses on tourism business (at least 2 weeks); · Employment history. 58 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING recommendations 1. Extend the duration of licenses and introduce permanent licenses. This can be achieved by: 1.1 Introducing by law a minimum 5-year validity period for all licenses (as in most countries); 1.2 Identifying licenses that can be issued once, i.e., permanent licenses that are revoked only if infringements are identified; 1.3 Enforce provisions of the law on duration of issued licenses to avoid the current discrepancy between legal terms and practical ones. Expected impact By extending the validity period of licenses, the government will further reduce the barrier to market entry that will: · Provide an incentive for entrepreneurs to enter into the market, by ensuring that they have sufficient time to 3 make a return on their investment without the constant risk of losing their license to operate. This will increase the number of active companies and the size of the productive investments,32 which are both quite limited at the moment; · Reduce the immediate costs of doing business by reducing official and unofficial payments, as well as time spent dealing with license renewals. This time could be translated into greater profits, more taxes paid, and more investments. These changes will lead to: · Higher profitability of existing companies would result in more taxes paid, compensating for the reduction in licensing fees; · More investments into the economy, which in turn will produce larger and more solid companies to increase employment and tax revenues; · More start-up companies, especially in sectors that the Government considers to be a priority, resulting in higher employment and tax revenues. 2. Introduce the possibility, particularly for individual entrepreneurs, to obtain long term licenses, while at the same time paying in yearly instalments. This would secure their rights for a longer time frame and reduce their financial burden, particularly heavy for cash-constrained individuals. Expected impact The immediate benefits of introducing payments by instalment for licenses would be two-sided: · For entrepreneurs: it would reduce the immediate burden for individuals lacking access to funding, resulting in: - Easier entry for start-up businesses, leading to more companies active in the economy to generate profits and state tax revenues; - Extended licenses, as applicants would apply more frequently for longer term ones, resulting in more secure rights and lower unofficial payments. · For the state budget: it would secure a more stable revenue flow. 32For more details on investments by SME sector see Chapter 1. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 59 LICENSING 3. Reduce the duration of the license issuing process by enforcing the existing 30-day limit and introducing transpar- ency into the decision process. This can be achieved by: 3.1 Introducing a "silence is consent" principle for all licensing bodies at the end of the 30-day consideration pe- riod, which would automatically grant a license in case no explicit refusal decision is made (the application form in that case should represent the license document); 3.2 Requiring licensing bodies to substantiate their refusal or delay of the application; 3.3 Introducing a monitoring system that allows ex-post verification of the average length of the licensing process; 3.4 Introducing a simplified process (with shorter time, e.g., 15 days) for renewals and repeated applications after a refusal. Expected impact The immediate benefits of enforcing an application review time limit and bringing transparency into the decision- making process will be: · Reduced time spent by entrepreneurs dealing with the procedure, leading to higher profits and higher state tax revenues; · Reduced unofficial payments, as a result of the more transparent decision-making process, that in turn could create higher profits and higher tax revenues. 4. Evaluate the need for a further reduction in licensed activities to include only those activities which: · Require strict government oversight to protect health and safety; · Deal with the allocation of scarce resources or with natural monopolies; · Do not foresee specific permit requirements.33 In particular it would be advisable to: · Reconsider the licensing requirements for sectors not directly falling into the above-mentioned categories (e.g., tourism, trading of jewelry, precious stones and metals, maintenance of motor vehicles and railway transports, repair and maintenance of cargo lifting devices, etc.); · Launch a comprehensive review of licensing and permit requirements for specific sectors, to identify potential overlaps and select the most appropriate form of governmental control (either licensing or permit). Expected impact By further reducing the number of activities subject to licensing, the benefits will be: · Reduced expenses for entrepreneurs dealing with the procedure, which could in turn increase their profits and generate additional tax revenues; · Further entry into the relevant sectors (thanks to the reduced barriers to entry) with positive effects on private sector profits and tax revenues; · Faster development of priority sectors for the government (e.g., tourism); · Higher competition in the sectors impacted by reduced licenses that could represent a market-oriented alter- native to regulation; · Less government resources dedicated to administrative procedures, redirecting the savings for different needs. 33Detailed analysis for possible further reduction of the number of activities is pro- vided in FIAS (2006). 60 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING 5. Reduce the scope of licensing suspension. In particular by: 5.1 Clearly defining for each licensing agency a "closed list" of situations requiring a license suspension; 5.2 Evaluating the option to subject license suspension to court approval. Expected impact By reducing the scope of license suspension, entrepreneurs will gain more secure rights, leading to: · Fewer cases of unofficial payments to licensing bodies; · Reduced entry costs, leading to more companies active in the economy, generating profits and state tax revenues. 6. Increase entrepreneurs' awareness of licensing procedures through the publication and dissemination of informa- tion regarding procedures, costs and validity of licenses. This can be achieved by: 6.1 From the government side: by enforcing information requirements for each licensing agency. Each agency 3 should be required to produce and distribute a set of application documents, sample of completed applica- tions and relative regulations free of charge to each applicants. A related implementation mechanism, provid- ing for fines in cases of non-compliance should also be put in place; 6.2 From the private sector side: business associations and other non-governmental organizations should develop information materials to be disseminated within the country to their members and SMEs. Expected impact By increasing the legal awareness of entrepreneurs, the benefits will be: · Reduction in the need for unofficial payments, thanks to their greater empowerment, with direct impact on profits and tax revenues; · Reduction in the time needed to deal with the procedure, as the information will be more readily available, having a positive impact on profits and in turn on tax revenues. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 61 LICENSING annex attachment 3.1. issuing bodies The state bodies that issue licenses most frequently reflect the legislative changes related to the introduction of the licensing law. In fact local executive authorities of oblasts, rayons and cities (Khukumats) and TajikPisheProm (Commit- tee for Food and Processing), which were among the largest issuers of licenses in 2002, do not appear in the ranking, as Khukumats are no longer eligible to issue licenses, and the licensing authorities of TajikPisheProm were transferred to the Ministry of Agriculture. The Ministry of Economy and Trade, in charge of licensing tourism activities, issued the most number of licenses in 2005. This ministry has also become responsible for issuing fiduciary licenses to patent attorneys, which may explain the rise as well as an overall increase in the number of tourism businesses in Tajikistan. The growth in the number of licenses issued by the Ministry of Health is due to the increase of the number of private practices, especially in the Dushanbe area and Sughd province, which are subject to licensing by this authority. The dedicated licensing department of the Ministry of Transportation has become responsible only for international passengers and freight transportation. Thanks to improved access to international transportation routes, international freight transportation has increased in Tajikistan. Other transportation activities subject to licensing are dealt with at the Transport inspection of this Ministry. As mentioned above, the Ministry of Agriculture took over the licensing authorities of TajikPisheProm in 2005; therefore, there is a remarkable increase in licensing activity compared with 2002.34 Chart 3.21. LICENSES OBTAINED IN 2002 AND 2005, BY GOVERNMENT AGENCIES % OF RESPONDENTS OBTAINING LICENSES Ministry of Economy and 21 Trade 9 Ministry of Health 13 8 Ministry of Transportation 12 Ministry of Agriculture 11 14 State Scientific Centre of the Medi- cine Examination (Ministry of Health) 9 Ministry of Energy 7 0.6 Ministry of Justice 4 2 Ministry of Industry 3 Khukumats 25 Transport Inspection 6 16 Committee for Food and . . Processing 10 2002 2005 34Except licensing for the sale of seeds and veterinary services, this Ministry issues licenses for the trade and production of ethyl spirit, alcoholic products and products containing spirit. 62 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING attachment 3.2. comparison of the licensing legislation in different countries tajikistan Belarus Georgia russia ukraine Law On Principles Decree of the Presi- of Issuing Licenses Law On Licensing Law On Licensing The regulating legal Law On Licensing dent On Licensing and Permits for Car- Specific Activities, Specific Economy act Specific Activities, rying out Business August 8, 2001. Activities, May 17, 2004 Specific Activities, July 14, 2003 Activity and Law (amended Febru- June 1, 2001 On Licenses and ary 7, 2005) Permits Dues Activities that can Licensing is done Activities that can damage the rights, for the sake of na- damage the rights, Protection of the legal interests, tional safety, public legal interests, rights, legal inter- health of the citi- order, protection of health of the citi- ests, life and health Licensing Principle zens, defense and rights and liberties, zens, state defense of the citizens, safety of the state, morals, health of and safety, the protection of the the cultural herit- the population, cultural heritage of environment and age of the citizens environmental the citizens of the ensuring the safety of RT protection Russian Federation of the state 3 Number of activities subject to licensing 66 49 36 110 68 For general activi- Most licenses are ties, 5 years permanent, but can be suspended Duration Not less than 3 5 ­ 10 years or revoked entirely Not less than 5 Not less than 3 years for special if the licensee does years years activities (Article 18) not eliminate the infringements within 3 months Time to issue the Up to 30 days after Up to 30 days after Within 10 business license receipt of the ap- Up to 45 days receipt of the ap- Within 45 days days after receipt plication plication of the application attachment 3.3. extract from the law of the rt "on licensing of certain kinds of activities" Article 18. Special list of the activities that requires a license 1. According to the present Law, the following activities are subject to special licensing procedures: · carrying out banking transactions; · dealing with foreign currency; · manufacturing and selling of ethyl alcohol, goods containing alcohol and spirits; · electrical communication; · mining and geological excavations; · use of objects of flora and fauna listed in the Red Book of Tajikistan of endangered species; · activities in the field of nuclear power. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 63 LICENSING of TV and radio for radio gas coal oil, other Hydro meteorol- ogy related activities Usage satellite and frequen- cies and broadcast- ing Extraction, processing, exploration of and finance at- consulting services Patent torneys busi- tourism, hotel ness oil oil, of gas activities and goods their consumer services Education- al Opera- tion and networks Storing gas the from processing communi- cation General electrical commu- nications activities (phone, mobile phones, internet, ...) transport medical services pharma- ceuticals catering of of and of fer- gas derived of metals and trade Import- export tobacco products Sales alcoholic products Trading oil, the products Sale rous/non-fer- rous scrap waste setup equip- power construc- tion Installation and of facilities and ment licensing to agriculture subject of of of process- ing agriculture production Manufac- turing tobacco products Manufac- turing alcoholic products activities and and 3.4. consum- goods and electric and ferrous/ precious production of ers Manu- facturing, transmis- sion distribution of power Collect- ing processing of non-ferrous scrap waste Processing of metals stones of on of of of and sectors envi- and field and attachment Bodies ministry agriculture and ronment protection state service surveil- lance regulation thein commu- of nication ministry economic develop- ment trade ministry education ministry energy industry 64 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING of private prepa- of herbs other Activities of pension funds Usage infection agents Collecting of and ration medicine finance Exchange activities (stock, commod- ity) Insurance activities Securities markets audit and ) at- insur- consulting services Audit activities (general audit, of ance investment compa- nies Lawyers and torneys busi- tourism, hotel ness of 3 consumer services Pawnshops Gambling activities Mainte- nance medical equipment Employ- ment related activities communi- cation transport medical services Private medical practices Private veterinary service for c of psy- of psy- narcotic pharma- ceuticals Pharma- ceutical activity Breeding of plants scientifi purposes Trade narcotics and chotropic substanc- es) Trade narcotics and chotropic substanc- es) catering of ...) of and of fal- and cation trade Trading palae- ography products protected from sifi (securities, checks, Trading jewellery, precious metals stones Trading civil military weapons and in refi of construc- tion Assem- blage, repair service eldfi safety agriculture of process- ing agriculture production ...) of consum- goods cation disinfect- production of ers Manufac- turing palae- ography products protected from falsifi (securities, checks, Production of ants of of on of of sectors medi- activity social labour Bodies ministry finance ministry health state supervision centre pharma- ceutical and cal ministry internal affairs ministry justice ministry of and security Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 65 LICENSING stor- (en- and industrial of and other Manufac- turing, age distribution of explosives Use protected orafl fauna dangered species) finance assess- of consulting services Evaluation and ment properties busi- tourism, hotel ness of for of ve- and trans- industrial consumer services Mainte- nance motor hicles railway transport Technical services air port Evaluation of safety Collection, storage and disposal dangerous waste communi- cation and air and of lifting services road cargo of of pas- transport Transporta- tion by railway Operation of sengers and terminals, transporta- tion Repair mainte- nance cargo devices Transpor- tation industrial explosives Transpor- tation dangerous waste medical services for and medical pharma- ceuticals Harvest- ing collection of herbs medical purposes catering py- of trade Sale rotechnical devices of and and infra- of car- works con- equip- power construc- tion Design, construc- tion repair road structure Design construc- tion buildings Geodesy and tography (on connected with struction) Repair of facilities and ment agriculture of process- ing agriculture production of with consum- goods devices amma- and production of ers Manufac- turing pyrotechni- cal Work explosive, infl ble, chemically hazardous industrial facilities for of of of sectors regu- in field com- for and de- state over in state the safety mining and under Gov- rt Bodies state service supervision and lation the transporta- tion state mittee invest- ment managing of property head partment of surveil- lance the works industry and agency construc- tion architec- ture the ernment of state supervision service environ- ment protection 66 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING of of earth other Exploring, use "interior" the finance consulting services busi- tourism, hotel ness in in in of 3 con- of eldfi consumer services Activity involved protection of dentialfi informa- tion Detec- tion electronic devices premises and industrial facilities Activities the electronic digital signatures radio and communi- cation Televi- sion, broadcast- ing audiovisual presenting transport medical services of sub- and pharma- ceuticals Trade narcot- ics psycho tropic stances) catering of ob- to private trade Trade equipment used tain information and (on works land construc- tion Geod- esy cartogra- phy the connected with manage- ment) agriculture of process- ing agriculture production of of consum- goods obtain production of ers Manufac- turing equipment to private informa- tion Manufac- turing information protection equipment for the rt of for of sectors man- car- of radio state for Gov- televi- the rt Bodies agency land agement, land-sur- veying, and tography under Govern- ment committee of sion Broadcast- ing central agency protection of secrets agency control drug-deal- ing head depart- ment Geology under ernment of Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 67 LICENSING of of other Use radioactive substances Use atomic energy with and finance Banking operations Banking opera- tions precious stones metals Drug-Dealing of consulting services Audit banking activities Illegal of busi- Control tourism, hotel ness Tourism activity for Agency consumer services and Affairs communi- cation Internal of transport Ministry Health, medical services of Ministry of pharma- ceuticals catering representatives of trade consists which car- construc- tion Geodesy and tography Commission,a agriculture by of issuedis process- ing agriculture production of as consum- goods of production of ers Use sources ionization radiation (such )srotareneg license The- (1) of sectors of space, car- and science youth Bodies national Bank tajikistan national agency the Geodesy and tography academy of committee on affairs, sport tourism 68 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 4. permits PERMITS 4. permits Permits represent an additional administrative hurdle for establish- main findinGs ing and running a business in Tajikistan. The permit system is a re- sult of two complementary forces: the bulk of permits, arising from Soviet-era technical requirements, along with permits resulting · About 60% of entrepreneurs needed to from new, market-oriented regulations, which have been added obtain at least one permit. On average, somewhat chaotically over the past 15 years. The overall system entrepreneurs need 2 permits to conduct has never gone through a proper rationalization and represents a business activities. heavy, and sometimes unnecessary, burden for SMEs. In addition, the system is opaque, as many regulations are not disclosed to · Permits are more frequent among start- the general public. up businesses (2/3 of entrepreneurs) and among small and medium companies (al- Permits are widespread (two out of three Tajik entrepreneurs can- most 3/4 of entrepreneurs). not start their businesses without obtaining permits first) and permit issuance can be extremely time consuming. The absence of es- · Duration of the application procedure tablished legislative norms and requirements, as well as difficulties and the cost of permits are highly variable: in accessing information, leave room for rent seeking opportuni- ties and force entrepreneurs to use unofficial payments. - Individual entrepreneurs spend on av- erage 71 somoni ($22) and 8 working Taking into account official and unofficial payments and missed days to obtain all necessary permits; business opportunities, the permit system generates a substantial burden for SMEs. In particular, it represents a barrier to entry for - Small and medium companies spend start-up businesses, reaching up to 12% of the annual profit of a on average 365 somoni ($114) and 34 small and medium company just launching its activity. working days; The problems indicated above are, to a great extent, due to the - Dehkan farmers spend on average 44 absence of an integrated system regulating the purposes and somoni ($13) and 4 working days. functions of permits: the areas of their application, the bodies is- suing them, the process cost and timeframe of issuance and can- · Existing businesses are under pressure to cellation. obtain a permit, since they are more vul- nerable if the permit is denied. Permit reform is not only necessary to reduce the administrative burden on entrepreneurs, but it is also a needed complement · Nearly half of entrepreneurs who obtained to the reforms developed so far by the Government of Tajikistan a permit in 2005 resorted to unofficial solu- in the area of licensing and inspections. The risk is that without tions. a proper intervention, a proliferation of permits might undermine the progress done in the other two areas. 70 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS 4.1 permits: the leGal framework According to the Tajik legislation, SMEs can start their activity from the moment of state registration, with the exception of activities BOX 4.1. EXAMPLES OF DIFFERENT PERMIT-LIKE requiring a license.1 DOCUMENTS However, the survey reveals that in most cases entrepreneurs must 1. Permit: authorization of the issuing body giv- also obtain one or more permits. Two out of three entrepreneurs ing the applicant the right to accomplish starting their activity in 2005 received permits for organization and an action and/or realize an activity; development of their business. For those businesses, obtaining a 2. Approval: consent of the issuing body with permit is a necessary prerequisite for starting their activity. the accomplishment of the activity and/or realization of activity; A permit is a document that gives the applicant a right to under- 3. Conclusion: a resolution based on an au- take a specific action. Tajik legislation does not provide a unified thorized body's examination or analysis of definition of a permit. As a result, a number of permit documents goods/products, regarding the possibility fall into the definition of permits (for the purpose of this report, a to perform an activity and/or realization of "permit" will be used to refer to any type of permissive document activity.2 as defined in Box 4.1). The absence of a normative definition cre- ates confusion, both among issuing bodies and entrepreneurs. Additionally, a permit is very often confused with a license, which 4 is a special permit to conduct an activity on a regular basis. The current permit system in Tajikistan has two origins: BOX 4.2. LEGAL BASIS OF PERMITS IS OFTEN 1. The original principles and technical requirements governing UNCLEAR permits were elaborated during Soviet times and have not been modified since, despite the changes that took place in · According to Article 78 of the Law of RT "On the economy and society. In particular, some of these rules Normative Legal Acts," all acts of state and are still based on old technological principles; local authorities, self-governing bodies, set- 2. In addition, during the past 10-15 years, the government tlements and villages come into force after adopted a number of norms in an effort to adapt to and reg- examination and registration in the Minis- ulate the development of a market economy. try of Justice of RT and official publication in newspapers and magazines of the state The result of these two driving forces is a system characterized by bodies. However, conducted analysis of the overlaps and inconsistencies due to the lack of a systematic ap- legislation reveals that some acts relating to proach. permits, although applied in practice, did not go through this examination procedure The lack of overarching principles governing the permits system (see Attachment 4.2 in Annex); has led to: · The Code of Administrative Violations of RT lists more than 50 cases of administrative re- · The proliferation of permits, i.e., the introduction of a number sponsibilities in cases of absence of permits of permits from different government bodies without a clear to engage in certain activities. Still, the le- legal basis (see Box 4.2) that are sometimes incompatible with gal requirements for these permits (and the the requirements of a market economy; administrative responsibility in case of their · The absence of homogeneous rules and procedures. For ex- absence) are not foreseen by the law. ample, the permits system in most cases requires that entre- 1 Articles 24 and 51 of the Civil Code of RT. 2 E.g., laboratory analysis of market products' compliance with sanitary norms. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 71 PERMITS "... and problems consist not only in obtaining preneurs renew their permits annually, regardless of whether permits, but also in the need to obtain them an- their business has undergone substantial changes. This adds nually..." instability to the terms of entrepreneurial activity. -Entrepreneur, focus-group participant European countries have long been in search of the optimum bal- ance between freedom of entrepreneurship, protection of the population, and state regulation. This has led to defining certain principles of state regulation, which could also be partially ap- plied in Tajikistan (see Box 4.3). BOX 4.3. PERMITS IN THE EUROPEAN UNION3 Basics Permits in the European Union are based on risk management. Permits are used as a tool to protect consumers' health and safety and to protect the environment. Constitutional courts prevent abuses, overseeing the list of permits introduced by the state bodies. Overall constitutional principles: - Parliamentary law should define whether a specific activity requires a permit; - A permit can only be required and issued if envisaged by the law. Law defines key criteria: - Objects and activities subject to permits; - Material and procedural criteria for issuing permits; - Responsibility of permit issuing bodies; - Fees associated with issuing permits; - Conditions for revocation of permits; - Opportunities for appealing decisions and other legal measures in cases of denial or issuance delay (such as "silence is consent"). Types of permits: - Administrative preventive permits: i) as a condition to undertake and commence certain activity; ii) issued by a single decision of a public institution (e.g., environmental permits, construction permits); - Registration and notification system: i) individual decides whether he/she can meet the conditions of the law; ii) activity can be commenced after registration or notification; iii) public institution is entitled to control the fulfillment of the defined conditions and criteria and can prohibit to carry out an activity (i.e., catering services, retail food shops). 4.2 overall assessment: procedures are most complicated for small and medium companies Two out of five entrepreneurs obtaining permits consider the over- all procedure as complicated or very complicated. Remarkably, small and medium companies seem to face the most difficult situ- ation (see Chart 4.1), despite their greater resources (human and material resources, higher educational level to deal with proce- 3 Based on materials of republican conference "Permits and Approvals in Entrepre- neurship Activity," Minsk (Belarus), December 20, 2006. 72 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS Chart 4.1. ASSESSMENT OF PERMIT PROCEDURE OVERALL COMPLEX : % OF RESPONDENTS WHO OBTAINED PERMITS Individual entrepreneurs 13 49 32 5 Small and medium companies 3 50 43 4 Dehkan farmers 11 53 35 2 75% . 50% 25% 0% 25% 50% Very easy . Rather easy . Rather complicated . Very complicated dures). This partly confirms our hypothesis that state bodies espe- cially target companies to force them to use unofficial ways to solve permit issues. 4.3 permit coveraGe and freQuency: staBle overall The Tajik legislation neither clearly specifies the number of bodies Chart 4.2. MORE THAN HALF OF BUSINESSES OBTAINED allowed to issue permits nor foresees the list of permits necessary AT LEAST ONE PERMIT to operate a business. As a result, state bodies at all levels intro- % RESPONDENTS duced permits independently and according to specific require- 4 76% ments, resulting in: 58% 58% · Wide coverage of activities subject to permits; 50% · Proliferation of (typologies of) permits; · Differentiated issuance procedures; · Different cost of issued permits; · Variable consideration periods. Total Individual Small and Dehkan SME sector entrepreneurs medium com- farmers A preliminary analysis by IFC has calculated that in Tajikistan, panies there are more than 50 state bodies that are entitled to issue more than 250 different types of permits.4 The following sections will go through the different areas in detail. 4.3.1 OVERALL COVERAGE AND FREQUENCY STILL EXTREMELY Chart 4.3. ALMOST 4 OF 5 SMALL AND MEDIUM COM - WIDESPREAD PANIES NEEDED TO OBTAIN PERMITS IN 2005 The number of entrepreneurs who needed to obtain a permit is % OF RESPONDENTS 83 very high: 58% of entrepreneurs needed to obtain at least one 75 permit in 2005 (see Chart 4.2). This number is even higher for start- 66 67 up businesses, as 66% had to obtain at least one permit. 56 57 59 49 Unfortunately permits are needed not only to start a business, but also to continue activity. The number of existing businesses requir- ing a permit (in most cases the renewal of an existing one) is ex- tremely high, particularly for small and medium companies (see Chart 4.3). . . Total Individual Small and Dehkan SME sector entrepreneurs medium com- farmers panies Start-ups Existing businesses 4 In January 2007, IFC Business Enabling Environment Project with the support of the Government of Tajikistan launched a comprehensive review of the permit system with the goal of mapping the total number of permits, the issuing bodies and the issuance process. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 73 PERMITS Chart 4.4. OUT OF SELECTED CIS COUNTRIES , TAJIKISTAN'S As in the case of licensing, existing businesses are more vulnerable ENTREPRENEURS ARE REQUIRED TO OBTAIN THE MOST PERMITS if their permit is not renewed, opening the door to unofficial ways % OF RESPONDENTS WHO OBTAINED AT LEAST 1 PERMIT to solve issues and, as a result, higher expenditure (see section 4.7.2). 58 54 45 Tajikistan ranks first among other CIS countries in terms of the per- 35 centage of SMEs who obtained at least one permit in the last year (see Chart 4.4). Not only Georgia, which has launched a dra- matic regulatory simplification effort, but also Uzbekistan, which 3 reformed its permits system only in the recent past, have made great progress compared to Tajikistan. Tajikistan Ukraine Belarus Uzbekistan Georgia Local executive bodies (Khukumats), Sanitary and Epidemiologi- Source: IFC (2006a), IFC (2006b), IFC (2007a), IFC cal Service (SES), and Fire Authority cover the large majority of (2007b) permits (see Chart 4.5). In fact, according to IFC analysis: · Local executive bodies are entitled to issue more than 10 dif- ferent permits; · SES issues more than 30 permits; · Fire Authority issues 8 permits. Chart 4.5. KHUKUMAT, SES AND IRE F AUTHORITY MOST FREQUENTLY REQUIRE PERMITS % OF RESPONDENTS OBTAINING PERMITS 49 49 42 43 32 23 23 25 23 36 28 22 12 15 5 4 8 11 6 7 5 . . . Khukumat SES Fire Authority Labour, social protec- Energy Energy distribution tion Water authority surveillance Barki Tojik Individual entrepreneurs Small and medium companies Dehkan farmers Since many normative legal documents that regulate the issu- ance of permits are not registered at the Ministry of Justice, there are many cases in which different state bodies and different hi- erarchical levels within the same body demand double require- ments from SMEs. In these cases, one body could take over both of these functions (an example is described in Box 4.4). There are also cases in which permits overlap with other regula- tory tools of regulation (i.e., certification, licensing5). To obtain a conclusion from the Sanitary-Epidemiological Service (SES), the applicant also needs to provide a product conformity certificate, which certifies the quality of the product. 5 For more details on doubling with licenses see chapter "Licensing." 74 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS BOX 4.4. AN EXAMPLE OF OVERLAPPING PERMITS IN ORDER TO BEGIN OPERATIONS AS A RESTAURANT In order to start operations, a restaurant must first obtain a permit from the national Environment Protection Committee of the city of Dushanbe to place the garbage in a certain place for garbage collection. In addition, the restaurant must also work with the State Environment Protection Committee to ensure that its business will not impact the environment significantly. One way to optimize the process would be to transfer authority to a single body. The State Industrial Safety Enforcement Agency issues permits for the operation of gas sites. However, in order to get gas, the restaurant needs to sign an according agreement with the state enterprise "Tajikgas," which requires a preliminary inspec- tion. In this case it would be reasonable to transfer the functions of issuing permits and conducting safety inspections of gas sites to Tajikgas, since the Agreement is the whole of reciprocal obligations, in this case between the state and the entrepreneur. 4.3.2 NUMBER OF PERMITS IS LINKED TO THE SIZE OF ACTIVITY On average, each SME is required to obtain more than 2 per- Chart 4.6. SMALL AND MEDIUM COMPANIES HAD TO OBTAIN mits per year. The number of required permits is related to the MORE PERMITS THAN ANY OTHER TYPE OF BUSINESS 4 legal form of enterprises: while individual entrepreneurs and de- AVERAGE# OF PERMITS BY TYPE OF BUSINESSES , hkan farmers are subject to fewer permit requirements, small and medium companies, distinguished by their larger size and higher turnover, require more than double the number of permits than 4 the remaining categories (see Chart 4.6). The absence of unified legislation on permits has led to regional 2 2 differences, characterized by the level of regulation of the local 1 government bodies in each region. As Chart 4.7 shows, even con- sidering the same type of business (individual entrepreneurs) and the same sector (retail trade), wide differences in the number of Total Individual Small and Dehkan necessary permits appear. SME sector entrepreneurs medium farmers companies Chart 4.7. INDIVIDUAL ENTREPRENEURS INVOLVED IN RETAIL TRADE IN GBAO NEED TO OBTAIN MORE PERMITS THAN THEIR COLLEAGUES IN OTHER REGIONS # OF PERMITS 5 2 2 2 2 2 1 A B Oblast Repub- tion district tion Repub- district Sughd of Subordina- province) of Subordina- province) province Dushanbe Kulyab Districts lican lican Gorno-Badakhshan Autonomous (Khatlon Districts Kurgan-Tube (Khatlon Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 75 PERMITS Chart 4.8. THE NUMBER OF AGENCIES ISSUING PERMITS The decrease in the number of bodies issuing permits (Chart 4.8) DECREASED CONSIDERABLY FROM 2002 TO2005 is nevertheless a positive message, as it testifies to the success of # OF BODIES consolidating the number of governmental bodies with whom 5 5 SMEs have to deal with,6 although there is still potential for further reduction and improvement in the number of interactions be- 3 3 tween entrepreneurs and state bodies. This reduction is especially 2 crucial for activities requiring different permits from different bod- ies (adding to the time and cost spent), e.g., construction activi- 1 ties. In such cases introduction of "one-stop-shop" principle could facilitate the overall process, where entrepreneur needs to apply to one single body which takes care of interaction with other bod- . . Individual Small and medium Dehkan farmers ies and gathering all necessary permits, resulting in reduced time entrepreneurs companies and cost. 2002 2005 4.4 issuinG process: unreGulated, opaQue, and unneces- sarily time-consuminG Chart 4.9. SMALL AND MEDIUM COMPANIES SPENT Due to the lack of unified regulations governing the application ABOUT 1.5 MONTHS TO OBTAIN ALL NECESSARY PERMITS process, businesses spent a lot of time obtaining permits. Even in BUSINESS DAYS cases in which the need to obtain certain permits stems from the 34 laws and provisions regulating the legal activity of state bodies, nevertheless these documents do not outline specific require- ments: the list of documents necessary to obtain permits or ap- provals, permits pricing issues, duration of application review pe- riod, and validity period of permits are not clearly defined by the 8 legislation. 4 In particular, lack of a clear and unified regulation can be as- sessed by the length of a permit application procedure. Pro- Individual Small and Dehkan entrepreneurs medium companies farmers longed consideration puts entrepreneurs under pressure and Business leads to unofficial solutions. While the overall procedure for in- days spent to obtain one 3 8 4 dividual entrepreneurs and dehkan farmers is not particularly permit time-consuming, small and medium companies spent almost 1.5 months to obtain all necessary permits, and on average Chart 4.10. EXISTING SMALL AND MEDIUM COMPANIES SPEND 8 business days for each permit (see Chart 4.9). This could be MORE TIME THAN START UPS TO OBTAIN NECESSARY PERMITS - due to the fact that officials consider companies as rent-seek- ing targets and prolong the issuance process intentionally. BUSINESS DAYS 34 It is also remarkable that existing small and medium companies 27 spent more time obtaining permits than start-up companies, even though they already gained experience in dealing with adminis- trative requirements. This could be evidence of the pressure from state bodies to force existing entities into rent-seeking opportuni- ties, since they are more vulnerable in case of permit denial (see Chart 4.10). Existing business Start-ups Business days spent to obtain one 8 7 permit 6 As well as reflecting a likely reduction in the number of required permits. 76 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS An unclear normative basis is often the cause of this lengthy pro- cedure lasting in some cases up to 160 business days (see Attach- ment 4.3 in Annex). The lack of clear procedures is further exemplified by the regional variation in the duration of the application process: Chart 4.11 considers the example of individual entrepreneurs working in retail trade. Chart 4.11. RETAIL TRADERS IN GBAO SPENT THE MOST TIME TO OBTAIN NECESSARY PERMITS BUSINESS DAYS 16 4 4 5 5 6 8 B A tion Repub- Repub- tion Sughd district prov- ince) of (Khatlon Oblast Subordina- province) of province Autono- Subordina- Dushanbe Kurgan-Tube Gorno-Bada- mous lican district Kulyab (Khatlon khshan 4 Business Districts Districts lican days spent to obtain one 2 3 2 3 4 4 3 permit 4.5 permits expenses Legislation does not provide clear rules for charging payments for issuance of permits (see Box 4.5). The absence of legislative norms BOX 4.5. PAYMENTS FOR PERMITS ARE NOT FORE- regulating permit costs does not exclude the fact that payments SEEN BY LEGISLATION are made in practice. In particular, not only can these payments be high (see Chart 4.12), but entrepreneurs often cannot distin- The Law "On Diverse Obligatory Payments Into guish between official and unofficial portions. the Budget" provides for about 20 different types of obligatory payments,7 but payments for ob- Chart 4.12. SMALL AND MEDIUM COMPANIES PAID THE MOST TO OBTAIN PERMITS taining a permit are not mentioned. This law as a whole regulates the obligatory payments that SOMONI arise from administrative procedures. Accord- ONE PERMIT ALL PERMITS 365 ingly, permits not covered by this law should be free of charge. 87 33 33 71 44 Individual Small and Dehkan Individual Small and Dehkan entrepreneurs medium medium companies farmers entrepreneurs companies farmers 7 Law of RT "On Diverse Obligatory Payments Into the Budget" dd. July 28, 2006. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 77 PERMITS Chart 4.13. SMALL AND MEDIUM COMPANIES WORKING Small and medium companies seem to bear the largest burden IN RETAIL TRADE PAID MORE THAN INDIVIDUAL ENTREPRENEURS during issuance of permits, both in terms of the number of neces- WITHIN THE SAME SECTOR sary permits, as well as costs. For instance, companies working in SOMONI 616 retail trade paid significantly more than individual entrepreneurs working in the same sector (see Chart 4.13). 4.6 economic impact of permits 120 Entrepreneurs spend not only financial resources, but also labor 35 58 and time resources to obtain the necessary documents from state . . bodies: Individual Small and medium entrepreneurs companies · Due to wasted time, a business loses the opportunity to gain One permit All permits additional profit (for start-up businesses); · Staff members involved in obtaining necessary documents are diverted from operational work (for existing businesses). These losses represent an additional burden in the form of op- portunity costs for businesses. Taking into account all the costs involved in the procedure, we estimate that entrepreneurs lose between 3% to 15% of their annual profits dealing with permits is- sues (see Chart 4.14). The burden is especially high for small and 8 medium companies, in particular for start-ups. Chart 4.14. ECONOMIC IMPACT OF PERMITS BURDEN RANGES BETWEEN 3%-15% OF ANNUAL PROFITS SOMONI 14% 5% 15% 3% 8% 3% of annual of annual of annual of annual of annual of annual profits profits profits profits profits profits 2,870 570 650 450 180 190 . . Individual Small and medium companies entrepreneurs Dehkan farmers Start-ups Existing businesses 4.7 access to information and unofficial payments The absence of a clear legislative basis and lack of transparency in the requirements increase the complexity of the procedure and lead to unofficial solutions. 8 Calculation is done for SMEs that underwent this procedure, i.e. which had to obtain at least one permit. For more details on the methodology see Box 3.6 in Chapter 3. 78 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS 4.7.1 DIFFICULTIES FACED WHILE OBTAINING PERMITS Almost half of entrepreneurs going through the permits procedure Chart 4.15. LACK OF INFORMATION IS STILL THE faced certain difficulties during the process (see Chart 4.15). How- MAIN PROBLEM TO OBTAINING PERMITS ever, the number of entrepreneurs facing difficulties with the per- mits process has decreased with respect to 2002. In 2005, 54% of % OF RESPONDENTS OBTAINING PERMITS WHO FACE PROBLEM respondents who obtained permits mentioned having problems Lack of information 18 during the procedure, down from 63% in 2002. 23 Large number of re- 12 quired documents 17 Insufficient legal literacy of entrepreneurs considerably compli- Unclear require- 9 cates the overall procedure. Entrepreneurs have difficulties in de- . . ments 12 termining which activities require permits. In addition, due to the 2002 2005 lack of transparency, entrepreneurs have limited access to the normative basis which regulate the permits procedure. Accord- ing to the findings of the survey, it is difficult or very difficult to ob- "...When I first started the business, it was very dif- ficult to find information regarding what I need- tain the necessary information on procedures by different bodies ed to do to get the permit. I also had no friends (see Chart 4.16). In some cases, it is the state bodies themselves who could help me..." that complicate the situation, with insufficient training and limited - Entrepreneur, focus­group participant resources to deal with entrepreneurs' requests. 4 Chart 4.16. ACCESS TO INFORMATION FROM STATE BODIES REMAINS VERY DIFFICULT % RESPONDENTS CONSIDERING ACCESS TO INFORMATION AS HARD OR VERY HARD State Automobile Inspection (GAI) 56 Committee for Architecture and 52 Construction State Scientific Center of the Medi- cine Examination (Ministry of Health) 52 State Industrial Safety Enforcement Agency 51 Energy Distribution Barki Tojik 35 Energy Surveillance 31 Khukumat 31 Fire Authority 28 Trade Inspections (MoET) 27 SES 24 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 79 PERMITS 4.7.2 UNOFFICIAL WAYS TO SOLVE ISSUES ARE WIDESPREAD The share of entrepreneurs who used unofficial payments in 2005 "...the main thing is ­ I know who to turn to and fell in comparison to 2002 (see Chart 4.17). However, the relation- how much it will cost, therefore personally I have no problems..." ships between entrepreneurs and officials are transforming into closer relationships, where rather than unofficial payments, other - Entrepreneur, focus-group participant means like presents, invitations to lunches, and other services are used to solve the issues: 47% of entrepreneurs used unofficial ways to obtain permits in 2005 (see Chart 4.18). Chart 4.17. THOUGH UNOFFICIAL PAYMENTS ARE DECLINING ... It is also remarkable that existing small and medium companies % OF RESPONDENTS OBTAINING PERMITS reported using unofficial payments more frequently than start-up 39 companies, confirming the assumption that due to their longer term investments, they are under greater pressure of refusal (see 25 Chart 4.19). There is a certain regional difference in the use of unofficial pay- ments for solving permit issues (see Chart 4.20). This difference can be due to the relationship entrepreneurs and officials built up dur- Unofficial payments Unofficial payments in 2002 in 2005 ing their interaction. Chart 4.18. ...UNOFFICIAL SOLUTIONS ARE HIGH % OF RESPONDENTS OBTAINING PERMITS 22 47 25 Unofficial payments Other unofficial ways in 2005 in 2005 unofficial ways in 2005 Chart 4.19. EXISTING SMALL AND MEDIUM COMPANIES Chart 4.20. SOLVING ISSUES IN UNOFFICIAL WAYS VARIES ACROSS REGIONS MAKE UNOFFICIAL PAYMENTS TO AVOID REFUSAL % OF RESPONDENTS OBTAINING PERMITS %OF RESPONDENTS OBTAINING PERMITS 61 36% 52 50 50 33% 41 35 27% 24% 26% 17% (Khatlon province) province Autono- Oblast district province) Republi- Dushanbe Kurgan-Tube Gorno-Bada- mous of district Kulyab Subordination . . Sughd khshan Individual Small and medium Dehkan farmers (Khatlon Districts can entrepreneurs companies Existing businesses Start-ups 80 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS recommendations 1. Reduce permits coverage. This in turn can be achieved by: 1.1 Reviewing the number of permits currently issued (see Attachment 4.1) in order to rationalize the existing legal basis according to the risk management principles. The necessary steps in this process are: · cancellation of outdated and anti-market permits; · consolidation/elimination of redundant permits, i.e. overlapping permits issued by different levels of the same agency, or by different agencies; · elimination of permits covering areas already regulated by licensing (see Chapter 3); · elimination of permits covering areas already covered by other administrative procedures (i.e., compulsory or voluntary certification). 1.2 Identifying by law the agencies allowed to issue permits. Expected impact Reduced coverage of permits will decrease the entry cost for new businesses and cost of doing business for existing 4 ones, with possible impact on the number of active companies and positive contribution to the budget. 2. Streamline the application process. This can be achieved by: 2.1 Introducing the "silence-is-consent" principle. Once an applicant for a permit submits the required paperwork, the failure of an issuing agency to respond with a decision within a given timeframe counts as an application approval (see Chapter 3); 2.2 Introducing an administrative principle of application review process, which limits the range of state interven- tion and clearly defines the required steps in case of refusal (see Chapter 2); 2.3 Specifying a uniform permits application procedure. Expected impact · Clear procedures would reduce the overall burden of the entrepreneurs in terms of time and money. In par- ticular, introduced measure would reduce the number of unofficial payments; · Transfer of responsibility from applicant to official would force the latter to examine documents in a timely man- ner, reducing the overall time of consideration; · Clearly substantiated cases of refusal would improve the overall process and reduce entrepreneurs' depend- ence on unfair decisions of officials. 3. Reduce the burden of permit renewals. This can be achieved by: 3.1 Extending the validity period of issued permits, thus reducing the need for repetitive renewals; 3.2 Designing a dedicated process with limited steps in case of no changes in business activity. Expected impact Simplified and less frequent renewal procedure would reduce the cost of doing business, while at the same time streamline the work of public bodies. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 81 PERMITS 4. Introduce the "one-stop-shop"9 principle of issuance of some permits (e.g., construction), which will help to de- crease the length of the process and increase the effectiveness of the procedure, both for entrepreneurs and the state bodies (see Attachment 4.4). In particular, in would be advisable to adopt a one-stop procedure for sectors requiring multiple permits. Expected impact Possibility to apply at "one-stop-shop" would reduce the overall burden for entrepreneurs in terms of time and cost spent and have a positive impact on transparency and reduction of unofficial solutions between entrepreneurs and officials. 5. Launch an information campaign to increase the legal awareness of entrepreneurs and government officials, including seminars, publications and distribution of explanatory materials. Expected impact Introduction of standard rules and requirements will bring clarity and will regulate the procedure of obtaining per- mits, improve accessibility to information, decrease the opportunities for unofficial payments and increase the legal protection of entrepreneurs. 9 A one-stop-shop is any institution that unites government officials from different de- partments in one location to provide improved information and/or services to its citizens. For an example of a "one-stop-shop" principle for registration procedure see Chapter 2. 82 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS annex attachment 4.1. rapid regulatory reform: the "guillotine" approach10 Programs for revising and eliminating old legal acts were conducted in Great Britain (Cancellation of the Act of 1944, Regula- tive base reform, 2001), Mexico, Hungary and South Korea. In 2004, Moldova also applied a similar approach after passing the new Law "On Revision of Legal Base Regulating Activity of Businesses," which was nicknamed the "Guillotine" Law. The "guillotine" approach can be used to reduce outdated and redundant permits with a single legislation and under a limited timeframe. The advantage of this exercise is to consolidate all legislative amendments into one general decision, reducing the time and effort needed to perform large scale reforms. The "guillotine" mechanism can be synthesized in the following steps: a. The government identifies the general scope of documents up for revision (in the case of Tajikistan, this would apply to permits, approvals and conclusions); b. The government provides all ministries with a specific deadline to elaborate a list of internal documents subject to revision according to point a; c. The government sets a deadline to each ministry to assess the necessity of each document based on a checklist that veri- fies its legality and suitability to market requirements; d. Every document and its justification is assessed by three separate instances: the responsible ministry itself, an independent 4 group of government experts and the interested stakeholders (e.g., entrepreneurs, business associations, etc.); e. As a result of the review, each document is either: · included into the "short-list" of accepted documents; · rejected or returned for modification; f. After the set deadline, the short-list is published and any document not included in it is automatically rejected through a single legal act (e.g. a decree implementing the reform); g. The "short-list" is included into a judicial database which represents the official register of all legal documents: provisions not included in the given register can not be applied toward business entities. attachment 4.2. examples of the legal acts foreseeing obtaining of permits which did not undergo examination in the ministry of justice of rt Agency Type of activity subject to permit Regulating legal norm State Communication Inspection Use of frequencies Regulations on state communication inspection Import of radio-electronic equipment (REE) and under Ministry of Communication of RT, ap- high-frequency facilities (HFF) leading to r-ra- proved by rder of Ministry of Communication diation or high-frequency magnetic radiation No.117, dd. December 5, 2003. Purchase, building and use of REE and HFF Ministry of Health Medical use of medicine Regulations on order of issuance of medicine prescriptions and medicine distribution from chemistries of RT, approved by Ministry of Health No.380, dd. December 23, 2002. Destruction of a consignment of faulty medi- Regulations on safe destruction of medicine cine which do not comply with relative standards of RT, approved by Ministry of Health No.370, dd. Crossing of international borders by medicines December 16, 2002. SES Use of water for drinking purposes Instruction on approval and issuance of the permits for special water usage, approved by Head of State Committee of Environment Pro- tection and Forestry of RT, dd. January 20, 2005. 10For more details see Putnina (2005). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 83 PERMITS attachment 4.3. procedure of getting permits and approvals in order to open a shop Application 3 Fire Authority KHUKUMAT (LOCAL GOVERNMENT) 4 City Electricity Provider 2 Start of activity 1 SES Trade department 5 6 TajikStandart Overall procedure 60 ­ 160 business days 1. Entrepreneur applies to the local government in order to obtain a permit to start the shop's activity; 2. Sales department of the local government reviews and checks documents and then passes on for review to the head of the local government. After getting the permit from the local government, entrepreneur applies to the following bodies in order to get the necessary permits and approvals: 3. Permit from Fire Authority; 4. Sign agreement with the administration of town electricity department; 5. Permit from Sanitary-epidemiological Service (SES) and issuance of medical books for sellers; 6. Get a certificate verifying the shop's compliance with the present standards of TajikStandart. attachment 4.4. an example of "one-stop-shop" principle introduced in italy In 1997, Italy passed a law that established widespread introduction of the "one-stop-shop" system The main goals of this policy were: · Simplification of administrative procedures for existing and potential enterprises; · Development of trade in underdeveloped regions of the country. Results of "one-stop-shop": · The registration and permits process is simplified; · Registration and permit issuance period decreased almost by 3 times; · "One-stop shop" departments are established in more than 160 municipalities. Effective introduction of "one-stop-shop" system requires the following: - Establishment of the authorized body responsible for appropriate functioning of "one-stop-shop"; - Establishment of an effective mechanism of cooperation between state bodies; - Identification of the rights and responsibilities of cooperative bodies; - Identification of the document revision period of by each body. 84 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 5. entrepreneurs and finance ENTREPRENEURS AND FINANCE 5. entrepreneurs and finance Therelationshipbetweenentrepreneursandfinancialinstitutionsin main findinGs Tajikistan is weak. Entrepreneurs do not perceive banks as reliable partners in addressing their needs of supporting their growth over · The relationship between the SME sector time. This is partly a result of the low level of confidence of the and banks is still extremely limited: overall general public toward the banking system as a whole, as well as only 14.6% of respondents have bank of the limited capability of the local banks to address the needs accounts (a decline from 18% since the last of their corporate customers. IFC survey in 2002), in particular: - 5% of individual entrepreneurs; The absence of a regular relationship between banks and - 30% of dehkan farmers; entrepreneurs also explains to a great extent the limited size of - 81% of small and medium companies. the lending market. In fact credit, in particular toward small and medium businesses, can only be extended when banks have · Entrepreneurs still have limited access to developed long term relationships with these businesses, and can lending as only 23% of the entrepreneurs accurately assess the risks related to lending ­ in particular, credit needing funding obtained it from a bank or risk. In this absence, lending is "rationed," i.e., financial institutions a microfinance organization (MFO). In fact: tend to reduce their risk by limiting their credit exposure, in terms - a third of respondents was in need of of number of borrowers and/or size of the loans or by applying external funding; risk mitigating factors, limiting the exposure to a very short period, - about one-third of those in need applied require high interest rates and/or high level of collateral. to a bank or an MFO (27%); - 86% of the applicants were successful, On the other hand, Tajik banks face a complex market for funding, likely as a result of a self-selection process where although interest rates on deposits are in the range of 20%, ofapplicants,i.e.onlythosewhoqualified they are not able to attract funds from individuals. for a loan applied for it. As a result, only a small percentage of Tajik entrepreneurs in need · The loan granting process shows significant of external financing apply for a bank loan. Most pursue other improvements with respect to 2002 and it means of fundraising (e.g., family or friends) or do not borrow at takes on average 15 days to obtain a loan all. from a bank and 18 days from a MFO. In this context the only alternative to local banks are MFOs, which · However, lending availability is still an issue: nevertheless cover only a very specific section of the lending - Interest rates are extremely high (about market, i.e., micro-loans targeting micro-businesses. The effect of 36%), as a result of high rates on deposits this situation on growth is particularly evident when the companies and credit risk; at stake are incorporated, and their financial needs can no longer - Loan maturity remains very short, with an be fulfilled by informal short-term loans. average maturity of 10 months for banks and 8 months for MFOs; - Collateral requirements also make access to finance extremely difficult (in particular for start-ups): more than half of the borrowers were required to provide collateral, which, on average, amounted to 140% of the total loan amount; - The share of the borrowers who used unofficial ways of solving the issues is still significant (26% of applicants). 86 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE 5.1 tajikistan's financial sector: an overview Tajikistan's financial sector has seen dynamic growth in recent Chart 5.1. EVOLUTION OF NUMBER OF BANKS years,duetotwodrivingforces:theconsolidationofplayers,thanks AND BANKING BRANCHES to the enforcement of stricter minimum capital requirement,1 and # OF BRANCHES #OF BANKS the entrance into the market of new players, mainly micro-finance organizations as well as a few branches of foreign institutions (see 250 18 201 209 Chart 5.1, Chart 5.2 and Attachment 5.1). 14 12 12 117 9 The increase of the loan to GDP ratio (from 14% in 2002 to 18 % 125 6 in 2005) as well as the deposit to GDP ratio (from 4% in 2002 to 8% in 2005) testifies to a rapid growth and a more central role of 0 0 the financial sector in the Tajik economy, albeit from a very low as of base. 2002 2005 30.06.2006 Source: NBT (2006) Nevertheless these indicators are still the lowest among the Central Asian countries and well below Eurozone2 countries and show the still limited development of the sector (see Chart 5.3). Chart 5.3. COMPARISON OF SOME INDICATORS IN THE BANKING SECTOR OF SELECTED Chart 5.2. BANK BRANCH DENSITY IS VERY LOW IN AJIKISTAN T COUNTRIES IN 2005 # OF BANK BRANCHES PER 10,000INHABITANTS LOAN/GDP RATIO IN , % DEPOSITS/GDP RATIO IN , % 10 104 90 2 3 4 5 57 0.3 0.5 38 34 22 27 33 28 30 19 12 18 8 Tajikistan Belarus Spain Ukraine Uzbekistan Germany Kazakhstan Kyrgyzstan Latvia Ukraine Russia Tajikistan Eurozone Source: National Banks of the countries, National Banking Associations and Central Banks. Source: Annual and monthly Central Banks reports; Business Monitor International ltd. 5.1.1 LENDING: GROWING AT HIGH PACE, BUT STILL LIMITED As a result, the total amount of lending from 2002-2005 increased Chart 5.4. LOAN VOLUME DEVELOPMENT annually by 41.4% and reached 1.3 billion somoni ($405 million) by the end of 2005 (see Chart 5.4). Taking into account the average MILLION SOMONI 1286 inflation rate during this period,3 the real growth of lending totaled 31.1%. 5.1.2 DEPOSITS: SIGNIFICANT DEVELOPMENT TO BE SUPPORTED BY 457 AN INCREASE IN THE TRUST OF PEOPLE IN THE FINANCIAL SYSTEM 14% of GDP 18% of GDP The volume of deposits also increased remarkably between 2002-2005 and amount to 540 million somoni ($169 million), which 2002 2005 Source: NBT (2006) 1 Since January 1, 2005, the minimum capital requirement has been $5 million. 2 Eurozone includes 12 countries which introduced in 2001 the united currency ­ Euro. 3 Average inflation rate between 2002 and 2005 being 10.2%. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 87 ENTREPRENEURS AND FINANCE Chart 5.5. DEPOSIT VOLUME DEVELOPMENT represents an annual real growth rate of 48.5% (see Chart 5.5). MILLION SOMONI The growth in volume of deposits continued in 2006 and reached 539 690 million somoni ($169 million) by June 2006. However, individuals still show limited trust toward the financial sector: 70.7% of deposits come from legal entities, while only 29.3% from individuals. 147 4% 8% of GDP of GDP In fact although banks offer quite high interest rates on deposits,4 the overall population still prefers to keep cash in hand. 2002 2005 Source: NBT (2006) Additional evidence of the limited trust towards the financial sector comes from the high flow of remittances from migrant workers5: about 90% of these flows conveyed through financial intermediaries are withdrawn the same day they are received.6 BOX 5.1. INTEREST TAX ON DEPOSITS7 In accordance with the Tax Code, the tax rate for interest earned on bank deposits amounts to 12%, which is directly deducted by the banks (withholding tax). In 2005, the state budget received less than 1 million somoni from the tax on interest (i.e., less than 0.1% of all tax revenues). A decrease in the tax rate on deposits, in particular on the ones denominated in local currency, would provide individuals and companies with an incentive to make more frequent use of bank accounts. 5.2 access to BankinG for small and medium Businesses still limited The access of small and medium enterprises to the financial sector "... After I could not get my money from the account during the financial crisis in remains quite limited: most of the transactions are still conducted the early '90s, I've preferred to deposit my in cash and only a small fraction of businesses develops a money at home: it is safer, requires no bank relationship with banks or other financial institutions. bureaucracy and funds are available 24 hours a day..." Only 14.6% of the respondents have an account in a bank in Entrepreneur, focus group participant Tajikistan. This figure also shows a sharp decline from the already low level of 2002 (18%) (see Chart 5.6). The overall average discloses different forms of behavior. In fact, out of the three categories of respondents (individual entrepreneurs, companies and dehkan farmers), only companies 4 Average interest rate for deposits from 6 months to 1 year amounted to 20.2% in local currency (somoni) and 13.8% in foreign currency in 2005 - NBT (2006). 5 In 2006 remittances have been estimated between 2 and 3.3 billion somoni ($ 0.6- 1 billion). 6 "Tajikistan: economical perspective," Asia-plus, 20.11.2006. 7 Estimates based on statistics from NBT (2006). 88 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE Chart 5.6. FEW SMES HAVE BANK ACCOUNTS % OF RESPONDENTS 2002 2005 Individual entrepreneurs 5% 6% Small and medium companies 81% 82% Dehkan farmers 30% 47% Average of SMEs 15%18% have frequent access to a bank account, with 81% of companies having a bank account.8 Yet the share of companies having a bank account is still below the expected level, i.e., 100%. Incorporated companies would indeed be expected to make use of bank accounts. This situation reflects the cash nature of the economy, which limits the demand for banks, but is also due to some deficiencies on the supply side, as banks do not proactively pursue corporate customers with services fitting their needs. The share of individual entrepreneurs and dehkan farmers who have a bank account is much lower, and declining further. In particular, dehkan farmers in the sample show the sharpest decline, from 47% in 2002 to 30%. Most likely newly established farms do not open a bank account. 5 Use of bank account appears to be mostly related to the size of business as well as to the sector of activity. BOX 5.2. DEPOSIT INSURANCE The Law "On Guarantee of Deposits of Individuals" determines the following repayment scheme for deposits in case of bank default: i) deposit amount below 250 somoni ($78) is reimbursed fully; ii) deposit amount up to 2,500 somoni ($781) is 90% repaid; iii) deposit amount above 2,500 somoni repaid 70%.9 For the purpose of deposit guarantees a special Fund of Guarantees of Deposits of Individuals is created by commercial banks in Tajikistan. The Fund is managed by a Supervisory Board and an Executive Board. The Supervisory Board consists of representatives of the Executive Apparatus of the President of RT, Majlisi Namoyandagon Majlisi Oli, National Bank and commercial banks. Commercial banks contribute to the Fund through: i) a one-off payment in the amount of 1% of the amount of deposits of individuals; and ii) quarterly payments in the amount of 0.1% of the balance deposits of individuals at the bank. All major commercial banks of Tajikistan are participants of this fund. Additionally legislation requires to reserve 18% of the overall deposit volumes of each commercial bank in the National Bank. 8 This higher ratio can be explained by regulatory requirements for SMEs during the registration process. In order to complete its registration, an SME needs to show deposits up to 50% of the nominal capital (depending on the legal form of SME, the requirement is between 30% and 50%). For this purpose, many SMEs just open temporary accounts in which they deposit the cash equivalent of the required capital. 9 Law "On Guarantee of Deposits of Individuals" dd. August 1, 2003. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 89 ENTREPRENEURS AND FINANCE Data show a clear relationship between enterprise size and availability of bank accounts (see Chart 5.7). Chart 5.7. ACCOUNT AVAILABILITY IS DIRECTLY CORELATED TO BUSINESS SIZE % OF RESPONDENTS HAVING A BANK ACCOUNT 72% 62% 65% 40% 13% 4% 1 employee 2 to 5 6 to 10 11 to 20 21 to 50 over 50 employees employees employees employees employees Chart 5.8. AVAILABILITY OF THE BANK ACCOUNT BY Among the largest SMEs, only dehkan farmers are the least likely BUSINESS WITH MORE THAN 20 EMPLOYEES to have a bank account. In fact in the case of dehkan farmers, % OF RESPONDENTS an increase in size does not necessarily reflect a more structured business activity, requiring the need of more formalized financial no bank account have bank account relationships (see Chart 5.8).10 3% 44% The reasoning above is seen as the main reason for not having an account: more than 89% of the respondents do not see any need 97% for an account nor any significant benefits from having one (see Chart 5.9). 56% Chart 5.9. MAIN REASON FOR NOT HAVING A BANK ACCOUNT - NO PRACTICAL NEED11 Small and medium companies Dehkan farmers % OF RESPONDENTS HAVING NO BANK ACCOUNT No need/ no practical benefits 89% Trouble with obtaining cash 6% High fees 5% Banking bureaucracy 4% Avoiding of taxation 2% Other 1% On the other hand, the (limited number of) respondents that "...I don't need a bank account because do have an account do not experience problems (61% of SMEs most of my transactions are done in cash. If I were to use an account, it would cost me using a bank account reported no troubles). Among the troubles toomuchtimewithcomplicatedprocedures entrepreneurswereconfrontedwithwhendealingwiththeirbanks: and gathering lots of documents..." withdrawing cash (17%), long duration of bank transactions (15%) Entrepreneur, focus group participant and complicated requirements of the banks during the process of the transactions (14%) (see Chart 5.10). Nevertheless, even among bank account holders, about one fourth (27%) think that the bank discloses information about his/her account without approval, further confirming the low confidence of entrepreneurs toward the financial system. 10 For more specific information on lending in rural areas see FAO/EBRD (2006). 11 Respondents could have chosen several answers. 90 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE Chart 5.10. MAJORITY OF SMES EXPERIENCE NO PROBLEMS IN USING A BANK ACCOUNT12 % OF RESPONDENTS HAVING A BANK ACCOUNT No troubles 61% Difficulty withdrawing cash 17% Duration of the account transactions 15% Numerous bank requirements on account transactions 14% Need of unofficial payment 11% Bank bureaucracy 8% High commissions fee 6% Usage of the information on the funds flows of your account by state bodies 4% Lengthy duration of converting national currency into foreign currency 2% Others 2% The legislation entails that banks disclose information regarding the accounts and the available properties of its customers on request of the head of the taxation bodies.13 The implementation of stricter requirements for disclosure of information, i.e., on the basis of a court decision, could reinforce the trust of the population toward banks. BOX 5.3. EXTRACT FROM THE LAW "ON BANKS AND BANKING" One of the major conditions for increasing trust toward banks is raising the confidence among the population that the 5 information about the bank account is not easily accessed or disseminated. At the same time a legal basis for access to bank account information should be provided to prevent misuse of the financial sector. This access should be first granted on the decision of the court if there is any suspicion of illegal activities. Tajik legislation, however, grants the tax bodies additional authorities to get access to bank information based on the written request of the head of the tax body. Surely, if access was granted only on the basis of a court decision it would increase the confidence among the population in the banking system. Article 32. Bank secrecy Information making up the bank secrecy is disclosed to: · ... · Taxation bodies: on questions concerning payment of taxes on the basis of a letter of the head of the taxation body.... Information on the balance and flow of funds of the account of an individual, as well as information on details and value of property, stored in safes and buildings of the bank, and information making up the bank secrecy is disclosed to: · ... · Taxation bodies: on the questions mentioned above 5.2.1 LENDING: LIMITED DUE TO SELF-SELECTION PROCESS Obtaining external funding still remains quite complicated for entrepreneurs: more than 60% of entrepreneurs assess the process 12Respondents could have chosen several answers. 13Tax Code of RT, Article 118. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 91 ENTREPRENEURS AND FINANCE of obtaining funding as complicated or very complicated (see Chart 5.11). Chart 5.11. OVERALL ASSESSMENT OF THE PROCESS OF OBTAINING EXTERNAL FUNDING % OF RESPONDENTS Individual entrepreneurs 2 43 43 11 Small and medium companies 4 22 53 21 Dehkan farmers 2 26 42 30 50% . 25% 0% 25% 50% 75% Very easy . Rather easy . Rather complicated . Very complicated Most worrisome, although small and medium-sized companies should have easier access to finance because of their greater degree of sophistication, they are the ones assessing access to funding as most complicated. In fact, about three-quarters of them consider borrowing a complicated procedure, likely due to their most pressing financial, which cannot be fulfilled by informal loans or by MFOs. Our findings on complexity of access to finance further support the results of the "Doing Business 2007" report, which ranks Tajikistan 143rd among 175 countries for the ease of obtaining a loan.14 Overall the banking sector is still not attractive from the SME point "...It makes no sense to apply for a bank of view. The situation, although improving with respect to 2002, is loan, because I know in advance that I can not get the loan for some reasons. That is still quite negative. As a result, only about of 14% of SMEs in need why I borrow money from friends, relatives or of a loan obtained one from a bank or a MFO ­ internal sources acquaintances..." and private savings still remain the major source of funding for Entrepreneur, focus group participant entrepreneurs. On the other hand, the approval rate improved greatly in comparison to 2002: 81% of bank applicants and 96% of MFO applicants received a loan in 2005. In 2002, only 31% of bank applicants and 48% of MFO applicants got a loan. This improvement can be explained partly by the significant support of the international donor community to develop the banking sector in general and micro lending in particular (see Box 5.4). The improvement in the approval rate could testify a higher flexibility to lend by financial institutions, a greater readiness from BOX 5.4. INTERNATIONAL COMMUNITY SUPPORTS THE DEVELOPMENT OF BANKING IN TAJIKISTAN EBRD's Tajik Micro and Small Enterprise Finance Facility (TMSEF), co-financed by IFC and Swiss SECO, started its activity in 2003 and focuses on institution building in selected partner banks and the delivery of sustainable and efficient financing to Micro and Small Enterprises. First Microfinance Bank (FMFB),15 the first international financial institution operating in Tajikistan since, 2004, has also remarkably contributed to the development of the banking sector with a special focus on micro loans. 14 IFC - World Bank (2006). 15 The shareholders of FMFB are AKF, KfW and IFC. 92 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE the SME sector to receive funding, as well as a self-selection of Chart 5.12. HIGH INTEREST RATES ARE AMONG MAJOR REASONS applicants. In fact, only the more credit-worthy companies FOR NOT APPLYING FOR LOAN16 applied to banks, while the rest either got funding from other % OF RESPONDENTS sources or did not receive funding at all. High interest rate 43% There are three main reasons why survey respondents did not No need 37% pursue a loan (see Chart 5.12): Collateral requirements 21% 1. no need: availability of alternative source of funding or Lack of long term loans/ insufficient amount of loan 12% insufficient qualifications to apply for a bank loan; Banking bureaucracy 6% 2. inconvenient lending conditions: high interest rates, unavailability of long-term loans/insufficient loan amount, Other 9% need for unofficial payments, bank bureaucracy; 3. strict requirements: high level of collateral. Though there is remarkable improvement of the approval rates for Chart 5.13. FEW SMES IN NEED OF EXTERNAL loans, only a small share of SMEs in need of external funding was FUNDING GOT IT FROM A BANK OR MFO able to get it from a financial institution (see Chart 5.13). % OF RESPONDENTS WHO WERE IN NEED FOR EXTERNAL FUNDING 5.2.2 INDIVIDUAL ENTREPRENEURS: INCREASING LENDING Bank loan MFO loan 27% 27% 2% About one third of individual entrepreneurs needed external funding. About one third of them applied to a bank or an MFO 12% and almost all of them received a positive answer (see Chart 5.14). 25% 11% This situation shows a great improvement with respect to 2002, as 15% 4% far as bank applications and approval rates are concerned. 7% 5 Individual Small and medium Dehkan entrepreneurs companies farmers Chart 5.14. ACCESS TO LOANS BY INDIVIDUAL ENTREPRENEURS IMPROVED % OF RESPONDENTS 2002 2005 6% No 65% No 92% No 65% No 66% No 71% No 94% 94% Yes 35% 12% Yes, by MFO Yes 35% Yes 34% Yes 8% Yes 17% Yes, by bank Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding? 5.2.3 SMALL AND MEDIUM COMPANIES: IMPROVED LENDING Companies are confirmed to be those most in need of external financing (almost half need additional funding). Nevertheless also in this case only one-third of them apply for a loan, almost in all cases from a bank, likely due to the size of loan needed (see Chart 5.15). 16Respondents could have chosen several answers. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 93 ENTREPRENEURS AND FINANCE Companies, with respect to individual entrepreneurs, have a higher rejection rate (only about two-thirds of them obtain a loan). Yet this situation has improved with respect to 2002. Chart 5.15 ACCESS TO LOANS BY SMALL AND MEDIUM COMPANIES IN 2005 IMPROVED % OF RESPONDENTS 2002 2005 50% No 27% No 54% No 72% No 65% No 63% No 94% Yes, by MFO 50% 3% 73% Yes Yes 28% Yes 35% Yes 46% Yes 34% Yes, by bank Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding? 5.2.4 DEHKAN FARMERS: LOW LEVEL OF APPLICATIONS Dehkan farmers, due to the nature of their business and the size of the companies, also require external funding quite frequently. However, only a relatively small fraction of them decides to apply for a loan (see Chart 5.16). Chart 5.16. ACCESS TO LOANS BY DEHKAN FARMERS IN 2005 IMPROVED % OF RESPONDENTS 2002 2005 52% No 43% No 83% No 61% No 87% No 80% No 94% 48% 57% Yes Yes 39% Yes 6% Yes, by MFO 17% Yes 13% Yes 14% Yes, by bank Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding? Chart 5.17. APPROVAL RATE OF THE LOANS APPLIED BY DEHKAN Approval rates have dramatically improved with respect to FARMERS 2002, to a large extent thanks to the presence of MFOs. Indeed, % OF RESPONDENTS APPLYING FOR A LOAN the approval rates between loans provided to dehkan farmers yes no by banks and MFOs show a remarkable difference (see Chart 5.17). Commercial banks generally provide dehkans with long- 20% 54% term loans that are larger in size, but MFOs have a much higher approval rate. This phenomenon most likely reflects self-selection 80% on the part of the applicants: larger loans are requested from 46% banks, while smaller loans are applied to MFOs (which lend less, but often require no collateral). Did you get the Did you get the loan from a bank? loan from MFO? 94 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE 5.2.5 LOAN DURATION: STILL TO BE IMPROVED Chart 5.18. DURATION OF LOANS IS SHORT %OF RESPONDENTS OBTAINING A LOAN Long-term lending is still scarce in Tajikistan. Lending is still mostly by BANKs to finance short-term working capital (less than 12 months). The 45% lack of funding available for long-term investments is especially critical for mid-size companies, as only investments could allow 30% them to grow. 22% Overall, average loan maturity is 10 months for loans provided by 2% 1% banks and 8 months for loans provided by MFOs. Almost no loans are provided beyond the 12-month horizon (see Chart 5.18). by MFOs As for today, banks and MFOs are gradually addressing this 61% need by developing special loan products to satisfy the different requirements of their clients ­ for example, the needs of the agricultural sector ­ but more should be done in order to satisfy 21% 16% the need for long-term investments. 2% Up to 3 3 to 6 6 to 12 12 to 24 Above 24 The unavailability of long-term lending can be explained by three months months months months months factors: 1. Long term lending is by its nature more risky, requires higher knowledge of the borrower and higher skills to be evaluated, "...We need money for a longer period, all elements that are still lacking in the current Tajik context; because in the short-term, we are not able to 2. Long term lending is often associated with real estate use money effectively and it might also be risky for us in case we do not obtain the required collateral (e.g., land, buildings), which are constrained by harvest..". 5 the current Tajik legislation on use of immovable property as Dehkan farmer, focus group participant collateral (see Box 5.5); 3. Limited availability of long-term funding for banks: Tajik banks BOX 5.5. IMMOVABLE PROPERTY AS COLLATERAL IN TAJIKISTAN not envisage the pledge of land plots, despite of the fact that Item 2, Article 359 of Civil Code Article 362 of the Civil Code allows pledge of the rights for a The collateral of the right to use a land plot, enterprises, land plot under the terms set by the land legislation. According buildings, constructions, apartments and other immovable to the Constitution of the Republic of Tajikistan the property property (mortgage) is regulated by the Mortgage Law. The rights to land belong to the state only. Therefore legal entities general collateral rules indicated in this Code are applied to and individuals cannot own the land and selling the land is mortgage when other rules are not stipulated by the present not allowed. Moreover, the land legislation does not envisage Code or the Mortgage Law. alienation through selling (passing) the land use rights, which prohibits mortgage of foreclosure of the land. Actually, placing Item 3, Article 362 of Civil Code a lien on land plots does not take place in real life due to Pledge of rights for a land plot and other natural resources the absence of the normative-legal base duly regulating the is allowed under the terms set by the land or other law on issues of land mortgage. This lack of regulations brings certain natural resources. difficultiesandproblemstotheuseofthenormsregulating land mortgage, and makes it difficult for dehkan farmers to pledge The civil legislation refers the regulation of the pledge of rights property due to the need for additional legal regulation of for a land plot to the land legislation. But the land code does these legal relations. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 95 ENTREPRENEURS AND FINANCE Chart 5.19. DISTRIBUTION OF THE BANK COLLATERAL on the one hand cannot place their own bonds on the % OF RESPONDENTS OBTAINING LOAN (practically non-existent) domestic market, while on the other 50% average collateral - 72% of hand cannot access international markets, which would principal amount require more transparency of their account as well as ratings from internationally acknowledged rating agencies. 21% 12% 8% 9% 5.2.6 COLLATERAL: STILL A HINDERING FACTOR No 1 to 50% 50% to 100% to above collateral 100% 150% 150% One obstacle in applying for a loan by a financial institution remains the high collateral ratio. In fact, every other lender had to provide some sort of collateral. Chart 5.20. MAJORITY OF BANK BORROWERS STILL REQUIRED A COLLATERAL IN 2005 The collateral requirements by the banks were on average 72% % OF RESPONDENTS REQUIRED COLLATERAL of the principal amount (see Chart 5.19). Considering only the 2002 2005 loan assisted by collateral, the average collateral ratio was about 88% 84% 140%. One of the reasons behind high collateral requirements, 71% 62% could be the complexity for banks to recover the collateral in 48% 41% case of default due to lengthy and costly court procedures. The lower collateral requirements for individual entrepreneurs and dehkan farmers can be explained by the nature of disbursed Individual Small and medium Dehkan loans: in most cases they are micro or group-loans, not supported entrepreneurs companies farmers by collateral. In contrast, 84% of small and medium companies were required to provide collateral, which represented a serious Chart 5.21. COMPANIES PROVIDE THE HIGHEST constraint for their lending operations (see Chart 5.20). COLLATERAL FOR BANK LOANS % of collateral of principal amount Not only small and medium companies had to provide collateral in most cases, but the requirements were extremely high: on 158% average more than 130% of the loan principal (about 160% if 144% 123% considering only those loans assisted by collateral, as shown in Chart 5.21). ItisalsoworthmentioningthattheTajiklegislationdoesnotallowfor use of the land user's certificates as collateral for loans, reducing the opportunity for dehkan farmers to access external sources Individual Small and Dehkan farmers of funding. An additional burden is the processing of collateral entrepreneurs medium companies contracts. First, the contract is verified in the notary office, then registered at the bodies of justices. This all prolongs the overall process and adds up additional cost and time for entrepreneurs. "...The banks introduced very complicated Insufficient collateral is among the major reasons for refusal of a collateral procedures. First you need to verify your collateral contract at the notary office bank loan (see Chart 5.22). and then go to the bodies of justice to get this contract registered. This is additional costs and Due to the smaller loan amounts disbursed and the nature of time for me..." their activity, loans provided by MFOs are mostly unsecured. In Entrepreneur, focus group participant 2005, only 14.3% of respondents that obtained a loan from an MFO (almost all individual entrepreneurs and dehkan farmers) 96 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE provided collateral (see Chart 5.23). In those cases, the collateral represented about 92.7% of the principal amount. Some countries successfully introduced alternative market-based mechanisms to facilitate SME access to funding by leveraging different typologies of credit insurance tools (see Box 5.6 and Box 5.7), which could be considered for the Tajik context as well. Chart 5.22. INSUFFICIENT COLLATERAL IS THE MAIN REASON FOR REFUSAL OF A BANK Chart 5.23. MFOS REQUIRED LESS COLLATERAL LOAN % OF RESPONDENTS PROVIDING COLLATERAL % OF RESPONDENTS WHO APPLIED FOR LOAN Insufficient collateral 17% 62% Lack of initial project capital 19% 3% Unwillingness to make unofficial payment 16% Individual Dehkan entrepreneurs farmers Poor business plan 12% Project considered as non-profitable 12% Low quality of business plan 10% The bank considered the project as non-priority project 7% Applicant's refusal to 5 accept the loan 6% Activity is not a suitable for funding criteria 3% Other 9% BOX 5.6. BUSINESS ASSOCIATIONS INSURANCE: THE ITALIAN exchange for this insurance, a participant pays a fee (in the EXPERIENCE OF "CONFIDI"17 range of 2-5% of the principal amount). The CONFIDI provides its insurance based on the concepts SMEs in Italy face an issue of credit availability, due mostly to of: the limited reliability of their financial reporting. Banks often ­ Double "risk screening": before being accepted for the require small and medium businesses to provide a relevant guarantee, each associate is assessed by the CONFIDI and amount of personal guarantees or collateral to offset then in turn by the lending bank their risk. In order to limit collateral requirements, business ­ "Risk-pooling": a CONFIDI ensures a high number of small associations have developed a different form of (partial) lenders, diversifying its risk credit insurance, called CONFIDI (i.e., "shared lending"). CONFIDI: some data CONFIDI: working mechanism As of the end of 2004 about 1.000 CONFIDI exist in Italy, A CONFIDI is a risk-sharing mechanism that provides credit providing guarantees for 7 billion supporting loans worth insurance for its associates, covering up to 50% of the about 20 billion, corresponding to about 12% of the total credit risk faced by the banks lending to its participants. In SME loans. 17Banca d'Italia (2006). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 97 ENTREPRENEURS AND FINANCE BOX 5.7. CREDIT INSURANCE18 ­ THE UZBEKISTAN CASE Credit insurance is a widely tool used to limit credit risk and Application documents: all the documents submitted to the foster lending from financial institutions. The goal of the credit bank for the credit proposal as well as a confirmation from the insurance is to protect the bank in case of non-repayment from bank that the project is under consideration. the borrower. The lender can ensure part of the loan through an insurance company, facilitating the lending process from Coverage and premium: the insurance covers up to 50% of the bank. The insurance company analyzes the project and the principal amount (on average 40-50%) and the required assesses whether to take the risk and at what conditions, i.e., % premium starts ranges usually from 5 to 6% of the insured of risk underwritten, as well as the price. amount. Chart 5.24. HOW COLLATERAL REQUIREMENTS AND 5.2.7 INTEREST RATES: EXTREMELY HIGH LOAN MATURITY AFFECT INTEREST RATES INTEREST RATES PER ANNUM IN , % Average interest rate on banking loans amounted to 2.6% monthly 39% or 36% annually. Taking into account inflation, the real interest rate 35% 29% in 2005 would be equal to 28.9%.19 10 5 12 The survey shows that interest rates are also linked to collateral months months months requirements as well as maturity (see Chart 5.24): No collateral Collateral Collateral between 1 and above 100% 100% · Loans provided with zero collateral have higher interest rates Chart 5.25. RELATION BETWEEN DEPOSIT AND LOAN RATES than ones provided with collateral. (OFFICIAL DATA ) · Loans with higher collateral requirements have higher interest % DEPOSIT RATE % LOAN RATE 28.9 30.9 rates, but their average maturity is longer 27.6 25.4 25.6 20.2 21.5 Loans disbursed by MFOs are characterized by slightly higher 17.5 14.6 nominal interest rates, which amount on average to 2.9% monthly or 41% annually. 3.1 This could be explained by: Less than 1 1-3 3-6 6-12 Over 1 · lower collateral requirements: typically MFOs do not require month months months months year As the official statistics shows commercial banks have the highest collateral; margin between deposit and loan rates for short term funds: the · higher weight of operational costs due to the smaller size of longer the maturity, the higher the funding costs, while at the same time, lending rate declines as most lending is secured by collateral. disbursed amounts; Source: NBT (2006) · currency of loans: in many cases MFOs loans are denominated BOX 5.8. COMPONENTS OF THE LOAN INTEREST RATE Coverage of the Coverage of operational Profitability of the bank attracted deposit rate Risk coverage expenses activities · Deposits · Credit risk · Credit assessment · Attracted resources · Currency risk · Administrative expenses on the inter banking market · Interest rate risk · Credit management · Liquidity risk INTEREST RATE ON LOANS Source: experts' interview 18 It covers investment projects only, i.e., medium-long term versus working capital finance. 19 The inflation rate in 2005 amounted to 7.1%. Official statistics indicate the average nominal loan rate to be 25.6%. 98 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE in somoni and as such require higher interest rates to reflect the higher cost of borrowing.20 5.2.8 UNOFFICIAL WAYS OF SOLVING THE ISSUES: VERY COMMON Unofficial payments are a serious issue faced by entrepreneurs Chart 5.26. UNOFFICIAL WAYS ARE USED ADDITIONALLY accessing the banking sector. 10% of the entrepreneurs indicated BY OBTAINING BANK LOANS using them to solve their issues positively. Altogether unofficial % OF RESPONDENTS PROVIDING COLLATERAL ways of solving issues21 represent a high burden for entrepreneurs 16% 26% (see Chart 5.26). 10% Furthermore, small and medium companies are particularly targeted by unofficial payments, with 29% of them facing the problem (see Chart 5.27). Again, this is particularly relevant as Unofficial Other Overall payments unofficial unofficial companies should rely on banks to a greater extent to finance ways solutions their growth. Unofficial solutions need to be addressed with the greatest Chart 5.27. UNOFFICIAL PAYMENTS ARE COMMON possible emphasis by the financial sector if banks expect to FOR SMALL AND MEDIUM COMPANIES increase confidence of the general public. % OF RESPONDENTS WHO OBTAINED LOAN Unofficial payments are rarer in MFOs22, where only 2.4% of the Individual 5% respondents indicated that they obtained a loan after making entrepreneurs unofficial payments (on average, 10% of the loan amount). Small and medium 29% companies 5 5.2.9 LOAN PROCESS: QUITE STREAMLINED It took on average 15 days to obtain a bank loan, from application Dehkan 23% farmers until disbursement. This average nevertheless discloses high variances according to the type of business (see Chart 5.28) ­ small and medium companies required the most time (more than a month). Nevertheless, even taking these variances into account, the loan underwriting process can be considered quite efficient, likely reflecting the self-selection process of applicants described above. The lending processing also varied by region. In GBAO, it took an average of 34 days to get a loan, while in DRS B, respondents spent only 6 days on average to get a loan. One of the reasons for this situation is the limited supply of financial services in GBAO, where only few branches of commercial banks are present. Quite similarly, entrepreneurs spent 18 days to get a loan from an MFO. 20 Over the past 3 years the differential is in the range of 6% per annum. 21 Including gifts, lunches or unofficial payments. 22 In the case with MFOs respondents were asked only about unofficial payments. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 99 ENTREPRENEURS AND FINANCE Chart 5.28. DURATION OF OBTAINING BANK LOAN IS Regionally the lending process was very fast in Kulyab, where LONGEST FOR SMALL AND MEDIUM COMPANIES applicants spent only 4 days to get a loan. The longest processing % OF RESPONDENTS was observed in Sughd region. Entrepreneurs spent almost 40 days Individual entrepreneurs to get a loan on average. MFOs in Sughd region have a certain established activity and move gradually from small scale lending 81% 14 days on average of individuals to bigger amounts provided to companies. With the increase of the loan amount also the processing duration grows accordingly. 14% 4% Small and medium companies 57% 25 days on average 29% 7% 7% Dehkan farmers 71% 16 days on average 21% 7% 1-20 days 20 to 40 40 to 80 above 80 days days days LEASING: AN ALTERNATIVE SOURCE OF FUNDING Leasing is a possible alternative source of funding for Only 5.2% of the respondents aware of leasing applied for enterprises. In 2004 the first leasing company "Nahust a leasing contract, while one third of those finalized it. leasing" was registered. Some leasing transactions were also conducted by Tojiksodirotbank and one by Chart 5.29. LIMITED AWARENESS ABOUT LEASING Agroinvestbank. The total volume of those operations % OF RESPONDENTS amounted to about 7 million somoni. Know about leasing Do not know about leasing Nevertheless, the volume of leasing operations in Tajikistan did not grow significantly in 2005. Leasing operations are constrained by the lack of state incentives (e.g., tax remissions), which could redirect the financial flows toward 70% production companies as well as limited long-term funding 92% 92% available from financial institutions and awareness from entrepreneurs. 30% 8% 8% Survey confirms the limited awareness of leasing among SMCs. Less than 10% of respondents know about it. Individual Small and medium Dehkan farmers entrepreneurs companies 100 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE recommendations 1. Provide incentive systems for banks to reduce credit rationing to SMEs, by reducing their credit risk. This in turn can be achieved: 1.1 From the government side by: · Implementing and developing improved pledge legislation measures and collateral enforcement regimes through: - introducing alternative dispute resolution mechanisms; - unified verification of collateral contracts in notary offices to speed up and facilitate the lending process; - introducing the possibility of using land user certificates as collateral for loans; · Establishing a national credit registry which would provide banks with additional borrower information, facilitating bank verification of credit requirements and credit history of borrowers; 1.2 From the banking side by: · Enhancing internal credit risk analysis capabilities by training credit officials and introducing advanced credit analysis methodologies (e.g., credit rating tools); · Promoting alternative financing mechanisms which imply reduced credit risk such as leasing; 1.3 From the private sector side by: · Introducing credit insurance provided by business associations (i.e. the Italian CONFIDI), that, in exchange for a fee, could ensure part (up to 50%) of the principal amount provided to a specific SME. Expected impact 5 By reducing the credit risk faced by financial institutions, three results are expected, which would reduce credit rationing and make financial resources more easily available to SMEs: · Increased amount of lending available to SMEs (i.e., for the same credit risk, more lending available); · Reduced interest rates, as a result of higher level of guarantees; · Reduced collateral requirements, as a result of higher level of guarantees. 2. Put in place policies to increase the confidence of the general public in the Tajikistan financial sector. This could be achieved: 2.1 From the government side by: · Increasing the awareness of the population of the Fund for Deposit Insurance, and strenghten its role for low/middle income households by introducing an upper limit to the coverage while increasing the threshold for full coverage (currently 250 somoni - $78); · Amending the banking legislation to introduce bank secrecy disclosure only on the basis of a court decision; 2.2 From the commercial banking side by: · Improving their internal controlling and auditing processes to eliminate unofficial payments from their branches; · Increasing accountability by introducing the principles of bank corporate governance and, over time require international rating companies to provide independent evaluation of their financial stability23; · Promoting the creation of an Inter-banking Association to develop common standards and promote banking interests on different levels as well as promoting banking activities among the population; 23In the short term, unfortunately Tajik banks cannot benefit from a rating provided by international rating agencies as the sovereign rating of Tajikistan provides an upper bound for their evaluation. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 101 ENTREPRENEURS AND FINANCE Expected impact Increased confidence in the financial sector will foster its development in several ways, among which, by: · Channeling financial resources to the financial sector, i.e., increasing the share of deposits, allowing for an increased intermediary role between individuals and the SME sector; · Narrowing the confidence gap between SMEs and banks, allowing them to revert more frequently to banks in case of need. 3. Create alternatives to lending by local banks, by: 3.1 Fostering the entry into the Tajik banking market of international financial institutions specializing in SME lending, which could easily leverage internationally developed credit and organizational skills as well as higher ability to leverage funding obtained on the international markets; 3.2 Furtherdevelopingmicrofinanceinstitutionsbyunifyingtheregulatinglegislationandsimplifyingthebookkeeping and reporting systems. Expected impact ByallowingtheentryofforeignplayersintotheTajikfinancialsector(allowedlegallysince2005),lendingopportunities will be increased through: · More financial resources will be directly available to SMEs; · Competition will force local players to align to best practices in terms of product availability and conditions. 4. Support the development of banking services by creating a "need for banks": 4.1 From the government/NBT side by: · stimulating the use of "cashless" payment systems (i.e., by introducing the possibility to direct debit charge bank accounts for the payment of local utilities); · conducting an awareness campaign addressed to communicate the benefits of using banks for the general public; · reducing the 12% withholding tax on deposit interests to attract more deposits from individuals. This measure could be applied to deposits denominated in somoni only to provide incentives to invest in local currency; 4.2. From the commercial banking side: · developing and disseminating informational materials on available banking products, including deposits, credit cards, payment systems and financing (including guidelines on loan application procedures as well as samples of relevant forms and applications). Expected impact Allowing banks to develop closer relationships with SMEs, which will in turn reduce the information asymmetry which creates a limit to the lending market. This in its turn would channel excess cash into the financial system, reducing the funding constraints for banks. 102 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE annex attachment 5.1. financial sector of tajikistan The financial sector of Tajikistan can be grouped into two subcategories: · First level: National Bank of Tajikistan; · Second level: ­ commercial banks; ­ microfinance organizations, non-banking financial institutions, and loan societies. The National Bank of Tajikistan (NBT), created in 1991, provides the banking surveillance function24 in addition to conducting the monetary policy to control inflation and money creation function. commercial banks The banking sector underwent major changes in the last 3 years and is now composed of 9 players: 6 banks in the form of joint- stock companies, 1 joint-venture bank, 1 foreign bank and 1 state bank ("Amonatbank," carrying out the functions of state saving- bank). Of these 9 players, 8 are private. Chart 5.30. THE STRUCTURE OF THE FINANCIAL SECTOR OF REPUBLIC OF AJIKISTAN T 5 Financial sector of Tajikistan National bank of Tajikistan Commercial banks Non-banking organizations Credit societies Non-banking financial organizations Microfinance organizations 24NBTconductsthesurveillanceovercommercialbanks,microfinanceorganizations, non-banking financial institutions, and loan societies. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 103 ENTREPRENEURS AND FINANCE Foreign investments started to play a role in the Tajik financial market:theFirstMicrofinanceBankcreatedin2004byinternational financial institutions is becoming one of the most active players in the market. The rise of the requirement on minimum capital for commercial banks to $5 million was one of the major forces behind the consolidation of the sector as it forced some of the weakest institutions out of the market. As a result, the concentration of the sector is quite high; in fact, the 2 largest players, Orienbank and Agroinvestbank, with 43% of the branches, cover about 60% of the market while the 4 largest players (Orienbank, Agroinvestbank, Amonatbonk and Tojiksodirotbank) reach more than 80% of it (see Chart 5.31). For the time being, there exists no inter-banking association representing and lobbying the interests of commercial banks in Tajikistan. Such an association could additionally promote the popularization of the banking sector among the population. Chart 5.31. INFORMATION ABOUT FUNCTIONING COMMERCIAL BANKS OF RT AS OF ULY J 1, 200625 LOAN PORTFOLIO MILLION SOMONI , % OF TOTAL DEPOSITS MILLION SOMONI , % OF TOTAL NUMBER OF BRANCHES % OF TOTAL LOAN VOLUMe DEPOSIT VOLUME NUMBER OJSC "Agroinvestbank" 132 31% 121 24% 57 28% OJSC "Orienbank" 115 27% 190 38% 31 15% OJSC "Tojiksodirotbonk" 55 13% 74 13% 9 4% State saving bank "Amonatbonk" 44 10% 64 15% 74 36% CJSC "Tajprombank" 32 8% 9 2% 11 5% OJSC "Sohibkorbank" 16 4% 1 0.1% 11 5% OJSC "Bank Eskhata" 15 4% 16 3% 8 4% CJSC "FMFB" 20 3% 12 2% 3 2% Tijorat Bank 0 19 4% 0 Non-banking financial institutions Non-banking financial institutions are legal entities that provide some banking services that range from lending, deposit taking, money transfer, cash transactions, emission and acceptance of credit cards, etc (see Box 5.10). The list of provided services by different types of non-banking institutions is determined by the current legislation as well as set in the issued licenses. Non-banking financial institutions include: 25 The information is only provided on 9 existing banks to the date of reporting. In 2005, 12 banks were operating in Tajikistan. In 2006 banks "STB-Investbank" and "Bank Olimp" were closed because of non-fulfillment of banking legislation, while "Kafolatbonk" was reorganized into a credit society. 104 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE · non-banking financial organizations (NFO)26; · credit societies (CS); · Microfinance organizations (MFOs): the range of non-banking financial organizations was expanded with the adoption of the law "On Regulation of Microfinance Organizations" in July 2004, and thereby the second level of the banking system was created (loan/deposit taking organizations). These institutions are aimed to fill in the market niches uncovered by the banks. NFIs are also seen as helpful platform for banks. If a bank can not fulfill the minimum capital requirement, it can get reorganized as a NFO/CS without being completely pulled out of the financial market. Sometimes banks can use NFIs to split up their operational departments. For instance, the bad performance of a large portion of the cotton loans was a decisive factor in the splitting up of Agroinvestbank, and the transfer of the cotton portfolio into a separate vehicle - NFO "Kredit-Invest". According to the assessments of the World Bank in Tajikistan the total debt of the cotton farms amounts to $280 million27 and a large chunk of it is provided by non-banking financial institutions. In the last years the role of microfinance in the financial sector has become more significant. As of April 1, 2006, there are 20 micro lending funds (MLF), 1 micro lending organization (MLO), and 2 micro deposit organizations (MDO) working in the Republic of 5 Tajikistan.28 BOX 5.9. AMFOT AND MFOS IN TAJIKISTAN the cash assets (safe). The NBT does not require the minimal capital for MLF. Association of the microfinance organizations of Tajikistan 2. Micro lending organization (MLO) ­ is a commercial MFO (AMFOT) supports the strengthening and development of the which can be created as Closed Joint-stock company microfinance market of Tajikistan. It acts as a representative (CJSC) or as a Limited liabilities company (LLC). The activity of of the interests of microfinance organizations in the country. MLO is subject to the licensing from NBT. The minimal capital AMFOT protects the rights and interests of its members through requirement is $10,000. A MLO can provide the same services elaboration of unified strategic and tactical approaches and as a MLF does. coordination of the MFOs' actions. 3. Micro credit deposit organization (MDO) ­ is also a commercial organization and its activity is also subject to Currently 25 MFOs are members in AMFOT. According to the the licensing from NBT. The minimal capital requirement by legislation there are three types of MFOs: MDO amounts to $100,000. Additionally, MDOs can provide: 1. Micro lending foundation (MLF) ­ is a non-commercial MFO i) deposits taking from legal entities and individuals; ii) which works on the basis of certificate issued by National administration of the client accounts; iii) cash transactions; iv) Bank of Tajikistan. The MLF can provide the following services: money transfer; v) emission and acceptance of credit cards; i) loans up to $20,000 per client; ii) leasing operations; iii) loan vi) pledging of security. borrowing by other organizations; iv) factoring; v) storing of 26 To differentiate them from banks, non-banking financial organizations cannot provide lending transaction. 27 World Bank (2006a). 28 http://www.nbt.tj/?c=44&id=44&a=242. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 105 ENTREPRENEURS AND FINANCE The loan portfolio of microfinance organizations (MFO) increased during the period from March 2005 to July 2006, from $8 million to $10 million and the total number of clients rose from 57,000 to 84,000.29 Despite this positive development, the demand for micro loans remains high and experts estimate an annual demand for micro loans of about $100 million.30 BOX 5.10. DEFINITION OF NON-BANKING FINANCIAL ORGANIZATION AND CREDIT SOCIETY A credit society is a legal non-banking commercial entity that A non-banking financial organization (NFO) is a legal entity conducts its activity on the basis of a license from the National which is not a bank and operates on the basis of a license Bank of Tajikistan. A credit society is entitled to provide the from the National Bank of Tajikistan. It is entitled to provide a following bank transactions: specific set of banking services, which is determined for each · Cash transactions: reception, converting, exchange, organization separately: wrapping and storage of the bank notes and coins; · Cash transactions: reception, converting, exchange, · Lending operations only for the members of the society; wrapping and storage of the bank notes and coins; · Deposit taking operations only among the members of the · Lending operations; society; · Transfer operations; · Clearing transactions only among the members of the · Safe operations: storage of papers, documents and society; valuables of the clients, including rent of the safe boxes and · Safe operations: storage of papers, documents and rooms; valuables of the clients, including rent of the safe boxes and · Clearing transactions, etc. rooms. The minimal capital requirement is set by the NBT for each NFO The minimal capital requirement for the credit societies is set separately. The provided operations are conducted only in to $300,000. The provided operations are conducted only in national currency. national currency. 29 Only on members of AMFOT. 30 Based on results of National conference ,,Microfinance in Tajikistan: possibilities and perspective". 106 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 6. inspections INSPECTIONS 6. inspections It is essential that the inspections system for businesses ensures compliance with the legislation while not creating an unneces- main findinGs sary burden for private enterprises. · Until mid 2006, inspections lacked a com- Survey data show little change since the previous report1; inspec- prehensive regulatory framework: our data tions still represent one of the most burdensome procedures for reflect the pre-reform situation. SMEs, resulting in unnecessary costs and missed business oppor- tunities, as well as inefficient use of public resources. Despite the · The lack of a risk based approach for se- frequency of inspections, limited steps are taken to ensure com- lecting businesses for inspections resulted in pliance with the underlying provisions. officials inspecting as many entrepreneurs as possible: 96% of the respondents were During the surveyed period, the Tajik government initiated a com- inspected in 2005, with an average of 13 prehensive reform of the inspections system, which resulted in the inspections per entrepreneur. July 2006 adoption of Laws establishing a new basis for the inspec- tions system.2 The new Laws provide for a system of conducting · The procedure for conducting inspections inspections and selecting businesses for inspections that should was also unclear and resulted in a loss of be more effective and efficient in ensuring compliance. significant resources in 2005: The Inspections Law represents a crucial step in the reform of the - Individual entrepreneurs spent 6 busi- inspections system, but to achieve its goal, it needs to be sup- ness days and 250 somoni ($78) deal- ported by additional measures: amendments to the secondary ing with inspectors, for a total impact legislation, creation of checklists to facilitate compliance, and estimated at about 7% of their annual development of inspections manuals at each inspecting agency profits3; level. - Small and medium companies spent almost 20 business days dealing with The effectiveness of reform will depend on how well the inspectors inspectors, paying out 1050 somoni can understand and correctly apply the new methods in practice. ($328), for a total impact estimated at Therefore it should be accompanied by a larger scale program about 7% of their annual profits; aimed at raising the qualification of inspecting officials. In addi- - Dehkan farmers spent 3 business days tion the numerous technical requirements underlying inspections and 70 somoni ($22) dealing with in- are often outdated and contradictory. Their revision and update spectors, for a total impact estimated will be the necessary complement to the above reform. at more than 1% of their annual profits. Finally, the results of the reform will not be fully realized until peo- · The legal awareness of entrepreneurs re- ple are completely aware of their rights and duties. For this reason, mains very low; on average, only every fifth equally important will be programs aimed at raising awareness of surveyed entrepreneur reported having a the entrepreneurs to make them able to capture the benefits of good knowledge of the legislation regulat- the new legislation fully. ing his activity. The next survey will be able to measure the results of the under- · Every second entrepreneur used unofficial taken efforts. ways to solve issues related to inspections in 2005, whereby 33% of them solved in- spections problems through unofficial pay- ments. 1 IFC (2004b). 2 No.154 dd. July 28, 2006, hereinafter the Inspections Law and No. 193 dd. July 28, 2006. 3 This profit equivalent also includes the opportunity cost of labor and lost income (see more details further in the chapter). 108 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS 6.1 inspections: the leGal framework Inspections are essential components of the regulatory system, ensuring that business activities are conducted according to reg- ulations aimed at protecting the health and safety of the citizens, "An inspection is a form of controlling activity mean- their consumer rights, and the safety of the state. Nevertheless, it ing the actions (...) of the controlling bodies aimed is essential that the state balance this control with efficient use of to ensure that business entities observe and follow the terms and requirements set by the laws of RT, economic resources. to discover and suppress violations of the law, to prevent them and to apply sanctions." At the time of data collection, no unified regulatory framework for Article 2 of the Inspections Law inspections existed in Tajikistan. As a result, each agency conduct- ed inspections according to its own rules. This situation reflected that of 2003, when the first survey of the business environment in Tajikistan showed that inspections were a significant obstacle to the development of entrepreneurs' activities.4 The system of inspections in the country causes many complaints, not only from entrepreneurs but also from government officials at all levels (See Box 6.1). Realizing the importance of the development of the private sec- tor for Tajikistan's economy, the government took active steps to improve the system of selecting and conducting inspections: · In 2001 the Decree of the President of the Republic of Tajikistan created the Inspections Registration Book (IRB)5 - an important and effective tool for reducing unjustified inspections6; · In 2004, the government started a reform process that culmi- nated with the July 28, 2006 approval of two laws that radi- cally changed the inspections system in the country: the In- 6 BOX 6.1: THE ANNUAL ADDRESS OF THE PRESIDENT OF THE REPUBLIC OF TAJIKISTAN TO MADJLISI OLI IN 2004 GAVE ADDITIONAL INCENTIVE TO THE REFORMS IN THIS AREA "The sector of entrepreneurship (...) still has not taken the proper place in the country's economy, because its development is hindered by many bureaucratic obstacles. (...) and encounter large problems during (...) various inspections on the part of numerous bodies ..." "...specifically define the power of authority and the responsibility of each controlling body. Based on this, to ensure transpar- ency of the entrepreneurs' rights and the legal power of authority of the state inspecting bodies...." From the annual address of the President of RT E. Rakhmon to Madjlisi Oli, April 30, 2004 4 See IFC (2004b) page 51. 5 Decree No. 542 of the President of RT, dd. February 28, 2001 "On Introduction of the Inspections Registration Book." 6 IFC distributed 125,000 copies of the IRB in 2006 among all entrepreneurs of Tajikistan. For more details, see page 124. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 109 INSPECTIONS spections Law and the Law On Changes and Amendments to the Tax Code. The Law On Changes and Amendments to the Tax Code refers to inspections conducted by tax bodies, while the Inspections Law covers the remaining set of agencies7 (for more details on the coverage of the Inspections Law, see Attachment 6.1 in the Annex). The Inspections Law introduces the following principles: - Risk management: inspections are conducted and enterpris- es are selected based on the assessment of the risk that their economic activity poses to public safety; - Functional division: inspection results decision and the fine amount are determined by different individuals than the ones conducting the inspection; - Transparency and compliance: in order to be able to comply with the rules, entrepreneurs need to have a full understand- ing of the regulations and of their own duties and responsibili- ties. The Inspections Law sets clear and specific procedures for all BOX 6.2. SOME PROVISIONS OF THE INSPECTIONS LAW Main objective Regulating the activities connected to arranging and carrying out inspections of business entities Frequency of inspections 1. Not more than once in 2 years (in some cases not more than once in 6 months); 2. New SMEs are not subject to inspections for the first 3 years of their work. 1. For legal entities: Duration of inspections Financial audits < 20 calendar days / Other inspections < 5 business days. 2. For individual entrepreneurs: Financial audits < 10 calendar days / Other inspections < 5 business days. 1. Authorization to conduct an inspection; Procedures for 2. Prior notification (3 days before the audit starts); conducting inspections 3. Use of the checklist; 4. No simultaneous inspections from different levels of one body; 5. A written report detailing the results of the inspection. Rights To obtain information on the inspection / To know who is authorized to inspect. Rights and duties of entrepreneurs Duties To produce required materials and documents / Not to impede the inspection / To execute the deci- sions. Rights To request written explanations / To request documents. Rights and duties of inspectors Duties To present the authorization for the inspection / To explain the rights and duties of entrepreneurs as well as their own rights and duties. Inspection bodies Entrepreneurs awareness Make normative documents accessible to the public. Publish an annual report, short summary of finding as related to inspections, short review based on the assessment, the plans and priorities for the next year. 7 See Article 2, Item 2 of the Inspections Law. 110 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS stages of inspections, starting from the preparatory one to the fol- low-up phase: · Before an inspection: - an inspecting body selects the businesses subject to an in- spection based on the risk management principle (non-risky economic activities are inspected at most once in 2 years8); - new businesses are not inspected in the first 3 years of opera- tions; - the inspecting body must authorize an inspection officially; - an advance notification of the inspection is sent to the busi- ness. · During an inspection: - an inspection is conducted on the basis of the inspection checklist,9 which is specific for each type of business activity and publicly available to the business; - an inspection is documented in an official inspection docu- ment; - the duration of a non-financial inspection cannot exceed 5 working days. · After an inspection: - the head of the inspecting agency reviews the inspection document and issues a decision on the inspection results; - the appeal procedures are clearly described in the decision. Thus, the new Inspections Law represents the basis for the devel- opment and improvement of the inspections system in Tajikistan. However, adoption of the law is not sufficient to change the situ- ation radically. Many other activities need to be implemented, 6 beginning with bringing the legislative and normative base into conformity with the Law, and launching a broad-scale informa- tion campaign. The Chart 6.1 presents the main stages of the inspections system reform based on the Inspections Law. The expected result of the reform is a system that increases the overall compliance with the regulations by introducing compli- ance promotion tools (e.g., advance notice), by raising the en- trepreneurs' awareness (e.g., through checklists) and by introduc- ing risk-management principles that will allow inspections to focus on the activities most likely to affect public welfare. The outcome should result in reduced burden for businesses and increased ef- 8 With exception for tax inspections: thematic inspections on taxation once in a year, complex inspections on taxation once in two years, Tax Code of RT. 9 With exception for tax inspections. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 111 INSPECTIONS Chart 6.1. SCHEME OF THE INSPECTIONS SYSTEM REFORM IN AJIKISTAN T August 2006 ­ 2007 March 28, July 28, Activities to be implemented by all inspectorates 2001 2006 Inspections Regis- Inspections Inspection manu- Risk tration Book Law Sectorial Laws als management Checklists Presedential Decree Law No. 194 "On Amendments to the Standardized proce- Set up categories of risk A questionnaire serv- No. 542 "On Intro- Inspections of Eco- laws to reflect the dures for conduct- and definition of risky ing as the basis for an duction of Inspec- nomic Activities in risk management ing inspections in sites to be inspected inspection tions Registration Tajikistan" principle accordance with more frequently Book in Tajikistan" the Inspections Law Chart 6.2. MOST BUSINESSES UNDERWENT AT LEAST ONE ficiency of the inspecting bodies. INSPECTION IN 2005 % OF RESPONDENTS SUBJECT TO INSPECTIONS The effect of the inspections reform strategy undertaken in Tajikistan will be traced in subsequent surveys. 98% 96% 99% 98% 99% 96% 94% 88% 6.2 coveraGe and freQuency of inspections remain criti- cal issues for smes The tendency found in 2002 survey for state bodies to inspect a . . Total SME Individual en- Small and Dehkan farm- sector trepreneurs medium com- ers large majority of enterprises still prevails in 2005. About 96% of SMEs panies 2002 2005 were inspected at least once a year in 2005 (see Chart 6.2). Chart 6.3. THE NUMBER OF INSPECTIONS IS SLOWLY DECLINING In addition, the number of inspections per enterprise, although declining overall, is still significant: on average, SMEs are inspect- AVERAGE # OF INSPECTIONS PER RESPONDENT ed 13 times per year (see Chart 6.3). The most significant decline is seen for dehkan farmers, and can be attributed to 2 factors: the 16 17 15 13 13 decreased frequency of tax inspections, and the elimination of 11 10 most of the licensing requirements, which in turn reduced inspec- 4 tions by licensing authorities.10 Start-up businesses underwent more inspections than existing . SME sector Individual en- Small and Dehkan farm- trepreneurs medium com- ers business on average. It is expected, however, that the number panies 2002 . 2005 of inspections for start-ups will decline substantially with successful implementation of the new law, which provides a 3-year grace Chart 6.4. START-UP BUSINESSES ARE MORE SUBJECT TO period for start-ups (see Chart 6.4). INSPECTIONS More than 70% of inspections are carried out by three agencies: AVERAGE # OF INSPECTIONS PER RESPONDENT 16 tax bodies (Tax Inspectorate and the Tax Police) conduct the 13 14 15 most inspections, followed by the Sanitary and Epidemiological 11 10 Service and Fire Authority (see Chart 6.5). 5 4 Interestingly, the Tax Police reportedly carried out more than one . SME sector Individual en- Small and . Dehkan trepreneurs medium farmers companies Existing businesses Start-ups 10 For more details, see the Chapter 3. 112 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS BOX 6.3. INFORMATION ON INSPECTIONS IN SOME COUNTRIES BASED ON THE RESULTS OF THE SURVEYS CONDUCTED BY THE IN- TERNATIONAL FINANCE CORPORATION The table below provides a comparison of inspections data from similar IFC surveys in the region. Those countries which began reforms earlier have already achieved positive results, such as a decrease in coverage and number of inspections. At the same time it should be noted that the application of risk management principles leads to focusing inspections to riskier businesses, increasing the duration of inspections of those entities. Approaches to reform in other countries are analyzed in Attachment 6.2. Belarus Georgia uzbekistan Ukraine Tajikistan Coverage, % 66 32 22 95 96 Average number of inspections per one SME 4.6 0.6 0.9 3.8 12.7 Average duration of one inspection, days 1.4 4.5 2.9 2.2 0.5 Average duration of all inspections, days 6.3 2.7 2.6 8.5 6.5 Cost of all inspections, USD 425 83 N/A N/A 83 * countries in bold made important steps to reform inspection system Source: IFC (2006a), IFC (2006b), IFC (2007a), IFC (2007b) inspection per enterprise per year on average. According to the Tax Code of RT,11 the Tax Police are entitled to participate in the Chart 6.5. TAX, SES AND IRE AUTHORITIES COVER ABOUT F inspections conducted by the Tax Inspectorate, but have no right 70% OF INSPECTIONS FACED BY ONE ENTREPRENEUR13 to carry out independent inspections.12 That they do so regardless AVERAGE # OF INSPECTIONS PER SME is indicative of the limited compliance by state bodies with the existing regulations. 3 13 2 1 0.3 1 There is also the problem of multiple inspections. These can be 5 carried out by the same body at different organizational levels (district, city and regional), as well as by different bodies con- 6 ducting overlapping inspections. For instance, an audit of the Epi- police Service Others Total payment of social tax is conducted by tax bodies as well as by inspection Tax Authority protection the Pension Fund (which has a right to inspect, but with the coor- Tax Fire dination of tax and finance bodies).14 The same overlaps are seen Social with the State Electricity Supervision Body (Energonadzor)15 and Sanitary-andand demiological Fire Department,16 which both have jurisdiction over the safety of electrical wires and electricity generating plants. The two bodies sometimes duplicate each others' activities during their inspec- tions of fire standards. 11Article 128 "The Rights of the Tax Police Divisions." 12The functions of the tax police were transferred to the newly established Agency on State Financial Control and Fight against Corruption, Presidential Decree, dd. November 30, 2006, No. 9. 13Category "Others" include: Department of Internal Affairs, State Automobile In- spection (GAI), Tajikstandard, Environment protection body, Khukumat, etc. 14In accordance with the Law of RT "On State Social Insurance," No. 517, dd. De- cember 13, 1997, FSP letter No. 10/570, dd. November 29, 2002. 15In accordance with the Law of RT "On Energy," No. 33 as of November 29, 2000, Government Resolution No. 84 dd. March 6, 1998, Government Resolution No.465 dd. October 17, 1996. 16Law of RT "On Fire Safety," No. 995 dd. July 21, 1994, Government Resolution No.726 dd. December 7, 1995, Government Resolution No. 457 dd. October 5, 1995. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 113 INSPECTIONS Chart 6.6. THE FREQUENCY OF INSPECTIONS SHOWS HIGH The average number of inspections also shows regional differenc- GEOGRAPHICAL VARIANCE es. Individual entrepreneurs in Dushanbe, for example, undergo AVERAGE # OF INSPECTIONS PER INDIVIDUAL ENTREPRENEUR almost double the number of inspections as their counterparts in other regions (see Chart 6.6). 25 19 18 Regional difference can be explained by several factors, but the 14 14 13 8 main driver appears to be the ratio between inspectors and en- terprises. Most of the inspecting bodies are located in the capital, B A Dushanbe. Therefore entrepreneurs in Dushanbe are subject to Oblast district district inspections at several organizational and administrative levels: Dushanbe province) Republi- of province) province Autonomous Republican rayon, city and national. of Kulyab Subordination Subordination Sughd (Khatlon Districts (Khatlon 6.3 who is inspected? the rationale and outcomes Districts can Kurgan-Tube are still unclear Gorno-Badakhshan The rationale for inspections is unclear (see Table 6.1). TABLE 6.1. MAJOR CHARACTERISTICS OF THE IN- 6.3.1 INSPECTIONS ARE NOT RISK BASED SPECTIONS IN TAJIKISTAN characteristics description Analysis of the distribution of inspections by sectors of the economy 1. High coverage Nearly 100% coverage without proves that the system for planning and conducting inspections in risk-based approach. the country is not risk based. The number of inspections (see Chart 2. No official conse- In 90% of cases inspection had quences no consequences. 6.7) does not show a high variance among sectors of activity: for 3. Duration is too short 50% of undertaken inspections example, consumers' services and retail trade businesses, which to be efficient lasted no more than 1 hour. do not pose high levels of risk to the population, were inspected in 2005 more often than the construction businesses. Chart 6.7. IN 2005, ENTREPRENEURS IN CATERING AND TRANS - Entrepreneurs involved in provision of services were inspected PORT WERE INSPECTED MORE THAN THOSE IN OTHER SECTORS17 twice by Energonadzor (Electricity Supervision), while those in- volved in manufacturing consumer goods were inspected just AVERAGE # OF INSPECTIONS ­EXCLUDING TAX INSPECTIONS once, despite a higher risk involved in working with equipment. Non-compliance with a risk-based inspections system implies Public Catering 11 waste of public resources as well as unnecessary burden for busi- Transport 11 nesses. Box 6.4 gives an example on risk-based approach. Consumer services 9 6.3.2 MANY INSPECTIONS, FEW RESULTS Wholesale trade 7 More than 80% of the interviewed entrepreneurs underwent the Retail trade 6 inspections without any consequences ­ i.e. only about one in five faced sanctions (see Chart 6.8). Penalty sanctions and withdraw- Production of consumer goods 6 al of products from sale were the most commonly used punitive actions by inspecting bodies. Construction 5 Agriculture 3 Others 6 17Category "Others" include: consulting services, processing of agricultural produc- tion, medical services, pharmaceutical products, tourism and hotel business, and communication. 114 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS BOX 6.4. RISK ASSESSMENT AND MANAGEMENT In an inspection system driven by risk-assessment and risk-management principles, the inspecting body selects the sites that have a high possibility of violating the existing legislation. There is an assumption that certain activities cannot breach the legislation and therefore are not subject to inspections. Thus, there is no need for 100% control over all activities, which is in any case impossible due to limited resources. In other words, the inspectors focus on lowering the risk factors in a risk-management system. By using risk-management techniques when selecting inspection sites, inspection agencies can more efficiently utilize their limited resources to ensure compliance with the law. Strategic planning and clear institutional objectives can also lead to more effective use of resources. In practice, this can be as follows: · Labor inspectorate has specific objectives and specific tasks in terms of observation of the basic legislation. · It has the staff, technical equipment and other resources to fulfill its duties. -- The total working hours of the inspectors can be calculated as follows: WL=(NO-NA)*(DB-DV-DL), where NO- Number of staff, NA- number of administrative and other staff, DB- number of business days, DV- number of vacation days, DL- sick leave days. -- The calculated number of working hours of the inspectorate can be distributed according to a strategic planning mecha- nism driven by the priorities discovered while using risk reduction methodologies. For example: » Preventive measures ­ 40% of the working time: - Preventive work in 1-2 priority areas having risk factors, and set to carry out within a certain year (e.g. construction and installation works, etc.) can take about 20% of the working time; - Other preventive work, like holding information campaigns on a certain topic, inspections aimed at providing in- formation and consultations for entrepreneurs, operating in high risk fields and in the fields with high law violations rate can take up to 20% of the remaining working time. » Training of inspectors and day-to-day trainings to maintain the professional qualifications (in the school for the State officials, on the job training, self-education) ­ 15% of the working time. » Office work (work with visitors/applicants, preparation of various reports and other documents) ­ 25% of the working time. » Other fields of activity as per specifics of some countries and specifics of the controlling body ­ up to 20% of working time. 6 · A crucial element of the system is that staff must report on the results of above events and that a performance evaluation system is in place to monitor the achievement of the objectives. · Work priorities must be reviewed at least once a year in accordance with the current information and decision-making policy to ensure the most efficient use of resources. Chart 6.8. ONLY SMALL NUMBER OF INSPECTED ENTREPRENEURS The ratio between inspected companies and actual conse- RECEIVED A PENALTY OR OTHER ADMINISTRATIVE ACTION quences is explained by two reasons: on the one hand it testifies % OF RESPONDENTS SUBJECT TO INSPECTIONS to the absence of a proper selection mechanism, which would 81% No consequences allow the agencies to place higher priority on inspecting the en- 19% Consequences terprises most likely to violate regulations. On the other hand it is directly linked to unofficial payments. In fact, a large number of entrepreneurs (almost 1 out of 3) prefer to avoid any sanctions from inspecting bodies by resorting to unofficial payments (see Chart 6.9). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 115 INSPECTIONS Chart 6.9. SMES RESORTED TO UNOFFICIAL SOLUTIONS BOTH TO However, even entrepreneurs who did receive administrative AVOID AND TO REDUCE VIOLATION FINES sanctions and fines made some unofficial payments, likely to re- % OF RESPONDENTS WHO MADE UNOFFICIAL PAYMENTS duce the size of the fine and alleviate the consequences of in- 47 spections. 31 Overall, the low number of infringements is a sign of the ineffi- ciency of the inspection system. In fact, if no infringements were revealed during the last inspection (at most one year before) and the business does not belong to a high risk category, it is unclear No fines Fines what purpose repeated inspections will serve, apart from increas- ing rent-seeking opportunities. "Frankly speaking, we are bothered by these inspections, when the city administration comes after the rayon to check the same thing..." 6.3.3 INSPECTIONS ARE TOO SHORT TO BE EFFECTIVE - Entrepreneur, focus-group participant Very often the duration of inspections is too short to be effective. Every third inspection of individual entrepreneurs lasted less than BOX 6.5. EXTRACT FROM INSPECTIONS LAW 30 minutes. Some inspections lasted only 15 minutes, which is in- sufficient to assess compliance of the entrepreneur's activity with "1. Every inspecting body carries out inspections prescribed norms (see Chart 6.10). A possible explanation for this ... not more than once in two years, except for the might be an informal relationship between officials and entrepre- cases envisaged in the present Law." neurs. Article 10 Chart 6.10. EVERY 6.3.4 UNOFFICIAL WAYS ARE IN MOST CASES THE EASIEST SOLU- FOURTH INSPECTION FOR INDIVIDUAL ENTREPRENEURS LASTED LESS THAN 15 MINUTES TION % OF RESPONDENTS INDICATING DURATION OF INSPECTION NOT LONGER THAN 30 According to the survey, about 52% of the interviewed entrepre- MINUTES neurs used unofficial means to resolve inspections issues in 2005 (see Chart 6.11). This includes unofficial payments, reference to 14% friends and relatives, and other informal options (invitation to 12% 9% lunches, etc.). less than 10 minutes between 10 and 15 between 15 and 30 Although unofficial means are common across all regions of the minutes minutes country, they are especially widespread in the Kurgan-Tube region of Khatlon province, where almost all entrepreneurs preferred to solve problems through unofficial methods (see Chart 6.12). Many entrepreneurs perceive unofficial solutions as a normal aspect of their business activity. This encourages transformation Chart 6.11. UNOFFICIAL WAYS OF SOLVING ISSUES ­ COM - of the "inspector-entrepreneur" relationship into one in which MON BY INSPECTIONS they become "partners" in bypassing the official system. This re- % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS lationship has developed due to various factors: the high level 19 of administrative interference into entrepreneurship activities, the 52 complicated and often outdated norms and requirements of in- 33 specting bodies, the low level of awareness of entrepreneurs, as well as the low salary level of government officials, whereby the Unofficial Other unofficial Unofficial solutions payments ways monthly wage is below the consumption norm (see Box 6.6). 116 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS 6.4 inspections: a relevant Burden for smes ... Chart 6.12. UNOFFICIAL WAYS OF SOLVING ISSUES ARE COMMON IN ALL REGIONS OF THE COUNTRY 6.4.1 ...IN TERMS OF TIME % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS Analysis of the legislation showed that prior to the new Inspections 96% 76% Law most inspecting bodies did not have clear guidelines for car- 63% 47% 35% 31% rying out inspections. The duration of inspections is clearly linked to the size of businesses: while it decreased significantly in 2005 for individual entrepreneurs district Oblast district Republi- (almost 3 times) and dehkan farmers (more than twice), it also province) province province) of Dushanbe showed an increase for small and medium companies in com- Kulyab Subordination Sughd parison to 2002 (see Chart 6.13). Kurgan-Tube (Khatlon Gorno-Badakhshan Autonomous (Khatlon Districts can The reduction of time spent in inspecting individual entrepreneurs "I've known the inspectors for a long time, and we have a mutually beneficial relationship ­ they help and dehkan farmers can be explained on the one hand by the me and I help them ..." reduction in the number of inspections (as it is the case for de- - Entrepreneur, focus-group participant hkan farmers), and on the other by the limited scale of the inspec- tions (in particular for individual entrepreneurs). For example, the Chart 6.13. TIME SPENT FOR ALL INSPECTIONS RANGES most frequent inspections are field audits by the tax inspectorate. FROM THREE DAYS TO A CALENDAR MONTH These inspections are limited to verification of the entrepreneur's . . # OF BUSINESS DAYS 2002 2005 patent and cash receipts. As these practices have become more 19 20 known among entrepreneurs, the duration of the audits has likely 17 reduced with respect to 2002. 6 7 3 Inspections of small and medium companies take the most time, lasting nearly one calendar month (20 business days) and inter- Individual Small and Dehkan entrepre- medium farmers rupting their usual activity. This is an increase from the previous sur- neurs companies Duration of vey despite the reduction in the number of inspections. The longer 1 inspection 5 14 3 in hours 6 BOX 6.6. AVERAGE SALARIES OF INSPECTORS, CONSUMPTION NORMAND INSPECTIONS REVENUES The nominal average monthly wage of wage-earners ...while the cost of food in the consumer basket per one household in the tertiary sector was 82 somoni in 2005... member (consumption norm) was 87 somoni in 2005.18 To change the existing situation, it is important to raise entrepreneurs' legal awareness, to raise the inspectors' technical qualifica- tions, and most importantly to introduce incentive systems that link public officials' salaries with their performance. In particular until salaries allow the official to afford normal living standards, unofficial payments will not be eradicated. Raising salaries per se is not a solution. Introducing risk-based inspection mechanisms should bring efficiency by reducing the number of needed inspec- tors, and in turn free up resources to be dedicated to increased salaries according to a performance based system. According to our data, it can be estimated that inspections-related payments in the country (including tax inspections) range between 30-40 million somoni ($10-$12 million).19 Even if these payments were to be official, they would represent no more than 3% of total government revenues. Therefore, it is difficult to justify inspections, in particular tax inspections, based on revenue motivations. On the other hand, if we consider the total number of inspectors active in Tajikistan (~4,000), the monthly revenue generated by each of them is about 620­830 somoni ($195-$260), which appears to be the amount necessary to integrate the official salaries. 18NBT (2006). 19By multiplying average cost of all inspections 265-330 somoni ($83-$103) by the total number of SMEs in the country (121,000 entities). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 117 INSPECTIONS BOX 6.7. EXTRACT FROM INSPECTIONS LAW "1. The duration of a financial audit of the activity of a legal entity must not exceed 10 calendar days. 2. Inspection ... by other inspecting bodies ... with duration, not exceeding 5 business days." Article 14 Chart 6.14. INSPECTIONS BY STATE AUTHORITIES OF SMALL AND duration of inspections for small and medium companies is clearly MEDIUM COMPANIES ARE THE LONGEST linked to the higher complexity of these more structured business HOURS PER1 INSPECTION activities (as Chart 6.13 shows, the duration of one inspection for them is about three times the one for individual entrepreneurs), 3 but also by the higher number of bodies performing inspections. Tax inspection 24 6 4 Distribution of the duration of one inspection indicates that some Tax police 9 of the inspections have very short-term character. For instance 7 about 60% of individual entrepreneurs had inspections no longer Social 2 than 1 hour. This could be due to the fact that inspectors visit en- protection 7 5 trepreneurs just to collect a bribe (see Chart 6.15). Environmental 2 Chart 6.15. ABOUT 50% OF INSPECTIONS LAST NOT MORE THAN 1 HOUR protection 5 3 % OF RESPONDENTS SUBJECT TO INSPECTIONS 3 TajikStandart 7 39% 36% 1 35% Komarchstroi 2 24% 25% (architecture) 9 19% 20% 21% State surveil- 1 12% 11%12% 10% 9% lance on labor 6 6% 6% 8% protection 6 2% 4% Office of Public 5 ... Prosecutor 18 up to 30 30-60 1-3 3-5 hours 5-10 hours above 10 5 minutes minutes hours hours Individual entrepreneurs Individual Small and medium Dehkan Small and medium companies entrepreneurs companies farmers Dehkan farmers 6.4.2 ...AS WELL AS DIRECT COSTS Chart 6.16. SMALL AND MEDIUM COMPANIES HAD THE HIGHEST EXPENDITURES FOR INSPECTIONS IN 2005 As with the duration of inspections, the expenses related to in- SOMONI spections (official and unofficial payments) differ greatly for each 1,049 SME type. Chart 6.16 shows that in 2005, small and medium com- panies spent, on average, 1049 somoni ($378) on inspections. This amount is four times higher than individual entrepreneurs and 15 times higher than dehkan farmers. 264 251 71 Duration of inspections and costs appear to be directly corre- SMEs on lated: it is in fact possible to identify a daily cost of an inspec- average tion, which also does not substantially differ among typology of Individual Small and Dehkan farmers entrepreneurs medium companies 118 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS companies. This supports the hypothesis that unofficial payments Chart 6.17. "DAILY COST OF INSPECTIONS " appear to be the main drivers behind inspection costs (see Chart 6.17): inspectors are in fact receiving a similar contribution from SOMONI each typology of inspection. 53 42 At the same time, the inspections-related expenses of entrepre- 24 neurs differ depending on the region. Other regional variances can be attributed to the lack of uniform normative approaches to conducting inspections, leading to a Individual Small and Dehkan farmers entrepreneurs medium difference in the number and duration of inspections (as illustrat- companies ed in Chart 6.18). Chart 6.18. REGIONAL DIFFERENCES IN TERMS OF NUMBER AND DURATION OF RETAIL TRADE INSPECTIONS IN 2005, BY STATE AGENCIES AVERAGE # INSPECTIONS PER SME DURATION OF ONE INSPECTION HOURS , 9 11 7 7 7 4 5 5 1 2 2 1 1 1 2 1 1 1 2 2 3 1 1 2 2 3 1 2 3 1 2 2 2 3 3 1 of of Autono- Oblast district prov- ince) prov- ince) (Khatlon province) province Districts Autono- Oblast district (Khatlon province) province . . . . . Gorno-Bada- mous Republican Dushanbe Districts Republican Dushanbe . Kulyab Subordination Kulyab Subordination khshan (Khatlon Kurgan-Tube Gorno-Bada- mous district Sughd khshan (Khatlon Kurgan-Tube district Sughd Tax inspection Fire Authority SES Tax inspection Fire Authority SES 6.4.3 ...LEADING TO AN OVERALL SIGNIFICANT ECONOMIC IM- PACT 6 The above-mentioned costs can be characterized as direct ones. At the same time, we must point to indirect costs associated with theopportunitieslost­thatis,thelossinprofitcausedbysuspension and limitation of business activity, as well as the human resources lost due to involvement of employees in inspections. Taking into account the direct and indirect costs involved in inspections, we can estimate the total economic impact of inspections on each typology of business: · Individual entrepreneurs face a total cost of about 290 so- moni ($91) on inspections, corresponding to 7% of their an- nual profits; · Small and medium companies face a total cost of about 1,450 somoni ($453), or 7% of their annual profits; · Dehkan farmers face a total cost of about 80 somoni ($25), which correspond to 2% of their annuals profit (see Chart 6.19). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 119 INSPECTIONS Chart 6.19. ECONOMIC IMPACT OF INSPECTION BURDEN RANGES BETWEEN BOX 6.8. ECONOMIC IMPACT ESTIMATE 2% AND 7% OF ANNUAL PROFITS Entrepreneurs spend not only financial resources to SOMONI deal with administrative procedures. They also use 7% of annual 7% of annual 2% of annual profits profits profits human resources and lose revenues in case their businesses are stopped as a result of an inspection. 1,450 Our estimates of the costs associated with inspec- tions include all these cost categories: · Direct administrative costs: n*(EO+EU); · Indirect "additional" costs consisting of: 290 - Labor cost: w*d; 80 - Loss of profits: (L*s/b)*p where: Individual Small and medium Dehkan farmers entrepreneurs companies · n ­ Number of times a business is inspected in a year; This situation is expected to change after implementation of the · EO - official cost of each inspection; Inspections Law. The expected results described in Box 6.9 are the · EU - unofficial cost of each inspection; following: · d - Business days of full-time employee time dedicated to inspections; · reduction of official and unofficial payments · w - Daily employee salary; · L - annual profit losses for an active company - advance notification of inspections should push compliance stopped because of inspections, but which re- and in turn reduce fines and unofficial payments; tains all its production factors; - checklists will increase transparency of the regulations, which · s - time, in business days, that a company's ac- in turn will facilitate compliance and reduce payments; tivity is stopped due to inspections; - the introduction of an official inspection document evalu- · b - Number of business days per year in the ated by a different individual than the one conducting the economy; inspection will raise objectivity of inspections and reduce un- · p - probability that company's activity is official payments; stopped. - the 3-year grace period will allow entrepreneurs to avoid bur- densome expenses during business establishment and devel- opment during the first years of experience; - limit in the number of inspections should reduce the unofficial payments, which showed a clear link with the number of in- "Why don't people speak of how much money we spections. `lose' because we suspend activities for the inspec- tions? It is not only us, who do not make profit. It is also the budget of the country, which does not get · reduction of labor costs the taxes from the transactions that we might have made..." - imposing a limit on of the duration of inspections will avoid - Entrepreneur, focus-group participant prolonged inspections; - checklists should facilitate inspections and in turn reduce time spent dealing with them; - advance notice will allow for better planning of the time of employees involved in inspections, leading to reduction of labor costs; - limit in the number of inspections and the 3-year grace period 120 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS would limit the number of inspections and in turn reduce the time spent dealing with inspectors; nevertheless one should BOX 6.9. EXPECTED IMPACT FROM INSPECTIONS LAW take into account that the duration of each inspection could Area of impact increase due to the lower frequency. Unofficial · decrease of the opportunities to close a business Stopping Labor business cost & official payments - the introduction of checklists, by bringing transparency into Provisions the inspection process and increasing compliance, should also reduce the chances of closing a business; Limit the # of - the limit in the duration of inspections should in turn reduce inspections, Avoid the chances a business will be shut down as a result of an redundant inspections inspection; - the inspection document and the separation of the decision- making process should reduce prejudgment in decision mak- ing and introduce objectivity of inspections results. Advance notice 6.5 amBiGuous and unclear norms create difficulties for appealinG About 1 in every 8 entrepreneurs felt the decisions made by the inspecting bodies were illegal. Nevertheless only 20% of them de- Duration of cided to appeal by turning to higher bodies of authority and high- inspection er officials. This shows an extremely low confidence in the appeal process (see Chart 6.20). The main reasons for this reluctance to appeal are fear of the negative consequences from the inspecting bodies and doubts Checklists as to the positive outcome. Some entrepreneurs also doubt the effectiveness of this mechanism in light of the required time and costs (see Chart 6.21). 6 Inspection document & It should be pointed out that before the adoption of the Inspec- Separation of inspection tions Law, while the responsibilities of SMEs were more or less clear, and decision- the responsibilities of inspectors at various inspecting bodies in making functions most cases were not. In particular, most entrepreneurs did not know that they can appeal a decision when the inspector was going beyond his or her powers or what the appeal procedure No inspections was. in the first 3 years of operations That is why in questionable situations, most entrepreneurs prefer to decrease the likelihood of negative outcomes by compromising with inspectors. To give entrepreneurs a better understanding of their legal rights, the Inspections Law obliges all inspectorates to introduce an In- "To appeal... costs more. The state bodies will never spections Manuals which should contain among other things a admit the mistakes of their inspectors...." detailed description of the appeal mechanisms. Open access to - Entrepreneur, focus-group participant Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 121 INSPECTIONS this information will help raise the legal awareness of entrepreneurs and enable them to defend their rights, as the reforms planned in this sphere and those in progress will not have effect without the support and active participation of the private sector. In order to make the appeal system fully functional, it is important to conduct reforms, in particular within the court system, to en- able entrepreneurs to fully protect their legitimate interests. Chart 6.20. ONLY FEW ENTREPRENEURS APPEALED DECISIONS Chart 6.21. MOST OFSMES DID NOT APPEAL THE WRONGFUL ACTIONS OF THE INSPECTING BODIES WHICH THEY FELT WERE ILLEGAL , OF INSPECTORS DUE TO APPREHENSIONS OF NEGATIVE CONSEQUENCES FOR THEIR BUSINESS % RESPONDENTS UNDERGOING INSPECTIONS % OF RESPONDENTS THAT THOUGHT IT NECESSARY TO APPEAL BUT DID NOT , 45% 2 In 10 consideration No answer 23% 35 Did not 14% succeed 6% 5% 5% 2% 77 Not 81 Did not ef- to necessary appeal the business bodies to ways dues, Other as outcome process more how appeal services) 63 my state to Long are fective know legal inspecting Doubts (the positive There 13 It was nec- 19 the don'tI Costs essary Appealed Succeeded from Was it necessary to Did you appeal? Results consequences appeal the illegal, of appeal in your opinion, decisions of the negative inspecting bodies? Possible 6.6 outdated reQuirements and low leGal awareness make compliance more difficult The norms and rules serve as the tools to regulate the actions of "... Some of the technical requirements are so ab- SMEs. But this goal can only be achieved if the norms and rules are surd that it is very surprising they have not been revised already. Yet these requirements are strictly feasible and understood by all. enforced." - Entrepreneur, focus-group participant As entrepreneurs said, there are multiple rules and technical re- quirements that are confusing and impossible to execute. For instance, the cost of a fire-prevention warning system at an 8 square meters retail trade shop can be equal to the amount of annual turnover. Rules and regulations are not only complicated, but also often unfeasible. In most cases they are inaccessible. Information is not shared between government bodies and entrepreneurs and in 122 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS most cases regulations are only available (in limited copies) to Chart 6.22. SHARE OF ENTREPRENEURS KNOWING THE LEGIS - government officials. Clearly this makes compliance literally im- LATION REGULATING INSPECTIONS WELL IS INCREASING possible. % OF RESPONDENTS 40% 36% As a result the majority of entrepreneurs are unaware of the de- 32% tailed requirements for their business activity. Without a well-de- veloped mechanism for informing small and medium businesses on normative-legal acts, entrepreneurs only get to know these re- 18% 19% 20% quirements during the course of inspections. Lack of information is also one of the major obstacles that entrepreneurs face with during their business activity. The survey shows a positive trend in raising the legal awareness among entrepreneurs. In 2005, there was a 12% increase in the Individual entre- Small and medi- Dehkan farmers preneurs um companies number of dehkan farmers who had a better knowledge of the . 2002 . 2005 legislation (see Chart 6.22). The checklists developed under the Inspections Law should solve the problem of low awareness among entrepreneurs. The check- "We have repeatedly asked the Ministry of Trans- lists detail the various technical requirements and should simplify port to show us the rules that regulate our activity, but we have not received any." the inspection process, helping entrepreneurs understand and meet their responsibilities. - Entrepreneur, focus-group participant 6 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 123 INSPECTIONS ENTREPRENEURS DID NOT MAKE EFFECTIVE USE OF THE INSPECTIONS REGISTRATION BOOK IN 2005 Chart 6.23. PRIOR TO 2006 IRB WAS NOT AVAILABLE FOR 50% OF ENTREPRENEURS The Inspections Registration Book (hereafter IRB) is a document in which % OF RESPONDENTS WHO HAVE IRB the information on each inspection is kept, including the name of the in- spector, date of inspection and inspection results. 81% 83% The IRB was introduced in 2001 with the goal of reducing unofficial and 69% unjustified inspections by inspecting bodies. It was expected that compul- sory registration of each inspection in the IRB should restrain the unjustified 43% inspections. However, this did not happen, as the number of inspections 33% was not limited by legislation and no one cared about the numerous en- 29% tries in the IRB by the same inspecting agencies. In 2006 the IFC Tajikistan Business Enabling Environment - SME Policy Project Individual Small and Dehkan published and distributed the IRB on a large scale throughout Tajikistan. . The initiative was financed by the Swiss State Secretariat for Economic Affairs (SECO). Distribution took place after conduction of survey and its 2002 . entrepre- medium farms neurs companies 2005 impact is to be measured in a follow-up survey. Chart 6.24. THE REASONS WHY ENTREPRENEURS DO NOT The survey does not demonstrate dramatic changes over the past 3 years HAVE NSPECTIONS I REGISTRATION BOOKS with respect to IRB availability: as of 2005 a large majority of individual % OF RESPONDENTS WHO DO NOT HAVE IRB entrepreneurs still do not have the IRB. I don't know what it is 44% The high numbers of small and medium companies that had the IRB can No need, I don't see the be explained by the better resources (e.g., qualified staff to track chang- advantages to using it 24% es in the legislation) and higher need for companies due to increased I didn't know there was an IRB 18% compliance requirements compared to dehkan farmers and individual entrepreneurs. I didn't have time to obtain it 9% I don't know where to Low awareness of entrepreneurs is one of the major factors affecting the obtain it 9% distribution and use of the IRB and the entrepreneurs' activities in general I don't think it'll change things for the better 8% (see Chart 6.24). Chart 6.25. MAJOR PART OF INSPECTING BODIES However, the low circulation of the IRB is caused not only by the low REGISTERED THE INSPECTIONS AT IRB IN2005 awareness of entrepreneurs, but by the lack of control of IRB entries made % OF RESPONDENTS by inspecting agencies. The latter would easily register inspections in the 65 62 book, as there were no limitations to the number of inspections, and reg- istration in the IRB would therefore not prevent them from another visit. If 50 there were clear procedures for the inspecting bodies, the IRB use would be more effective and entrepreneurs themselves would seek it out and 23 27 22 23 start using it. 12 16 The survey shows that the majority of inspectors make records in the In- spections Registration Book when carrying out their activities (see Chart . Always Sometimes Never 6.25). Tax Inspectorate . . SES Fire Authority The survey results demonstrate that the main reason that inspectorates 124 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS Chart 6.26. MAIN REASONS FOR NOT FILLING IN THEIRBIN do not fill out the Inspections Registration Book is that the entrepreneur 2005: SME DID NOT REQUEST IT himself does not insist on recording the inspection in the IRB. Inspectors % OF RESPONDENTS should nonetheless request the IRB from businesses before the start of the 81% 76% inspection, to register the inspection and fill in the appropriate columns of 70% the Book. Some entrepreneurs explain that they don't want to record the inspection 30% 24% because they are not sure of the result of the inspection, and are afraid of 19% the possible negative consequences (see Chart 6.26). .. At the same time, entrepreneurs point to certain improvements that fol- Tax SES Fire Inspectorate Authority lowed the introduction of the Inspections Registration Book. Every fifth in- terviewed entrepreneur mentioned some positive change from using the The inspector refuses to fill in IRB. I myself do not insist on filling in BOX 6.10. FREE DISTRIBUTION OF IRBs IN 2006 In 2001 a Decree of the President of Tajikistan introduced the Inspections Registration Books for business entities in Tajikistan as fulfilment of the terms for a structural adjustment credit (SAC) provided by the World Bank to the Government of Tajikistan. Unfor- tunately by 2005 only a limited number of SMEs possessed and used the book (as later confirmed by our survey results - see Chart 6.23), which in any case lacked a uniform format. In order to fill in this gap the IFC Business Enabling Environment Project decided to publish 125,000 copies of IRBs. The initiative was financed by the Swiss State Secretariat for Economic Affairs (SECO). IFC experts developed an information section of the IRB, to help entrepreneurs obtain more information on the procedures and basic principles of inspections, as well as on their own rights and duties. The information includes the list of the laws regulating en- trepreneurs' activity as well as the contact information for state bodies authorized to carry out inspections and the organizations providing support for entrepreneurs. The distribution of the copies was undertaken through the local offices of the Ministry of State Revenues and Taxes of RT (the 6 current Tax Committee), who took the responsibility to ensure adequate distribution reach (by December 2006 about 70% of the copies were distributed) . Chart 6.27. EFFECT OF IRB 63% 9% 8% 6% 5% 4% 2% 4% I do not have the IRB Number of Don't know/Hard Number of inspec- Number of Number of First inspection Other inspections to answer tions decreased, inspections did inspections did happened by decreased, but and the proce- not change, and not change, but availability of the procedures dures became the procedure the procedures IRB. That is why did not change more clear and remained unclear became more it's hard to transparent and non-trans- clear and trans- judge. parent parent Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 125 INSPECTIONS RECOMMENDATIONS As we described in the chapter, the critical change needed to reform inspections in Tajikistan will be to switch from a system focused on "hunting" for infringements to one focused on preventing and eliminating the causes of future infringements. The basis of this change is included in the provisions of the new Inspections Law, which implementation will be critical to solving most of the issues and concerns raised in this chapter. As a general recommendation, we suggest developing a thorough implementation mechanism to reach the expected outcome. As such our detailed recommendations will be focused specifically on the implementation mechanism as well as on additional suggestions not directly linked with the Inspections Law, but which will be complementary to it. 1. Disseminate among the wide public the provisions of the Inspections Law and in particular the detailed inspection process as envisaged by the new law. This in turn can be achieved by: 1.1 Developing information campaigns via media addressed to a wide audience; 1.2 Targeting specific audiences, i.e., business associations, business incubators, NGOs with specific training pro- grams aimed at raising their knowledge and making them able to support SMEs; Expected impact Higher level of awareness of the Inspections Law and a standardized and transparent inspection process will em- power entrepreneurs vis-ŕ-vis inspectors by providing them with some direct tools to reduce the burden of inspec- tions and at the same time warrant compliance. The expected results are: · Reduced number of inspections by applying the frequency limit provided by the law; · Higher level of compliance due to the application of the advance notice mechanism; · Reduced unofficial payments as a result of the two points above. 2. Provide entrepreneurs with clear, up-to-date and easily available regulations/instructions. This in turn can be achieved by implementing the provisions of the Inspections Law: 2.1 Developing sector-specific checklists at each inspectorate level, which incorporate all technical regulations; 2.2 Making checklists and regulations available to entrepreneurs in advance in large-scale information campaigns and before inspections, so that entrepreneurs can be better prepared; 2.3 Reviewing the regulations underlying inspections to align them with international best practices as well as with the institutional context of Tajikistan; 2.4 Developing violations preventing activity to reveal the causes of violations, their analysis, development and the implementation of measures to eliminate them; Expected impact The elaboration of checklists at the agency level, based on up-to-date regulations, and their dissemination should on the one hand create awareness and on the other bring transparency to the inspection process, leading to: · Higher level of compliance, as the rules will be available, clearer, easy to read and to apply, facilitating their implementation; · Lower fines for businesses induced by higher compliance; 126 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS · Reduced need for unofficial payments, as clearer rules and simple yes/no answers will empower the entrepre- neurs vis-a-vis the inspectors. 3. Implement risk-based selection mechanisms of SMEs to be inspected. These criteria will be differentiated for each inspection agency according to specific risk parameters set by the regulations to be implemented. This in turn can be achieved by: 3.1 Implementing the provisions of the Inspections Law requiring differentiation of inspected entities based on their potential risks, and in particular the high risk category requiring higher frequency inspections; 3.2 Defining risk-management principles within each category, which would allow inspectors to identify businesses with higher likelihood of infringements ­ i.e., selection based on past infringement records and random selec- tion mechanisms. Expected impact The definition of risk categories should drastically reduce the coverage of inspections and change their very nature. Indeed, inspections should not represent the norm; rather, the exception, unless specific reasons exist. A business in fact should be inspected more frequently only if it belongs to a high risk category or if company-specific conditions exist. A risk-based inspection system should result in: · Lower direct and indirect costs for businesses, both in terms of fines as well as opportunity costs, i.e., loss of labor and missed business opportunities; · More efficient use of public resources, as inspections will only be focused on high risk areas. 4. Revise the organizational structure, professional qualifications, incentive systems and the salary scale of inspector- ates. This in turn can be achieved by: 4.1 Rationalizing the number of inspectors to be allocated to each agency and their geographical distribution, according to the number of entities to be inspected and the risk level associated with the inspected entities; 4.2 Submitting inspectors to regular training programs and professional tests to improve professional skills and the 6 efficiency of the inspection process; 4.3 Reviewing the salaries of inspectors and introducing incentive systems linking work effectiveness with their sala- ries. Expected impact An improved organization of the key inspectorates should complement the introduction of risk-based principles of inspections. A lower number of highly skilled, professionally trained and better rewarded inspectors should war- rant: · Improved outcomes of inspections, warranting higher level of standards despite the reduction in the number of inspections; · Reduction in unofficial payments, as a result of an incentive system linking salary with performance. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 127 INSPECTIONS annex attachment 6.1 Chart 6.28. INSPECTIONS COVERAGE IN 2002 ­ 2005 BY INSPECTING BODIES. % RESPONDENTS Tax Inspection 91% 95% Fire authority 35% 52% Sanitary-and-epide- 30% miological Service 44% Khukumat (oblast/ 9% city/rayon) 35% Environmental 11% protection 27% TajikStandart 21% 23% . . Prosecutor's office 5% 9% GosGorTechNadzor (State technical Surveillance) 1%6% 2002 2005 attachment 6.2. approaches to reforms in some countries The search for ways to improve the functions of inspections is not just a characteristic of developing countries. Many countries in more advanced stages of economic development are also looking for an optimal balance that preserves the freedom of entrepreneurs' activity while retaining state regulation (control) and ensuring consumer safety. A review of the best examples from these inspections improvements demonstrates the availability of different approaches. ARMENIA Development and adoption of the Law on Inspections established the minimal procedural norms and rights of SMEs (defining the list of inspecting bodies, time frames for carrying out inspections, basic rights of entrepreneurs, etc.). Development and adoption of the Law on Tax Authority (defining the mandate, rights and responsibilities of the parties). Development and adop- tion of the Guidelines for conducting inspections. LATVIA The government initiated a task force with various objectives: to develop a program emphasizing the clear rights and obliga- tions of inspectors and entrepreneurs; to conduct a wide information campaign for entrepreneurs; to establish a Coordination Council; to run trainings for inspectors, etc. POLAND Development and adoption of the Law On Free Economic-Business Activity, where minimum procedural requirements and rights of entrepreneurs are established. The law regulates all aspects of state control and inspections of the activity of business entities and envisages the basic minimum of procedural requirements for carrying out inspections. ROMANIA Incorporation of several inspections into a single state body of control, introduction of a single inspections register, develop- ment of the Code of Conduct and guidelines for inspectors, etc. RUSSIA Adoption of basic norms and rights of entrepreneurs under the Law On Protection of the Rights of Legal Entities and Natural Per- sons In the course of Inspections (Surveillance) by the State Bodies of Control. This is a framework law to protect entrepreneurs from illegal inspections and to ensure minimal intrusion into economic activity of private sector). 128 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 7. taxation TAXATION 7. taxation The unified Tax Code, which went into effect on January 1, 2005, main findinGs was a great improvement to the Tajik tax system, but tax legisla- tion is still under development: the Tax Code has been amended · Patent taxation system is the preferred sys- 4 times in the last 2 years and most implementing instructions, reg- tem among individual entrepreneurs: more ulations and manuals are still to be developed. than 90% chose it. Although the overall tax burden of SMEs does not appear to be · Retail trade tax is an inefficient taxation excessive, the tax system is nevertheless complicated, taking into tool detracting significant resources. Re- account the economic "literacy" of SMEs. On the one hand, it tail trade tax administration is the primary hinders development of the sector, while on the other hand push- source of frequent tax audits: individual es business entities into the shadow economy. entrepreneurs were inspected 9 times per year. However retail trade tax makes up The tax system foresees simplified taxation for most types of busi- only 2% of the overall tax revenues of the nesses, but none of those mechanisms are straightforward or trans- country's budget. parent enough to warrant accountability of SMEs and tax authori- ties. The result is a complicated system, which hinders growth and · Only about 50% of small and medium com- development of businesses, but which is also difficult and costly panies opt for the simplified taxation sys- to administer. tem, as the tax burden under the simplified system is not radically different from that Individual entrepreneurs can opt for an efficient lump-sum taxa- of the standard system, and no substantial tion system (the patent), which should spare them from compli- simplification is offered. cated reporting and unnecessary inspections: nevertheless, the obvious benefits of this system are eliminated by the necessity to · Overall payment of taxes is burdensome for pay retail trade tax and social tax based on realized revenues small and medium companies: companies and profits, respectively. As a result, entrepreneurs face the high- under the simplified system make 16 pay- est number of tax audits. Retail trade tax, in particular, is also in- ments per year and companies under the efficient for the tax authorities, as it absorbs significant resources standard one make at least 25 payments. while generating limited revenues. · More than half of dehkan farmers think that Legal entities of smaller size have the choice to opt for a simplified the unified tax for agricultural producers revenue based taxation system, but its benefits are far from clear, had a positive impact on their activity, but as the implicit tax burden is not radically different from that of the 42% do not, mainly due to their inability to standard system, while tax administration does not present clear reduce the tax burden in cases of low pro- advantages. ductivity. Dehkan farmers are in a better situation: their lump-sum taxation · "Land improvement payments" (i.e., unof- system is simpler and spares them from very frequent inspections. ficial "voluntary" payments, not foreseen by Nevertheless, they are not offered the possibility to reduce their legislation, charged by local authorities for tax burden during unprofitable years. maintenance of nearby areas, event plan- ning, etc.) are common: more than 50% of Tax administration procedures are the greatest burden for busi- SMEs made these payments. nesses. On the one hand they are cumbersome, as they require frequent and complicated payments. On the other hand, tax · Assessed share of entrepreneurs hiding their compliance is most often pursued through tax inspections, which sales decreased from 39% in 2002 to 24% in leave a high degree of discretion to the tax inspectors and as such 2005. are prone to corruption. A typical example of these procedures is the so-called "chronometry measurement," which is supposed to 130 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION determine the yearly income of businesses based on subjective evaluation of generated revenues during inspections, creating a clear conflict of interest and leaving ample room for unofficial payments. Additionally, tax inspections are inefficient from the standpoint of public administration, as they focus on pursuing the most vulnerable businesses, rather than the "big tickets." In this context, entrepreneurs' awareness of regulations is low. This, together with the complexity and non-transparency of the taxation process, appear to be the main driver of unofficial pay- ments. 7 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 131 TAXATION 7.1 review of the current tax system in tajikistan Chart 7.1. TAX REVENUES ARE INCREASING CONSISTENTLY ... It is very important that a tax system complies with the general level of economic development of a country and, as far as SME SOMONI , `000S 1,192,505 taxation is concerned, is consistent with entrepreneurs' institution- 933,263 712,589 al capacity. In fact, a system with unreasonable requirements for 496,500 SMEs hinders the development of businesses. Instead of promoting 351,350 233,491 tax compliance, the complicated tax system partly or completely pushes entrepreneurs into the "shadow economy." 2000 2001 2002 2003 2004 2005 Source: State Statistical Committee (2006). Tax revenues in Tajikistan have increased significantly over the past six years (see Chart 7.1), with an average nominal growth of Chart 7.2. ...ALTHOUGH GROWTH IS SLOWING DOWN about 40% (20% in real terms). CHANGE FROM THE PREVIOUS YEAR IN , % However, after a rapid growth from 2001 to 2003, the nominal 55% growth rate in the recent years is slowing down (see Chart 7.2). 47% 47% 34% 29% In international comparison, tax revenues are quite low in relation to official GDP (see Chart 7.3). 2001 2002 2003 2004 2005 Source: State Statistical Committee (2006). While the limited fiscal pressure could be partially explained by the low level of economic development, the large contribution of Chart 7.3. TAX - TO - GDP RATIO IS LOW indirect taxation to overall revenues (see Chart 7.5 ) partially re- flects the limited revenue generating capability of the tax authori- %, 2005 ties. Tajikistan's indirect tax share of the overall tax revenues is high 52% 51% 46% (see Chart 7.4), even in comparison with other CIS countries. 32% 31% 26% Although official statistics do not provide specific data on SMEs' 17% contribution to tax revenues, it is possible to estimate it by using the revenue data of the survey and official statistics (see Attach- ment 7.1). Accordingly, estimated tax revenues from SMEs repre- sent about one quarter of the overall tax revenue (23%).1 Sweden France Ireland Estonia Denmark Tajikistan Kazakhstan The 2005 Tax Code,2 is the main legislative document establish- Source: Eurostat (2007), for Tajikistan ­ State Statistical Committee (2006). ing a framework for taxation in Tajikistan. It has introduced several Chart 7.4. SHARE OF INDIRECT TAXES IN AJIKISTAN IS HIGHER T Chart 7.5. INDIRECT TAXES REPRESENT MORE THAN HALF OF THE TOTAL REVENUES3 THAN THAT OF PEERS %, 2005 78% % OF TAXES PAID 51% 54% 56% 78% 22% Indirect taxes Direct taxes Belarus Russia Tajikistan Uzbekistan 1These data do not include the tax revenues generated by the workforce em- Source: Eurostat release 41/2007-20 March 2007, for ployed in the sector. 2 Tajikistan ­ State Statistical Committee (2006). Three changes have been made to the Tax Code through Laws No. 144 dd. December 26 2005, No. 193 dd. July 28, 2006 and No.219 dd. December 22, 2006. 3Excluding social tax. 132 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION BOX 7.1. STRUCTURE OF THE TAX REVENUES Chart 7.6. TAX REVENUES IN 2005 BY TAX TYPES5 The recent rise in tax revenues is caused IN MILLION SOMONI Social Indirect taxes Direct taxes tax by economic growth,4 with a large share due to increase of VAT on imported goods 152 1193 (see Chart 7.6). Overall, the tax system relies 38 22 5 11 47 mostly on indirect taxes (more than 70% of 85 45 54 48 26 1 total revenues) with distributional implica- 99 57 tions of the tax burden, particularly on low 506 income households. VAT tax tax tax tax tax Excise duties taxt ts tax berfi entities profi cate entities Others Total users' trade profi income producers certifi Social Custom legal ed legal Cotton Road Retail Aluminum on Unifi enterprise on Personal taxt for patent/ agricultural Profi for tax for taxation Source: Tax Committee Data 2006 Minimal Payment Simplied provisions which affected the taxation of the SME sector (see Box 7.2). BOX 7.2. NEWLY INTRODUCED PROVISIONS IN THE 2005 TAX CODE AFFECTING SME TAXATION The Tajik taxation system consists of 15 national taxes and 3 local taxes (see Attachment 7.3). · Profit tax rate on legal entities reduced from 30% to 25%; National tax rates are set by the Tax Code (with the exception · VAT threshold increased from 96,000 to of the excise6 rates which are set by the government) and their 200,000 somoni; revenues are allocated to the central budget. Rates for the local · Introduction of the new "minimum tax on taxes are set by local authorities within the framework provided revenues of enterprises," to be paid month- in the Tax Code, and revenues contribute to the budget of local ly on the basis of resulting revenues; authorities.7 · Public transport maintenance tax abol- ished; At the present time, tax legislation foresees two taxation regimes · Tax rate decreased from 5% to 4% under the 7 for each type of SME, with the exclusion of dehkan farmers, who simplified system; face a unique simplified system: · Real estate tax now collected from all enti- ties, not just individuals; 1. A standard regime, characterized by detailed book-keeping · Local retail tax rate reduced from up to 5% and tax administration requirements, based on actual profits to up to 3%. achieved by the activity; 4 Category "Others" include: State duties, Real Estate tax, Land tax, Mineral resourc- es tax. 5 The average GDP growth amounted to 7% in 2002-2005, State Statistical Commit- tee (2006). 6 In accordance with Clause 239 TC RT, "excise (excise tax) is an indirect tax, in- cluded to the sale price of sub-excise goods." Sub-excise products are spirits, soft and strong drinks, processed tobacco, fuel, oil and processed oil, vehicles, jewelry, gold, platinum and silver. 7 Majlis of the people's deputies of the oblast, city and rayon. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 133 TAXATION Chart 7.7. FIVE DIFFERENT TAXATION REGIMES EXIST 2. A simplified regime, characterized by simplified book-keep- FOR SMES IN AJIKISTAN T ing, tax administration and tax calculations, based either on lump-sum regimes (for individual entrepreneurs and dehkan Individual Small and medium Dehkan entrepreneurs companies farmers farmers) or a revenue based one (for small and medium com- panies). Simplified Simplified Tax system Patent for legal entities Unified Tax for As a result, according to the legal form of business activity five Agricultural Producers taxation regimes can be identified (see Chart 7.7). Standard Personal Profit Tax for legal system Income Tax entities 7.2 taxation of individual entrepreneurs Individual entrepreneurs have a choice between the standard personal income taxation system and a simplified, patent based one. 7.2.1 THE STANDARD TAXATION SYSTEM Under the standard system, individual entrepreneurs are taxed according to the personal income tax system8 applied to their re- alized profits. As such they are subject to two direct taxes: - Personal income tax: calculated based on the size of entre- preneurs' profits at a rate between 8% and 13%9; - Social tax: calculated on the basis of entrepreneurs' income at a rate of 20%. Declared monthly revenue is taken into ac- count as a basis for taxation. However, the revenue can not be less than an average monthly salary of employees as de- fined by the State Statistical Committee (declared monthly salary should be no less than 83 somoni and the social tax burden is 16.6 somoni10). If an individual entrepreneur hires external workers, he has to withhold their social tax, which is calculated as follows: - Employer has to contribute 25% of the employee's salary; - Employee has to contribute 1% of his own salary. Additionally, individual entrepreneurs can also be subject to other indirect taxes depending on the type of activity and the size of turnover: - Retail trade tax: up to 3% of cash sales11; - VAT: 20% of the net value added to turnover; - Road users' tax: calculated as 2% of expenditures (until the 8 Individual entrepreneurs operate on the basis of a Certificate on state registration ­ see Chapter 2. 9 Incomes below monthly wage are not taxed, amounts above monthly wage and up to 100 somoni are taxed at 8%, and above 100 somoni taxed at 13%. 10State Statistical Committee (2006). 11Tax rate is established by the local authorities within the framework set by the Tax Code, i.e., up to 3%. 134 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION end of 2006 individual entrepreneurs were not subject to this tax).12 7.2.2 THE PATENT TAXATION SYSTEM As an alternative, an individual entrepreneur with annual rev- enues below 200,000 somoni ($62,500) can apply for a patent, which offers simplified taxation and registration system. The cost of a patent,13 paid on a monthly or biannual basis, includes the lump-sum payment of a personal income tax - entrepreneurs are exempted from payments of personal income tax. The patent sys- tem is applicable to certain activities14 only. Within the framework of the patent system, individual entrepre- Chart 7.8. THE OVERWHELMING MAJORITY OF neurs are subject to: INDIVIDUAL ENTREPRENEURS IS WORKING UNDER THE PATENT SYSTEM - Patent payments: the monthly cost varies according to the type of activity, must be paid in advance, and ranges from 7 % OF INDIVIDUAL ENTREPRENEURS somoni ($2.20) (dry cleaning) to 60 somoni ($18.20) (taxi driv- 92% ers); - Social tax: calculated on the basis of entrepreneurs' revenues at a rate of 20%. However, the declared monthly revenue can not be less than 18 minimum monthly wages per calen- dar year (therefore monthly taxable amount is 30 somoni and 8% the social tax burden is at least 6 somoni).15 Patent system Standard System Additionally they might be subject to retail trade tax up to 3% of cash sales. The patent system is clearly preferred by individual entrepreneurs: in fact more than 90% of them choose it over the standard system (see Chart 7.8). Table 7.1 compares two taxation regimes. 7 7.2.3 TAX ACCOUNTING AND REPORTING ARE QUITE PROBLEMATIC FOR INDIVIDUAL ENTREPRENEURS Reluctance to pay taxes and propensity to hide revenues is uni- versal. If the tax system is also hard to comply with, the probability of tax evasion increases. To address this issue, a transparent, sim- plified system of accounting and reporting should be introduced. 12According to the amendments to the Tax Code introduced by Law. No.219 dd. December 22, 2006. 13For more details on the differences between the patent and certificate see Chapter 2. 14Only 49 activities can be conducted under the patent (see Chapter 2). 15Resolution of the Government of the RT No. 250, dd. June 6, 2003. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 135 TAXATION Table 7.1. Comparison of the simplified (patent) and standard (certificate) regimes for individual entrepreneurs patent certificate=standard · Personal income tax; · Personal income tax; · Social tax; · Social tax; · Retail trade tax. · Retail trade tax; · VAT; · Road users' tax. Advantages Disadvantages Advantages Disadvantages 1. Fixed rate for patent eliminates the 1. Patent system hinders economic 1. Certificate system does not hinder 1. Necessity to document transactions need to calculate the individual growth, since exceeding VAT economic growth, since it does and submit tax returns. income tax amount. threshold leads to switch from pat- not place threshold limits on the 2. Complexity of tax amount calculation. 2. Absence of advance (current) ent to standard taxation system. revenue value. 3. Commitment to pay advance (cur- payments. 2. Foreign trade operations are not 2. Foreign trade operations are al- rent) payments. 3. Absence of commitments on dec- allowed. lowed. 4. Necessity of regular visits to tax agen- laration submission. cies. 4. High threshold to retain simplified taxation system. Business case: calculation of profit tax for legal entities Certificate Patent Formula A Revenues 50,000 50,000 B Profitability 12% 12% C Profit before taxes 6,000 6,000 C=A*B D Tax (on income) 775 - D=C*13% E Road users' tax burden Patent cost - 414 30 somoni*12months*1.1516 F Net profit 5225 5586 For certificate: F=C-D; for patent: F=C-E G Tax burden (as % of profit) 13% 7% For certificate: G=D/C*100%; for patent: G=E/C*100% In accordance with the Law of the RT "On Accounting,"17 rev- BOX 7.3. MINIMUM REQUIREMENTS FOR PRIMARY enues and expense accounting of individual entrepreneurs op- ACCOUNTING DOCUMENTS: erating without forming a legal entity are regulated by the Tax Code, although the Code provides only general provisions. - name of document; - date the document was composed; For accounting purposes, an individual entrepreneur under the - name (official name of a legal entity or a full standard system must record all transactions in a Book of Reve- name of individual on behalf of which the nues and Expenses (BRE),18 have a cash register and provide sup- document is drafted and issued); porting documents to confirm expenses (e.g., invoices, receipts - name (official name of a legal entity or a - see Box 7.3). full name of individual) for whom the docu- ment is issued; There are two significant problems with keeping BREs: - taxpayer identification numbers of the party issuing the documents and of the party for - Maintaining transaction records; whom the document is issued; - Confirmation of expenses. - description of transaction; - amount of transaction (in cash and in-kind) Not every entrepreneur is able to keep daily records in the BRE. In- - official positions of individuals responsible sufficient training, lack of time, and lack of a systematic approach for execution of the transaction, their signa- tures and seals, if required. 16 Highest regional coefficient according to Governmental Decree No. 140, dd. Article 68, TC of RT March 31, 2006. 17 Article 5, Law "On Accounting" No. 75, dd. May 14, 1999. 18 A specialized book registering trade operations (purchases, sales). 136 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION are obstacles to the use of the BRE as an accurate reflection of the taxable base. "...Mainly, I am buying required goods at the mar- ket, where nobody will provide the receipt or some other document." Due to their high cost, the majority of entrepreneurs do not have the money to purchase and install cash registers (and frequent- - Entrepreneur, focus-group participant ly, the company which sells them imposes a maintenance con- tract, which raises the cost further and complicates the use of the machines). In addition, in a country with unstable power supply (usually from November until April), entrepreneurs who have pur- "...We have constant problems with these cash reg- isters, as tax employees usually force us to buy them chased cash registers are also forced to keep handwritten BREs. from a certain firm. Moreover, when there is a lim- ited supply of electricity, people can not use them Additionally, while maintaining the BRE, entrepreneurs have prob- - no end of trouble with tax officials..." lems confirming their expenses, as in some cases there is no pos- - Entrepreneur, focus-group participant sibility to get supporting documents (invoices, receipts, etc.). Individual entrepreneurs working under the standard system cal- culate the following taxes, based on the BRE records: - Personal income tax; Chart 7.9. EVERY THIRD INDIVIDUAL ENTREPRENEUR CONSIDERS TAXATION PROCEDURES COMPLICATED - Social tax; - Retail trade tax. % OF INDIVIDUAL ENTREPRENEURS In addition, performance of structured accounting calculations is in some cases beyond the capacity of individual entrepreneurs 8% 58% 28% 6% (See Box 7.4). 75% 50% 25% 0% 25% 50% Thecomplexityoftaxationisconfirmedbythesurvey'sfindings:every . . . . third individual entrepreneur considers the calculation and payment Very Rather Rather Very of taxes as complicated or very complicated (see Chart 7.9). easy easy complicated complicated BOX 7.4. EXAMPLE OF THE MONTHLY CALCULATION OF PERSONAL INCOME TAX FOR INDIVIDUAL ENTREPRENEURS Income Income (100-(100*X)-MMW) * PTRA = A (100-(100*1%)-20) * 8% = 6.32 7 500 somoni 500 somoni (400-(400*X)) * PTRB = B (400-(400*1%)) * 13% = 51.48 A+B = C 6.32 + 51.48 = 57.8 Or 11.6% of income X ­ social tax rate of 1% MMW ­ minimum monthly wage (20 somoni) PTRA ­ personal income tax rate for income under 100 somoni (8%) PTRB ­ personal income tax rate for income above 100 somoni (13%) A ­ sum of the personal income tax from 100 somoni B ­ sum of the personal income tax from 400 somoni C ­ total personal income tax Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 137 TAXATION The patent system is an efficient and convenient lump-sum taxa- tion system as it sets limited requirements on entrepreneurs, both in terms of accounting requirements as well as interactions with the tax bodies. As mentioned above, entrepreneurs only need to pay the cost of the patent, which already includes payment of personal income tax, i.e. individual entrepreneur is exempted from separate personal income tax payment. The cost of pay- ment varies according to the type of activity and ranges from 7 somoni ($2.20) to 60 somoni ($18.20). However, individual entrepreneurs under the patent system are subject to social tax and retail trade tax (if their activity is con- nected with retail trade). These requirements partly undermine the advantages of a lump-sum patent based system and con- tradict the rationale for patents, exposing entrepreneurs to tax inspections (see 7.2.4) 7.2.4 RETAIL TRADE TAX: CUMBERSOME ACCOUNTING AND RE- PORTING RESULTS IN UNOFFICIAL PAYMENTS Chart 7.10. ONLY ABOUT 40% OF RETAIL TRADE TAX IS Reporting of the retail trade tax (calculated based on gross rev- COLLECTED enues from retail trade) is complex, particularly for individual en- SOMONI, `000S trepreneurs. For entrepreneurs under the standard system there are two methods of calculation: 60,000 1. Based on the records in BRE (trade logbook); 2. Based on cash register receipts. 25,600 All records in the BRE should be confirmed by invoices and re- ceipts. The legislation does not require entrepreneurs under the patent Retail trade tax Calculated retail trade tax (official data) according to survey data system to have a cash register. Thus, it is within the authority of a tax inspector to determine and confirm the amount of revenues Source: State Statistical Committee (2006), Survey data and profits to be charged for taxes. This in turn opens the door for rent-seeking relationships between entrepreneurs and inspectors. Retail trade tax administration is also inefficient for the state tax authorities, as it absorbs a significant amount of resources while generating only 2% of the total tax revenues.19 It is estimated that collected retail trade tax represents only about 40% of what could potentially be collected (see Chart 7.10). 19 State Statistical Committee (2006). 138 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION 7.2.5 INDIVIDUAL ENTREPRENEUR: ADDITIONAL PAYMENTS ARE BUR- DENSOME Local governments illegally charge so-called "land improve- Chart 7.11. "LAND IMPROVEMENT PAYMENTS ARE WIDE " ment" payments, requiring individual entrepreneurs to contribute SPREAD AND BECOMING MORE COMMON in cash or in-kind for maintenance of nearby areas. The share of % OF INDIVIDUAL ENTREPRENEURS individual entrepreneurs making such payments increased in 2005 with respect to 2002 (see Chart 7.11). 49% 42% Noteworthy is the fact that individual entrepreneurs under the standard system paid more than those operating under patent (see Chart 7.12). This situation could be explained by the fact, that individual entrepreneurs under the standard system have higher turnover, and as such are an easier target. Hence, they avoid confrontation with authorities and are more willing to make these payments. 2002 2005 Chart 7.12. INDIVIDUAL ENTREPRENEURS UNDER THE STANDARD SYSTEM MADE HIGH ADDITIONAL PAYMENTS SOMONI 160 60 Individual entrepreneurs Individual entrepreneurs under the patent system under the standard system annual turno- ver, in somoni 7,000 90,600 Chart 7.13. TAX INSPECTORATES DISTRIBUTE THEIR RESOURCES IRRATIONALLY 7.2.6 TAX INSPECTIONS OF INDIVIDUAL ENTREPRENEURS ARE INEF- AVERAGE # OF INSPECTIONS FICIENT Production of consumer goods 14 1 Individual entrepreneurs were subject to very frequent tax inspec- 7 tions in 2005. The lack of a risk-based management system20 in Wholesale trade 7 4 Tax inspection planning tax inspections (see Chart 7.13), and limited qualifica- Retail trade 7 1 Tax police tions and low salaries of tax officials lead to inappropriate and inefficient allocation of the inspectorats' resources. Inspections of Medical services 5 2 individual entrepreneurs can not be at the same time justified by Main tax revenue from the tax receipts (only 2% of the overall tax income of the state Catering 5 2 retail trade and catering is generated from retail budget).21 While excessive tax inspections generate unnecessary trade tax and patent and Transport 5 1 burden for individual entrepreneurs in the form of interruption of certificate fees. In 2005 these taxes constituted business activities and unofficial payments. Communication 4 0 about 2% of State budget tax revenue. 20For more details on risk-based approach see chapter "Inspections." 21State Statistical Committee (2006). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 139 TAXATION Chart 7.14. INDIVIDUAL ENTREPRENEURS MADE UNOFFICIAL Correct assessment of the taxation base is one of the main rea- PAYMENTS DURING TAX INSPECTIONS sons for conducting chronometry surveys, which try to estimate possible revenues through observations. As individual entrepre- % OF INDIVIDUAL ENTREPRENEURS INSPECTED WHO MADE UNOFFICIAL PAYMENTS neurs trading in the bazaar generally do not use cash registers 21% (see 7.2.4), chronometry surveys are also tools to estimate the vol- 19% ume of trade. However, chronometry surveys are subject to an open conflict of interests, because the inspector wants to overes- timate the volume of revenues, while the entrepreneur wants to underestimate it. The wide range of authority given to inspectors opens the door for rent-seeking opportunities. Inspection deci- Tax inspection Tax police sions are often arbitrary and lacking an obvious rationale, making chronometry surveys a legal "extortion tool." In fact, individual en- trepreneurs are very often forced to resort to unofficial payments during tax inspections (see Chart 7.14). To address this issue, it is necessary to introduce objective mecha- nisms to assess the tax base or to rely on lump-sum assessments. 7.3 taxation of small and medium companies Chart 7.15. OPTION OF TAXATION DEPENDS ON REVENUE According to the standard taxation system for legal entities, small and medium companies are subject to: Road Users Tax Option 1 VAT VAT - Profit tax from legal entities: calculated as 25% of profits; Standard - Minimum tax on revenues of the enterprises: calculated as 1% system 25% profit 25% profit 25% profit of turnover on a monthly basis to anticipate the annual profit Option 2 VAT tax and to represent the minimum amount; Simplified - Social tax: calculated as 25% of employees' salaries. system 4% revenues 4% revenues Annual gross revenue 200,000 600,000 The company can additionally be subject to SMEs can opt for SMEs stay under All SMEs are the simplified or the the previously subject to the standard system chosen system, standard taxation - Retail trade tax; plus they pay system, VAT and VAT road users tax - VAT; - Road users' tax. For companies with an annual gross revenue below 600,000 so- moni, the legislation foresees simplified revenue based taxation system (4% of gross revenues). This unified tax substitutes the cor- porate profit tax and the minimum tax on revenues of the enter- prises and road user's tax (see Chart 7.15). Small and medium companies operating under the simplified sys- tem are subject to a simplified accounting and tax reporting sys- tem based on the Book of Gross Revenue Records, which is used for:22 22In the case that company is VAT payer, it needs also to keep special VAT log- book. 140 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION - Calculation of revenues; - Submission of tax returns. Payment of other taxes remains the same under both systems.23 In particular small and medium companies under both taxation sys- tems are subject to VAT if their turnover exceeds 200,000 somoni,24 VAT records are kept in a separate journal. According to the survey, in 2005 about 96% of small and medium Chart 7.16. ONLY 49% OF SMALL AND MEDIUM COMPANIES companies achieved gross revenue of less than 600,000 somoni WITH TURNOVER UNDER 600,000 SOMONI PREFER SIMPLIFIED and as such could opt for the simplified taxation system. Never- TAXATION SYSTEM theless, only about half of them applied for the simplified taxation % OF SMALL AND MEDIUM COMPANIES WITH TURNOVER UNDER600,000SOMONI system (see Chart 7.16). PER YEAR 51% 49% Indeed, as shown further in the chapter, the simplified system can represent a higher tax burden for SMEs, partly explaining the rea- sons for its unpopularity. 7.3.1 DIFFICULTIES RELATED TO TAX REPORTING AND CALCULA- TIONS Standard system Simplified system One of the differences between the two taxation systems of small and medium companies is the frequency and number of tax pay- ments and reporting requirements related to these payments. Un- der the simplified taxation system, small and medium companies make at least 16 payments per year and submit respective re- ports to tax bodies. Companies under the standard system submit at least 25 payments along with the necessary reports (see Chart 7.17). However, this calculation does not include retail trade tax payments, VAT and road users' tax. The system is so complex that tax inspectors would need profes- sional specialization to ensure proper compliance and cover all Chart 7.17. SMALL AND MEDIUM COMPANIES UNDER THE STANDARD SYSTEM SHOULD SUBMIT AT LEAST 25 TAX PAYMENTS 7 TYPESOF TAXES AND THE FREQUENCY OF PAYMENTS AND REPORTING Minimal Total pay- tax on Corporate Social tax Simplified ments per revenues tax tax year Standard Every Once a Every system month year month 25 Simplified Quarterly Every month 16 23With the exclusion of road users' tax, which is applicable for companies with annual revenues above 600,000 somoni and therefore is not applicable for the simplified system. 24Legislation gives right to become a VAT payer also for companies below the VAT threshold. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 141 TAXATION Chart 7.18. TAJIK COMPANIES MAKE MORE THAN exceptions. The current lack of transparency in the system only 55 PAYMENTS PER YEAR encourages unofficial payments. AVERAGE #OF TAX PAYMENTS PER YEAR 70 The excessive number of tax payments and reports in Tajikistan 55 34 is confirmed by other studies as well. According to "Doing Busi- 3 4 13 16 ness 2007," companies under the standard system of taxation in Tajikistan made up to 55 tax payments25 per year and spent 200 hours dealing with tax issues (see Chart 7.18 and Chart 7.19), rank- Kong, Norway China Russia ing 154 out of 175 countries in terms of having the most time con- Hong Switzerland Singapore Tajikistan Kazakhstan suming tax system.26 Source: PWC/WB (2006) For the purposes of book-keeping within the simplified system, leg- islation requires a book for revenues without clearly defining the Chart 7.19. TIME SPENT PER YEAR TO COMPLY WITH TAX unified format. This in turn leads to a situation where tax officials OBLIGATIONS IN AJIKISTAN IS AMONG THE HIGHEST IN ANY T can find fault with every small detail during the tax payment proc- COUNTRY ess. HOURS PER YEAR 256 224 Calculations of the corporate profit tax and minimum tax on en- 156 terprise revenues are complicated. Small and medium compa- nies have to make monthly advance payments of the minimum 68 80 87 30 tax on enterprise revenues of 1% of gross revenue of the account- ing month. In the case where monthly advance payments of mini- mum revenue tax are less than the monthly corporate profit tax Kong, China Russia Norway instalments multiplied by 1.1 for the previous year, the difference Singapore Tajikistan Switzerland Hong Kazakhstan should be paid as an advance payment for current payment of corporate profit tax.27 At the end of the accounting year the en- Source: PWC/WB (2006) trepreneurs calculate the actual amount of the minimum tax on enterprise revenues tax by calculating the difference between the corporate profit tax due and the amount of 1% of revenue Chart 7.20. SMALL AND MEDIUM COMPANIES UNDER THE paid throughout the year. If the latter is higher than the corpo- STANDARD SYSTEM HAVE MORE DIFFICULTIES WITH TAX PAYMENTS rate profit tax amount, there is no further payment required. If it is AND CALCULATIONS lower, the entrepreneur has to pay the difference.28 % OF RESPONDENTS CONSIDERING TAXATION COMPLICATED OR VERY COMPLICATED The complexity of tax calculations and payments is confirmed by 43% the survey data. It is remarkable that every third company under 35% the simplified taxation system considers payments and calcula- tion of taxes to be complicated or very complicated (see Chart 7.20). According to FIAS report,29 taxpayers spent an equivalent of about 20% of the taxes that they paid on record keeping, tax filing, and Companies under Companies under simplified system standard system other tax related documents, as well as on attorney and account- 25 The difference between the two figures is explained by the fact that "Doing Busi- ness" also includes the Value added tax, Road tax, Social tax, Corporate income tax, Property tax, Vehicle tax, Interest tax and Land tax. 26 IFC/WB (2006). 27 Tax Code, Article 198. 28 The sum of monthly tax payment = 1% from gross revenue + (1/12 Profit from Last Year*1.1 - 1% from GR of the current year). 29 Fias (2006). 142 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION ant fees. It should also be mentioned that there is no developed tax consultancy market in Tajikistan, and only larger companies "...Consultations of tax experts are expensive, my can afford to hire tax consultants. Business associations could play small company can not afford them..." a role in filling the gap by connecting entrepreneurs (members of - Entrepreneur, focus-group participant associations) and tax consultants: for example, tax consultation could be provided by the business association and the costs of consultations could be recovered by membership fees. Taxpayers have a choice to file taxes: - personally; - by registered mail with notification; - electronically, in cases prescribed by the state authorities. In practice, entrepreneurs deliver tax reports personally and have two options: "...I'd better pay my tax supervisor to complete submission of all tax returns rather than wait for a long time in queue, since there is no guarantee that 1. To spend a long time in queue: the majority of taxpayers usu- a tax official will not find some fault with my docu- ally postpone filing taxes until the deadline, resulting in exces- ments..." sive overload of tax departments; - Entrepreneur, focus-group participant 2. Preparation, pick-up and acceptance of the report is done by a tax official in return for certain remuneration. Overall, prolonged and intensive contact between officials and entrepreneurs often results in informal relationships that result in rent seeking. 7.3.2 SMALL AND MEDIUM COMPANIES: THE SIMPLIFIED SYSTEM AND SOCIAL TAX IMPOSE A HEAVY BURDEN The number of companies that opt for the standard system (about 50%) is not surprising considering that a comparison between the standard and simplified systems shows that the tax burden under the simplified taxation system is not radically different from that under the standard system, while no substantial simplification is offered (see Table 7.2). 7 To some extent, we could expect the advantage of the simplified system to be based on simpler requirements. Unfortunately, as our analysis shows, this is not the case, and the difference between the two systems does not provide an incentive to choose the sim- plified one. Table 7.3 also shows that a simplified system based purely on rev- Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 143 TAXATION Table 7.2. Taxation of small and medium companies under simplified and standard systems Business case: calculation of profit tax for legal entities Company I Company II Formula A Revenues 100,000 200,000 B Profitability 16% 10% C Profit before taxes 16,000 20,000 C=A*B D Profit tax (on income) 4,000 8,000 D=A*4% E Road users' tax burden Net profit 12,000 12,000 E=C-D F Tax burden (as % of profit 25% 40% F=D/C*100% Business case: comparison of the tax burden between standard and simplified systems of taxation as % of profit Company I Company II 40% Depending on profitability level, under the simplified taxation system a company has an 25% 25% 25% equal or even greater tax burden than under the standard system. Simplified system I Standard system Simplified system II Standard system Chart 7.21. COMPANIES WITH LOWER TURNOVER CHOOSE enues penalizes companies for growth, as it provides an incen- SIMPLIFIED TAXATION tive for entrepreneurs to remain small, but highly profitable, rather than expanding into larger companies with lower margins. This is AVERAGE TURNOVER , `000S SOMONI 120 also confirmed by findings of the survey: annual turnover of the companies under the simplified system is significantly lower than turnover of companies operating under the standard system (see 54 Chart 7.21). Social tax is an additional burden for small and medium compa- nies. The majority of entrepreneurs considers the social tax rate Simplified Standard (25% of wages) too high. The high rate of this tax increases com- panies' labor costs, hindering the creation of additional jobs.30 The high tax also results in companies' tax evasion and black labor "...Social security payments are so high and do not market. Taking into account the qualitative package of social allow me to introduce additional incentives to keep services provided in Tajikistan, the government could consider re- my workers." ducing the level of social tax. - Owner of a small company, focus-group participant 7.3.3 ADDITIONAL PAYMENTS ARE HIGH FOR SMALL AND MEDIUM COMPANIES As in the case of individual entrepreneurs, small and medium companies (as well as larger companies) are subject to "land im- provement" payments: almost 60% of companies reported mak- ing these payments (see Chart 7.22). 30For more details see PCW/WB (2006). 144 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION 7.3.4 TAX INSPECTIONS FOR SMALL AND MEDIUM COMPANIES ARE Chart 7.22. IN 2005, COMPANIES UNDER THE STANDARD NOT ALWAYS JUSTIFIED SYSTEM PAID MORE FOR LAND IMPROVEMENT THAN THOSE " " UNDER THE SIMPLIFIED SYSTEM Small and medium companies were inspected on average al- SOMONI most 3 times by tax authorities in 2005. Also in this case Tax police 393 conducted inspections, although according to Article 128 of the 289 Tax Code, the tax police has the right to participate in the inspec- tion only when it is conducted by tax inspectors. The percentage of inspections concluded with unofficial pay- ments testifies to the inefficiency of the system (see Chart 7.23). Simplified Standard This situation can be improved by: - Increasing awareness among entrepreneurs of main ac- "...Why should I keep records and pay all the taxes, counting principles; if I can pay less directly to the inspector....." - Simplifying tax calculation and taxation procedures; - Entrepreneurs taking advantage of the appeals mechanism - Entrepreneur, focus-group participant for the tax authorities' decisions. Application of risk management principle in planning and con- ducting inspections according to the new amendments to the Tax Code (see Box 7.7) should bring significant results in targeting entrepreneurs violating tax regulations. In addition, pre-selection Chart 7.23. UNOFFICIAL PAYMENTS ARE COM - of risky businesses would allow to reduce the waste of resources of MON DURING INSPECTIONS the tax inspectorate and increase its effectiveness. % OF SMALL AND MEDIUM COMPANIES The next survey will be able to measure the results of the under- 33% taken efforts. 29% 7.4 taxation of dehkan farmers In 2005 the new Tax Code introduced a uniform tax for agricultural Tax inspection Tax police producers31 which includes all tax payments. The uniform tax is a lump-sum tax based on the plot size and type of crop which does not depend on profitability of agricultural producers' activities. As 7 such, it simplifies tax calculations, as well as the collection proc- BOX 7.5. TAX INSPECTIONS AND THEIR ess. CONSEQUENCES Dehkan farmers are subject to social insurance and members of "... In 2006, tax inspections were conducted a dehkan farm pay social tax like individual entrepreneurs who among 5,776 of the country's companies, and operate based on the patent (at least 6 somoni). However, the 4,474 (77.5%) of them were found guilty of tax head of a dehkan farm pays social tax as a certificate holder (at violations. A total of 13,9 mln. somoni was issued least 17 somoni). In cases where dehkan farms hire external work- in fines ..." ers, social tax is calculated as follows: Asia Plus, January 31, 2007 31Legal entities utilizing land as the main production mean also pay this uniform tax for agricultural manufacturer's production. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 145 TAXATION BOX 7.6. EXTRACT FROM THE TAX CODE - 25% on employees' salaries is the share of the employer; - 1% from salaries of workers. "In case of non-agricultural activity by agricul- tural producers, taxation is conducted accord- Agricultural producers, taxed with the uniform tax, are exempt ing to the Tax Code. The incomes and costs of from paying other taxes, such as: agricultural and non-agricultural activity consid- ered separately." · Taxes paid under the simplified system; Article 306, TC of RT · Individual income tax; · Corporate profits tax; · VAT; · Land tax; · Minimal tax on enterprise revenues; · Road users' tax. If dekhan farmers use their grown product for further processing, they are taxed under the standard regime (see Box 7.6). 7.4.1 DEHKAN FARMERS: LUMP-SUM TAXATION AS A POSITIVE SYS- TEM Chart 7.24. MORE THEN HALF OF DEHKAN FARMERS NOTED The introduction of the unified tax for agricultural producers an- POSITIVE EFFECTS FROM THE UNIFIED TAX FOR AGRICULTURAL ticipated simpler accounting procedures and a lighter tax burden PRODUCERS for dehkan farmers. In fact, more than 55% of surveyed dehkan % OF DEHKAN FARMERS farmers have noted a positive change from its introduction (see Chart 7.24). Nevertheless, a significant amount of respondents 55.3% was not satisfied by the new system, noting the necessity to pay 42.1% taxes independent of generated income, without the possibility to prove the "worst case scenarios." Lump-sum taxation is beneficial to dehkan farmers, given their 2.6% low tax literacy. Nevertheless, in cases of poor productivity, de- hkan farmers are not exempt from tax obligations. As taxation is Positive Negative No influence independent from productivity, it would be advisable to create a mechanism under which dehkan farmers would be able to re- duce their tax burden in cases of low profitability (i.e., by introduc- ing the possibility to prove low income). Chart 7.25. DEHKAN FARMERS WERE INSPECTED AT LEAST 1.6 TIMES In addition, it should be noted that the unified tax for agricultural AVERAGE # OF INSPECTIONS PER YEAR producers is applied only to their activity that relates to agricul- tural production: this system is problematic, as it does not stimu- 8.3 late development of agricultural products processing, especially in the case of limited size farms. If a dehkan farmer processes his own production, he must pay all taxes in accordance with the 2.8 standard tax system, rather than the unified tax system. 1.6 7.4.2 TAX INSPECTIONS OF DEHKAN FARMS ARE LESS FREQUENT Individual Small and medium entrepreneurs companies Dehkan farmers According to the findings of the survey, dehkan farms were in- spected less than twice a year, a frequency which is lower than 146 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION BOX 7.7. AMENDMENTS TO THE TAX CODE AFFECTING INSPECTIONS In the framework of inspections reform, amendments to the Tax Code were adopted on July 28, 2006, regulating tax inspec- tions (see section 6.1). Main changes (see Table 7.3) cover: · Frequency of inspections: - Frequency of document inspections depends on the volume of revenues; - Inspection raids are conducted once a year. · Duration of inspections: - Duration of document inspections varies depending on the revenues volume; - Duration of inspection raids for each taxpayer can not exceed 4 hours. · Risk management principle foresees selection based on past infringement records and taxpayer revenue volume; · Entrepreneurs' access to taxation related information; · Legal justification for tax inspections; · Detailed justification of chronometry surveys; · First inspection to be conducted 30 months from the date of the state registration; · Limitation on repeated tax inspections. Table 7.3. Main changes to tax inspections procedures Type of Inspection inspection sub-type Inspection subject Frequency Duration Risk management principles Document Complex Tax obligation fulfilment (all - Not more than once every 2 - General duration is 30 days; - Selection based on past taxes) years, if revenues of the business - 10 days for SME under simpli- infringement records; are less than 15 million somoni fied system; - Selection mechanisms Thematic Tax obligation fulfilment (spe- per year; - Up to 60 days if revenues of based on the revenue vol- cific taxes) - Not less than once per year, the business exceed 15 million ume of businesses. Counter Inspection of third persons if revenues of the business are somoni per year. above 15 million somoni per year - First inspection for newly estab- lished businesses 30 months after start of activity. Raid - Registration of taxpayer; - No more than once per year - Each raid inspection of a - Correct use of cash registers separate taxpayer does not - Observance of production exceed 4 hours, and total standards, packaging, stor- duration of each raid inspec- age and sale of goods with tion does not exceed one excise. working day. any other typology of SMEs (See Chart 7.25). This evidence, com- bined with the sharp decline in tax evasion, proves that a trans- "...The unified tax is profitable for large farmers, as they have sufficient resources to react to quickly parent and simple system is beneficial not only for SMEs, but also changing business conditions..." for the government. - Entrepreneur, focus-group participant 7 7.5 tax evasion: a way to escape the system A high tax burden and the complexity of taxation accounting Chart 7.26. 1 OUT OF 4 SMES MADE AN EFFORT TO HIDE and inspections force entrepreneurs to search for alternative solu- REVENUES tions, such as tax evasion. % OF RESPONDENTS Respondents believe that every fourth business (24%) hides rev- 39% enues from taxation (see Chart 7.26). This figure has dropped sig- nificantly from 2002, possibly due to: 24% · Introduction of a unified tax for agricultural producers, which simplifies tax administration and restricts tax evasion; · Entrepreneurs being less prone to revenue non-disclosure as a 2002 2005 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 147 TAXATION result of increased tax authority control; · The fact that experienced businesses consider paying taxes cheaper than making unofficial payments. Chart 7.27. 28% OF INDIVIDUAL ENTREPRENEURS MADE AN Individual entrepreneurs seem to hide revenues more often than EFFORT TO CONCEAL REVENUES any other type of business (see Chart 7.27). On the one hand, in- % OF RESPONDENTS dividual entrepreneurs consider retail tax, the largest part of their tax, as burdensome, and try to underreport the sales volumes. On 28% 26% the other hand, their low accounting literacy prevents them from proper bookkeeping. 12% Additionally, every fourth small and medium company is thought to conceal revenues in an effort to ease their tax burden. It must be pointed out that, among dehkan farmers who are sub- Individual Small and medium Dehkan farmers ject to a simple lump-sum system independent from their profit- entrepreneurs companies ability, the share of entrepreneurs hiding revenues is much lower. 7.6 taxation system hinders Business Growth Chart 7.28. TAX BURDEN AS %OF PROFIT The current taxation system is one of the barriers hindering the % OF PROFIT 40%32 development of business, because the tax liability, and conse- quently the tax burden of SMEs, increases as the business grows (see Chart 7.28). 25% There is an imbalance between the growing number of SMEs 20% and the relatively insignificant growth of their revenues (i.e., the 13% number of individual entrepreneurs is increasing, while few of 7%32 them make the switch to become larger businesses), which is due 5% to an irrational taxation system that does not stimulate revenue growth. A typical example of a tax that hinders business growth is ed) cate) the road users' tax (see Table 7.4), which is calculated based on entrepre- (Patent) entrepre- medium medium costs, and as a result, larger scale companies with low profitabil- (Certifi (Standard) (Simplifi neurs and and ity bear a higher tax burden than smaller companies with higher profitability. Individual Individual neurs Small Small companies companies As a result of the analysis performed, it is important to draw the implications of the SME taxation system on the different types of companies. Taxation is the most pervasive administrative proce- dure as well as the most burdensome, both in terms of direct costs (tax burden) and indirect costs (tax administration). By comparing the different implicit tax rates for each typology of businesses, a clear message emerges. The current taxation system is skewed toward mid-size businesses. It should also be noted, that while the Tajik taxation system presents highly differentiated rates, the most recent trend in taxation in most CIS countries is toward a flat tax rate, considerably lower than the one in Tajikistan (see Box 7.8). 32In the case of simplified systems, implicit tax burden is calculated based on sur- vey data. 148 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION Table 7.4. Differences in the road users' tax before and after introducing amendments into Tax Code Road users' tax: main provisions Before amendments After amendments (before January 1, 2007) (after January 1, 2007) All entrepreneurs with gross Tax payers All SMEs (except patent holders) revenues above 600,000 somoni per year Tax base Delivery of goods (work, services) Total expenses Road users' tax: main provisions Company X Company Y According to amendments in the Tax Code, road users' Revenues 700.000 2.000.000 tax is charged based on the total amount of expenses of the enterprise (2% of total Expenses 300.000 1.600.000 expenses). Thus, companies with higher expenses bear a Profit before taxes 400.000 400.000 higher burden. This situation prevents companies from in- Somoni vesting. The previous provision with gross income excluding 32.000 Road users' VAT and retail trade tax as tax burden tax base could have gener- 6.000 ated more tax revenues. Company X Company Y BOX 7.8. THE CASE FOR FLAT TAXES33 In 1994, Estonia became the first country in Europe to introduce a so-called "flat Table 7.5. Flat tax rates tax", replacing three tax rates on personal income, and another on corporate on personal income, % profits, with one uniform rate of 26%. In 2001, Russia too moved to a flat tax on per- sonal income. Since 2001, Russia has imposed a single 13% tax rate on all personal Country Rate Year in- troduced income. In the year before the flat tax, Russians in the two higher tax brackets re- Estonia 26 1994 ported only 52% of their income to the taxman. In 2001, after falling into the new, Lithuania 33 1994 all-encompassing 13% bracket, these same households reported 68%. Latvia 25 1995 7 Russia 13 2001 The flat tax sharpens the incentive to work. A progressive income tax deters extra Serbia 14 2003 effort from society's best-paid (and therefore most productive) members. Russia's Ukraine 13 2004 experience, however, suggests that the principal virtue of the flat tax is its simplicity. Slovakia 19 2004 The government's revenues did not surge because Russians suddenly squared their Georgia 12 2005 shoulders and straightened their backs. Rather, Russia's tax system became easier Romania 16 2005 to administer and easier to comply with. Macedonia 10 2006 33 From The Economist print edition, dd. April 14, 2005 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 149 TAXATION recommendations 1. Further simplify the taxation system for individual entrepreneurs working under patents, by introducing a compre- hensive lump-sum system: 1.1 Consolidating into the patent costs both retail tax and social tax payments; 1.2 Revising the patent payments on a regular basis by consultations with others stakeholders, e.g., within a frame- work of an annual workshop. Expected impact By consolidating all taxes to be paid by individual entrepreneurs into a patent, the benefits would be two-fold: · On the entrepreneurs' side, the amount of payment would be clearly defined and would eliminate the costs of unneeded inspections and unofficial payments. Increased certainty would in turn increase the forecast ca- pacities of entrepreneurs and improve their business management opportunities. Additionally, simple payment would increase the number of patent holders through increase in registration; · On the government side, it would drastically reduce the number of inspectors, as tax audits could be simply performed by verification of a valid patent. Fewer inspections would allow the tax authorities to redirect their resources, resulting in more value added work. Additionally, lump sum patent payments would facilitate fore- casting tax revenues. 2. Introduce systematic and simplified tax accounting for: · Individual entrepreneurs working under certificate; · Small and medium companies taxable under simplified system. This could be achieved by: · Introducing unified tax accounting and reporting which would allow to submit one single tax return; · Book-keeping for purposes of taxation, based on simplified unified Book of Revenues; · Clearly defining tax accounting procedures in Tax Code. Expected impact The introduced measures will increase the attractiveness of these systems, increasing the number of tax payers and consequently the amount of tax revenues going into the state budget. In addition, this would have a positive impact on employment level in the country. 3. Strengthen the advantages of simplified taxation for legal entities, by either streamlining tax administration proce- dures (e.g., quarterly payment and unified reporting for all taxes) or considering a tax rate reduction. As it is now, the simplified tax is neither simple, nor economically efficient; Expected impact Further strengthening the advantages of simplified taxation for legal entities, by either streamlining tax administra- tion procedures (e.g., quarterly payments and unified reporting for all taxes) or consider a reduction of the tax rate. Indeed, as it is now, the simplified tax is neither really simple, nor economically convenient. 150 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION 4. Consider the possibility to eliminate taxes which represent an obstacle to business growth. A typical example of these taxes is the newly reformed road users' tax, which is calculated based on costs, implicitly representing a dis- incentive for companies which invest and generate long-term growth. Expected impact Abolishing these kinds of taxes would create additional incentive for companies to invest in business development and reduce the drive towards "shadowing" of revenues and expenses. 5. Further improve the taxation regime for dehkan farmers by introducing the option to reduce the tax burden for smaller sized farms in cases of low profitability, which should be proved by the farmer and subject to a tax audit. The decision to reduce the tax burden should be made by a special commission of representatives from tax authorities, local governments, and local self-governments, in order to prevent unfair decision-making and corruption. Expected impact Introduction of this measure would reduce the tax and debt burden of the dehkan farms. Elimination of unneces- sary pressure would motivate farmers to improve their performance. 6. Evaluate the opportunity to reduce social tax payments which represent a disincentive to hire employees and push labor into the shadow market.34 Expected Impact Reduced social tax rate would reduce the labour cost and increase employment level by creating additional jobs. 7. Streamline the tax administration. This can be achieved by: 7.1 Simplifying tax payments by consolidating them (i.e., providing the option to pay more frequently on voluntary basis) and wherever possible reduce the number of tax forms; 7.2 Simplifying the taxation forms, reducing the number of pages and redundant information; 7.3 Introducing risk management principles in planning and conducting inspections, focusing the verifications on the businesses where higher returns are expected; 7 7.4 Reducing the scope for tax inspections and clearly limit the arbitrary powers of tax inspectors; Expected Impact Effective tax administration system would require: · Reduction of corruption; · Redirecting government resources from unnecessary tax procedures to more efficient use; · Reduced costs to businesses due to consolidated number of necessary payments, as well as cost and time of interaction with tax officials. 34For more details see FIAS (2006). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 151 TAXATION 8. Abolish the practice of charging additional payments not foreseen by the legislation ("land improvement pay- ments"). This can be achieved by: 8.1 Providing an opportunity to report illegal payments issues to higher authorities; 8.2 Declaring "land improvement payments" illegal and sanctioning officials that require them. Expected Impact Abolishing illegal payments would lead to: · An increase in profitability of entrepreneurs, resulting in increased tax revenues to the state; · Reduction of corruption, resulting in an improved business environment. 9. Provide tax consultation within business associations to allow access to tax consultations for smaller member-busi- nesses. Expected impact Access to tax and accounting consultations would facilitate tax filing and accounting of smaller sized businesses. 10. Increase the legal awareness of entrepreneurs through state and non-governmental structures to improve entre- preneurs' access to information on taxation. Expected Impact The benefits of increasing the legal awareness of entrepreneurs would include: · Reduction of unofficial payments; · Reduction of time required to deal with tax payment and tax inspection procedures, positively affecting entre- preneurs' profits and state tax revenues. 152 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION annexes attachment 7.1. calculation of smes' tax revenues Individual entre- Small and medium preneurs companies Dehkan farmers Source Formula A Amount of taxes paid per one busi- ness in 2005, somoni 1,161 17,561 2,026 Survey data B Number of business 88,589 6,974 25,877 State Statistical Committee C Estimated tax revenues from SMEs, somoni 102,851,829 122,470,414 52,426,802 Estimation A*B D As % of total tax revenues 8.6 10.3 4.4 Estimation C/E*100% E Total tax receipts in the country 1,194,000,000 State Statistical Committee attachment 7.2. taxes paid by smes taxes taxpayers object of taxation tax rate tax frequency Patent Individuals Fixed sum Beginning of the month 8% - if taxable income is less Individual income tax/for than 100 somoni; certificate holders Individuals Income 13% - if taxable income is End of month over 100 somoni Legal entities Amount paid to physical 25% End of month Social tax persons Lndividual entrepreneurs Revenue 20% End of month Retail trade tax Legal entities and individu- als Retail sale of goods Up to 3% End of month Legal entities and indi- Road users tax viduals, whose revenues Amount of expenditures 2% End of month exceed 600,000 somoni Unified tax for agricultural Legal entities and dehkan From 4 to 164 somoni per Anticipated on products producers farms Land area hectare35 quarterly basis36 Tax paid under the simpli- Legal entities, whose fied system revenues exceed 600,000 Gross revenue 4% End of quarter somoni Minimum tax on profit of Advance payment every the enterprises Legal entities Gross revenue 1% month Profit tax from legal entities Legal entities Profit 25% End of year Value added tax Legal entities and individu- Taxable operations and als import 20% End of month Legal entities and individu- Excise als, manufacturing excis- Taxable operations with End of month 7 able goods excisable goods 35 This provision has come into force after adopting changes into Tax Code, dd. December 22, 2006. Before introducing amendments, the object of the taxation was gross revenue. 36 Should be paid not later than February 15, May 15, August 15, November 15. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 153 TAXATION attachment 7.3. current taxes of tajikistan National taxes: Local taxes: 1) individual income tax; 1) real estate tax; 2) profit tax from legal entities; 2) tax from owners of transport means 3) value added tax; 3) retail trade tax. 4) excise; 5) social tax; 6) land tax; 7) sub-soil users tax; 8) road users tax; 9) tax paid under the simplified system; 10) unified tax for agricultural products users; 11) custom duty or other custom payments; 12) state duty; 13) sales tax (cotton-fiber and premium aluminum); 14) minimum tax on profit of the enterprises; 15) goods processing tax. According to the Tax Code of Tajikistan, the taxes can be classified as follows: 1. Depending on the entity, imposed by taxation are: - taxes paid by the legal entities (tax on legal entities income); - taxes paid by the individuals (income-tax); - combined taxes (tax from the sale of ginned cotton and primary aluminium, tax for the real estate). 2. Depending on formation mechanism, the taxes are divided into: - Direct, i.e., if the final payer is the owner of the taxed property or recipient of the taxed income (income tax from the individuals, tax for the legal entities income); - Indirect, i.e., If the final payer is the goods consumer (excise, VAT). 3. Depending on the way tax revenues are allocated to budgets, the taxes are divided into: - 15 state; - 3 local. attachment 7.4. social tax rates social tax rates Individual Entrepreneurs Small and medium companies Dehkan farmers For hired personnel For themselves 20% For hired personnel 25% 1% For themselves 20% For hired personal 25%37 1%38 from total sum from employees 25% 1% from total sum from employees of employees' salary paid by from total sum from employees of employees' salary paid by salary paid by employee of employees' salary paid by salary paid by employee employer salary paid by employee employer employer 37A sum total of employees' salaries subject to 25% tax, paid by employer. 38Each employee's salary subject to 1% tax, withheld and paid by employer. 154 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 8. foreiGn trade and technical reGulation FOREIGN TRADE AND TECHNICAL REGULATION 8. foreiGn trade and technical reGulation The volume of foreign trade in Tajikistan has been increasing every main findinGs year and reached 8.1 billion somoni ($2.5 billion) in 2005, equal to 116% of GDP. It was accompanied by an increased deficit in the · Almost 80% of entrepreneurs consider balance of trade. While import is a necessity for a small economy foreign trade procedures complicated or lacking industrial capabilities, export should represent the nec- very complicated. essary complement to avoid macroeconomic imbalances. The role of SMEs in foreign trade has decreased dramatically over the · The percentage of SMEs participating in observed period: SMEs have almost withdrawn from export, and exports dropped dramatically from 8% in halved their participation in import. 2002 to 0.4% in 2005. Complicated and time-consuming import/export procedures are · The number of entrepreneurs involved in a burden for entrepreneurs, further worsening Tajikistan's already import operations decreased consider- low position in world trade due to its unfavorable geographic lo- ably, from 19% in 2002 to 11% in 2005. cation. Foreign trade also suffers from a lack of institutional support to develop links with the global markets, as well as from outdated · Only larger companies are engaged in standardization and certification procedures. These represent foreign trade. additional obstacles to foreign goods reaching the Tajik market and for Tajik goods to be sold abroad. It would be very important · Almost 40% of SMEs consider the certifi- to address the effectiveness of these procedures in the WTO ac- cation procedures complicated or very cession process of Tajikistan. complicated. Technical regulation and certification is aimed at protecting con- · 18% of SMEs were required to certify their sumers' health and guaranteeing basic safety levels, and is very goods. In particular: closely linked to foreign trade. In particular the need to certify - 20% of individual entrepreneurs; almost all the goods entering the country, even if subject to inter- - 36% of small and medium companies; nationally recognized standards, adds to import costs, while the - 5% of dehkan farmers. misalignment of Tajik standards with international ones makes ex- port almost impossible for companies lacking the scale to engage · 36% of SMEs used unofficial ways to solve in complex procedures. Nevertheless, certification and standardi- certification issues. zation also affects businesses operating in the local markets: ex- tensive coverage, repetitive procedures and the absence of a · Small and medium companies spend one risk-based approach to the application of technical standards month obtaining a certificate. make the existing regulations a very complicated and inefficient procedure. 156 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION 8.1 tajikistan foreiGn trade: the context In the past decade, world trade has grown more than twice as Chart 8.1. TRADE DEFICIT AS A SHARE fast as world GDP. Countries which are able to create an envi- OF GDP IS INCREASING ronment conducive to direct foreign investment and are able to 2002 2003 2004 2005 trade most effectively can attain the highest levels of growth and development. While both developed and developing economies have increased trade through lowered tariffs, nevertheless open -7% -7% trade regimes are only effective when there are complementary -11% policies in place: removal of non-tariff barriers and implementation -14% of facilitation and customs reform programs are equally important objectives for promoting economic development.1 The Republic Source: State Statistical Committee (2006) of Tajikistan, given its natural size constraints, lack of natural re- sources and geographical location also must address the effec- tiveness and efficiency of its foreign trade operations in order to facilitate necessary imports and foster export growth. Tajikistan is trying to join the WTO, and this membership is expected to further foster the development of foreign trade. The trade balance of the country is increasingly negative (see Table 8.1). As the Tajik economy grows, demand for goods una- vailable on the local market will grow in parallel, and so will the imports. On the other hand, a certain export potential, which is needed to avoid macroeconomic imbalance, has yet to be fully exploited. TABLE 8.1. TRADE BALANCE DEVELOPMENT IN PERIOD 2002-2005 2002 2003 2004 2005 Import, million somoni 2,469 3,036 3,747 4,565 ($823) ($1,026) ($1,232) ($1,431) Export, million somoni 2,097 2,682 3,335 3,535 ($699) ($906) ($1,097) ($1,108) Trade balance, million somoni -371 -354 -412 -1,030 (-$124) (-$120) (-$135) (-$323) Source: NBT (2006) Chart 8.2. RAW MATERIALS PREVAIL IN EXPORT STRUC- Trade balance deficit as a share of GDP has remarkably increased TURE OF THE GOODS IN AJIKISTAN T in 2005 (see Chart 8.1). 16% Cotton fiber The export structure of Tajikistan is characterized by three major 62% Primary observations: aluminum 6% Electricity 1. raw materials orientation (see Chart 8.2): Tajikistan's industrial 8 sector is underdeveloped and as such cannot fully exploit the availability of raw materials. As a consequence, exports are mostly focused on raw materials (more than 84% of the total) 16% Other and it is not value adding; 2. Low diversification: electricity, cotton and aluminum consti- tute the bulk of exports, exposing the economy to the risks of 1For more details see World Bank (2006b). Source: NBT (2006) Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 157 FOREIGN TRADE AND TECHNICAL REGULATION BOX 8.1. RAW MATERIALS ORIENTATION OF EX- fluctuating prices; PORT 3. concentration among few large scale companies: specific structure of export does not facilitate the involvement of Although in the last years several production smaller companies (i.e. electricity or aluminum are by their facilities for cotton processing were created, al- nature precluded to SMEs), and cotton export is still heavily most 90% of cotton is still exported without further concentrated among a few players and focused on a large processing. In 2005 cotton export consisted of: scale export of raw materials (see Box 8.1). 1) cotton fiber ($148 million); 2) cotton yarn ($7.5 million); 3) textile ($11 million). SMEs could support exports diversification as well as increase the share of other exports: their potential contribution is considered Source: State Statistical Committee (2006) beneficial also from the government viewpoint (see Box 8.2). BOX 8.2. EXPORT DEVELOPMENT STRATEGY OF As a landlocked country with limited natural resources and lim- FRUIT AND VEGETABLE PROCESSING SECTOR FOR ited size, Tajikistan is forced to import goods unavailable on the 2006-20102 domestic market. The structure of imports clearly reflects this: food products (e.g., sugar, flour, wheat), car parts, and timber are im- To better address the diversification of exports, portant commodities needed by the Tajik market. In this context, the government of Tajikistan elaborated a strat- import facilitation for SMEs will be essential in order to avoid: egy to develop the export potential of the fruit · Product shortages on the local market; and vegetable processing sector. Since domes- · Artificial price increases of imported goods with negative im- tic demand for fruits and vegetables does not pact on economic growth. exceed 10-15% of the produced volume, it is necessary to market the remaining 85-90% to ex- 8.2 role of smeS in foreiGn trade operations ternal markets. Development of the processing industry should then increase the export poten- Participation of small and medium businesses in foreign trade tial of the sector from $20 million to $45 million by should be fostered, since on the export side it might facilitate the 2010. This in turn could contribute to about 2.8% transformation of the export structure from raw materials to proc- of GDP and 6% of export volumes of the country. essed goods (see Chart 8.3), while on the import side it might re- The strategy consists of two stages: duce entry constraints into the Tajik markets of goods otherwise · stage i is a short-term strategy that includes unavailable, or available in limited quantity/quality. For example, measures addressing consumer requirements SMEs could actively participate in the value chain of textile pro- on quality, raw materials and necessary vol- duction illustrated in Box 8.3. umes of delivery; · stage ii is a mid-term strategy that addresses SME sector participation in foreign trade is strongly declining (see the measures for improving processing tech- Chart 8.4) and only larger-sized SMEs got involved in foreign trade nologies, packaging methods and diversifica- operations in 2005 (see Chart 8.6): tion of products. · Average turnover of companies involved in export is about 700,000 somoni, which is 22 times higher than the turnover of SMEs not involved in export operations; · Average turnover of companies involved in import is about 100,000 somoni, which is 4 times higher than that of SMEs not involved in import operations. The share of SMEs involved in export operations declined by about six times from 2002 to 2005. While the non-participation of individual entrepreneurs and dehkan farmers can be explained with the use of larger scale intermediaries, the relevant drop in the 2 Ministry of Economy and Trade (2005). 158 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION Chart 8.3. EXPORT POTENTIAL OF SMES CAN BE DEVELOPED .. Chart 8.4. PARTICIPATION OF SMES IN TRADE IS SHARPLY DECLINING High potential % OF RESPONDENTS ENGAGED IN FOREIGN TRADE Low potential EXPORT STRUCTUREOF EXPORT(%) POTENTIALFOR SMES 8 4 6 6% Electricity 1 0,1 0,4 16% Cotton fiber IMPORT 29 62% Primary aluminum 19 21 14 7 16% Other (agricultural products, 1 textiles, mineral products) Source: NBT (2006), Experts' Interviews . . Individual Small and Dehkan farm- entrepreneurs medium com- ers panies 2002 2005 BOX 8.3. TEXTILE INDUSTRY VALUE CHAIN The value chain in the textile industry can be broken down into five independent steps, culminating in production of ready made garments (see figure below).3 The process starts with the labor intensive harvesting of raw cotton and ends with the equally labor intensive finishing of the ready made garments (cutting, sewing). In between there are several capital intensive processing steps that include treatment of raw cotton (ginning, spinning), as well as production of fabric (weaving or knitting) and coloration (and printing) of fabric. Most of Tajik export Cotton harvest & prepara- Fiber & yarn Fabric Coloration & tion formation formation printing Finishing Input · Raw cotton · Ginned cotton · Yarn · Grey · Colored fabric Description · Picking · Spinning · Knitting · Scouring · Ready made gar- · Ginning (for soft fabrics) · Bleaching ment production · Weaving (for tough - hydroperoxide - Simple technol- fabrics) - hydrochloride ogy · Dyeing - Inexpensive - Operable on small premises Characteristic · Labor intensive · Capital intensive · Capital intensive · Capital intensive · Labor intensive 8 End product · Ginned cotton · Yarn · Grey · Colored fabric · Sellable good - Carded - Combed - Streched 3The finishing of the ready made garments can be done in small independent sewing shops. In Bangladesh, for instance, one of the leading countries of garment production, more than 50 percent of firms in the textile industry employ less than 300 workers. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 159 FOREIGN TRADE AND TECHNICAL REGULATION Chart 8.5. POTENTIAL .. OF SMES IN IMPORT IS HIGH number of small and medium companies involved in export (from 8% to 4%) is a worrisome signal. It might testify to higher market High potential concentration due to economies of scale, but it might also reflect Low potential the fact that only a limited number of selected exporters, those STRUCTURE who developed a good knowledge of administrative procedures OF IMPORT(%) POTENTIALFOR SMES and relevant connections, are involved. This is further illustrated by the fact that even among SMEs actively involved in trade, pro- 15% Food products cedures are considered among the most complicated (almost 3% Timber 80% of SMEs consider foreign trade procedures complicated or 9% Cars and spares very complicated) and by the high frequency of unofficial ways 17% used to resolve procedure-related issues (about 50% for small and Petroleum, natural gas medium companies, the larger and most significant sample of re- 18% Electricity spondents). Although participation of SMEs in import operations is higher than in export, it also shows a remarkable decrease (see Chart 8.4). The 48% Alumina analysis of the current import structure shows a high potential for SMEs in some categories (see Chart 8.5), which to a certain extent explains the higher share of participating SMEs. Higher participa- tion of SMEs in import is to a large extent demand driven. Accom- Source: State Statistical Committee (2006), Experts' Interviews panying economic growth, there is a high unfulfilled demand for imported goods in the country, which obviously can not be satis- fied by the small number of large importers. Chart 8.6. ONLY LARGE COMPANIES ARE INVOLVED The same considerations as in export apply to import. Higher con- IN FOREIGN TRADE OPERATIONS centration could be efficient if purely driven by economic consid- ANNUAL REVENUE IN SOMONI, `000S PER SME erations, while it might also be a signal of increased complexity of the procedures which implicitly select the number of market EXPORT IMPORT participants. 702 The following set of issues related to foreign trade operations for SMEs will be analysed in the rest of the chapter: · High transportation costs; 92 · Absence of institutional support to facilitate foreign trade op- 28 24 erations; · Complicated regulatory procedures; SMEs conduct- SMEs not in- SMEs conduct- SMEs not in- · Internationally unrecognized technical standards. ing trade volved in trade ing trade volved in trade 8.2.1 ACCESS TO INTERNATIONAL MARKETS: HIGH COST OF TRANS- PORTATION Transportation plays a significant role in the development of for- eign trade. Transportation in Tajikistan is a very complex issue, constrained by various factors: · Mountainous terrain and harsh weather conditions make it very difficult to transport goods within the country, especially during the winter; · High unofficial payments extracted by police at internal checkpoints are a major contributor to transport costs; 160 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION · Major transit route for Tajik trade runs through neighboring Uz- bekistan and is complicated due to a strict visa régime. Fur- BOX 8.4. POSSIBLE EFFECT FROM REDUCTION OF thermore, informal payments for road transport are also com- LOGISTICAL COSTS mon practice during transit through Uzbekistan4; · Attractive transport opportunities to the south are limited by A substantial reduction in logistical costs will re- continuous instability in neighboring Afghanistan. quire both improved domestic policies and im- proved regional cooperation. Currently, border It should be noted, that the Government of Tajikistan is making delays typically add 2 to 3 days to total tran- an effort to improve the transport infrastructure. There are several sit time. Bringing this time down to the official projects underway, aimed at improving transportation within the Government target of 3 hours would save an country (e.g., completion of Anzob tunnel construction, which estimated $10 million per year in waiting time would connect the north and the south of the country for the en- alone. More efficient operations and increased tire year), but also to enable access to international markets (e.g., competition in road and air services could lower completion of the Dushanbe-Kulyab-Kalaikhumb-Khorog route, the annual transport costs by a further estimated which would connect Tajikistan to Karakorum route and provide 20 percent, or $22 million per year. By streamlin- access to countries of the Asian-Pacific region). ing documentation requirements and customs processing, logistical costs of importers and ex- Changes in domestic transport regulations could improve access porters could potentially be reduced by an ad- to international markets and significantly reduce export transpor- ditional estimated $30 million per year. More sig- tation costs as well (see Box 8.4). Finally, the main transit route of nificant savings would be possible once transit Tajik export goods through Uzbekistan is dependent on collabora- through Uzbekistan improves and transit through tion between the two countries. Afghanistan becomes possible and safe. A sur- vey of traders commissioned by the World Bank 8.2.2 INSTITUTIONAL SUPPORT OF SME EXPORT IS NEEDED confirmed that the top three problems for trad- ers in Tajikistan are (i) burdensome customs pro- Obtaining access to export markets is crucial for fostering SME cedures and paperwork; (ii) corruption; and (iii) growth and productivity, especially in light of increased globali- poor transport services. zation and market liberalization. However, SMEs face many con- straints, preventing them from competing effectively in these Source: World Bank (2005) markets: lack of necessary knowledge and financing, inability to meet foreign regulatory requirements, or inadequate quantity and quality of products for foreign buyers. Chart 8.7. MEMBERS OF EXPORT CONSORTIUM IN TALYI ACHIEVE BETTER PERFORMANCE THAN NON MEMBERS - This problem is emphasized by the Tajik institutional context (i.e., % OF TURNOVER ACHIEVED % OF COMPANIES OPERATING IN no consulting on foreign trade operations) and the absence of THROUGH EXPORT MORE THAN SIX COUNTRIES established long-term practices and relationships with foreign counterparts. 49 46 33 34 One effective way of addressing these problems is through the development of export consortia.5 By participating to an export consortium, SMEs can significantly improve their export potential and reduce the costs and risks involved in entering foreign mar- 8 kets (see Box 8.5). So, for instance, in Italy, members of a consorti- SMEs, members SMEs, non- SMEs, members SMEs, non- um export a higher share of their turnover than non-member firms. of a consortium members of a of a consortium members of a consortium consortium Additionally, members of the consortium are operating in more Source: UNIDO (2005) countries than non-members (see Chart 8.7). 4For more details see World Bank (2005). 5Export consortia are voluntary groupings of enterprises, usually in the same or simi- lar business or subsector, with the objective of improving the export readiness and increasing the export volumes of the participants. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 161 FOREIGN TRADE AND TECHNICAL REGULATION BOX 8.5. BRAZILIAN TEXTILE CONSORTIUM FLOR BRASIL In 1998, Brazilian SME support institutions organized a training course in Italy for 15 enterprises from Brasilia that produced knit- wear, work clothes and beachwear. All firms were producing for the domestic market, but were finding it difficult to compete with the traditional brands of Rio de Janeiro (the city that dictates fashion trends in Brazil) and, consequently, to grow. During the training course, the participating firms learned everything related to the commercialization of their products. Be- cause Italian SMEs had good access to information on markets, trends, consumer demands and distribution channels, they were able to commercialize their products in many countries. The 15 Brazilian firms noted that the Italian SMEs were in fact very similar to them. In addition to the similarity in size, the level of production technology was comparable. The main distinguishing features were the differences in design and the firms' access to information. The Brazilian firms thus decided to prioritize these two aspects in their future operations. Upon their return to Brazil, the 15 firms tried to implement what they had learned in the training course and from their Italian counterparts. They began to plan ahead, to involve their clients in the development of collections and to give more impor- tance to their joint catalogues. The entrepreneurs became aware of the wide range of assistance provided by APEX, the Brazilian Agency for the Promotion of Exports. Since the group's products had been well received among local clients, they considered the possibility of exporting them. After having conducted research on the possibility of penetrating foreign markets, the firms created the consortium Flor Brasil and began their export activities. They improved the quality of their products and attempted to make their designs more uni- form. Jointly, they participated in trade fairs in Italy and France, which served as a valuable learning experience. Today, Flor Brasil exports to Europe and the United States and had an estimated export turnover of $1 million for 2003. Source: UNIDO (2005) Most consortia are non-profit entities, and members retain their financial, legal, managerial, and commercial autonomy. So, de- spite their participation in the export consortia, member firms do not give up any control over their business to others. This is the main difference between consortia and other types of strategic alliances. Chart 8.8. FOREIGN TRADE PROCEDURES ARE COMPLICATED With the support of international organizations in some regions of FOR MOST ENTREPRENEURS6 the country, Tajikistan's small and medium enterprises have al- % OF RESPONDENTS CONDUCTING EXPORT ready shown some promising developments. Remarkable in this context, is the creation of business support services organizations 21 65 14 (see Box 8.6). % OF RESPONDENTS CONDUCTING IMPORT 8.2.3 COMPLICATED PROCEDURES LEAD TO LOW INVOLVEMENT 2 20 56 22 OF SMES 25% 0% 25% 50% 75% 100% According to the survey, about 80% of entrepreneurs consider ex- port and import procedures in Tajikistan as complicated or very Very Rather Very Rather easy easy complicated complicated complicated (see Chart 8.8).7 6Due to limited size of the sample no division into typologies of SMEs is possible. 7None of the respondents conducting export assessed the process as very easy. 162 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION BOX 8.6. INTERNATIONAL ORGANIZATIONS IN TAJIKISTAN THAT SUPPORT THE DEVELOPMENT OF EXPORT POTENTIAL OF SMES msdsp - cross-border trade between tajikistan and afghanistan With the financial support of GTZ, MSDSP facilitates cross-border trade between Tajik and Afghan Darwaz. Activities include support of entrepreneurs (small-sized businesses), who are involved in cross border trade. There are some potential Tajik export sectors which need further development in terms of product quality and marketing: craft businesses (mainly wood and metal processing), and processing of fruits and vegetables. There are several border markets situated in GBAO, where mainly basic food products are sold, which are originally produced neither in Tajikistan nor in Afghanistan. The program is aiming to use these markets as trade facilities for potential Tajik export goods. In 2006-2007, working with its AKF partners on the Afghan side, MSDSP begun to support entrepreneurs in border zones. A busi- ness incubator has been established in Darwaz in order to foster development of small enterprises in the area. Combination of business infrastructure, services and training will assist beneficiaries by the end of the program period. In 2007, MSDSP will begin preparations to facilitate 2 cross-border youth artisan's workshops and 2 women's handicraft exhi- bitions. The exhibitions will take place in partnership with AKF Afghanistan and will capitalize on the improved access across borders to include the involvement of 120 entrepreneurs, youth and artisans. itc - trade promotion program The objective of the project funded by SECO is to strengthen the sustainable expansion and diversification of SME exports in Tajikistan. It aims to develop national capacity for trade development by focusing on business services providers while also addressing institutional issues. Since the start of the project in 2004, it has worked on three levels: · Direct enterprise level assistance Pilot enterprises received direct hands-on assistance in developing their export competitiveness. International experts, while coaching local experts, provide individual consultancy services to the pilot enterprises, helping the enterprises to implement their action plans. Training, marketing missions and other services are extended to a larger group of enterprises to help them modify their export approach. · Assistance in developing business support services organizations NTDC as a trade promotion organization was established in April 2005 and provides market information to enterprises, analyzes external trade, establishes contacts with trade representatives abroad and creates an information database on SMEs. · Association of Exporters of Agro Industrial Complex was created in April 2005 With the support of the program, capacity building seminars were conducted for SQAM bodies, some regulations were reviewed and recommendation for further improvements were provided. · Assistance in the sector and national trade strategy development ITC supported the Government in the elaboration of the "Export Development Strategy of the Fruit and Vegetable Process- ing Sector of Tajikistan." Indeed, in order to conduct a foreign trade operation, a business 8 needs to go through a very complicated process of gathering multiple documents and dealing with various state agencies. For example, a cotton exporter needs to obtain about 12 differ- ent permits from different agencies, each requiring a fee, before Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 163 FOREIGN TRADE AND TECHNICAL REGULATION BOX 8.7. MAJOR PROBLEMS DURING IMPORT OP- being able to export goods.8 The procedure, laid out in Chart 8.9, ERATIONS is complicated due to: · The necessity to visit the same agency more than once dur- The key problems reported with import proce- ing different stages of the application process (e.g., applicant dures are: goes through customs authorities 3 times during the process); · Duplication of the steps (e.g., National Bank checks the 100% · Under-invoicing in double-entry book keep- prepayment confirmation, even though this confirmation has ing is reportedly high, leading to Customs already been done by the seller's bank). authorities using other valuation methods. Valuation disputes are frequent and are As a result, it is estimated that exporters spend at least 18 man- handled through the High Economic Court days preparing one shipment of cotton fiber, and that the total under the Administrative Violation Code's regulatory costs amount to nearly 5% of the shipment value. Ex- Customs Chapter (Tajikistan has no Valu- pert estimates indicate that this cost is 3 times higher than a stand- ation Dispute Resolution Administrative Tri- ard administrative cost, which ranges from 1% to 1.5%. bunal as of yet, and, without WTO mem- bership, is under no obligation to establish one). 6 different valuation options remain Chart 8.9. NECESSARY STEPS FOR EXPORT OF COTTON available to Customs officials under the new Code, and there are doubts among step aGency document/permission the business community about the consist- Tajik Universal Commodity ency in their application. STEP 1 Exchange Conclusion of TUCE · TajikStandart certifications are required for STEP 2 TajikStandart Certificate of Conformity import, even for import of certified prod- ucts. STEP 3 Bank of Seller Passport of transaction/Confirmation on 100% prepayment by the buyer · Customs authorities require original letters Confirmation of 100% prepayment/ STEP 4 National Bank of Tajikistan Confirmation that sales tax has been of credit and other important documents, paid and do not accept faxed documents (as is STEP 5 Tax Department Confirmation that sales tax has been internationally practiced) or e-mails. paid Directorate for Customs · Customs authorities reportedly still require a STEP 6 Supervision Registration of export documentation Foreign Exchange Certificate of the trans- actional bank, despite the 2003, 2004 and STEP 7 Tajik Rail Way Permission for shipment of the goods 2005 reforms on current account transac- tions. STEP 8 Chamber of Commerce Certificate of Origin Source: FIAS (2006) STEP 9 Sanitary Inspection (Minis- Phyto-Sanitary Certificate (organic try of Agriculture) products) STEP 10 Regional customs office Final customs clearance of shipments Issue railway bill plus register the set of STEP 11 Tajik Rail Way export document which accompany the goods STEP 12 Customs Services of the rail way station Final approval of the shipments Source: Experts' interviews 8 ADB (2004). 164 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION A number of procedures represent a key burden for SMEs, deter- BOX 8.8. EXPORT PROCEDURES IN TAJIKISTAN ARE ring export activities, adding to administrative barriers and export- AMONG THE MOST COMPLICATED IN THE WORLD ers' costs. A few examples: time (days) 1. advance payment on export goods. New exporters would least most certainly have problems finding customers willing to prepay Estonia 3 Iraq 105 100% before obtaining a product. Denmark 5 Kazakhstan 93 2. There are 19 commodities which are required by legislation to Germany 6 Chad 87 be traded at the tajik universal commodity exchange (tuce) Hong Kong, China 6 Burundi 80 in order to be eligible for export. In practice, however, this Lithuania 6 Angola 74 rule is applied to other categories of goods as well, i.e., the Singapore 6 Tajikistan 72 customs offices require a TUCE valuation or permit on goods Sweden 6 Eritrea 69 not included in that list. However the TUCE authorization can Canada 7 Burkina Faso 69 only be obtained in Dushanbe. Finland 7 Azerbaijan 69 Norway) 7 Lao PDR 66 Import procedures are also very complicated, involving several documents (number) state agencies in the overall process, which is further delayed fewest most by excessive paperwork (see Attachment 8.1 in the Annex). The Hong Kong 2 Zambia 16 main problems occurring during import procedures are described Canada 3 Djibouti 15 in Box 8.7. Denmark 3 Lao PDR 12 Kiribati 3 Kazakhstan 14 Tajikistan ranks among the lowest for foreign trade operations in Tanzania 3 Rwanda 14 Doing Business 2007 (163 out of 175 countries), since procedures Austria 4 Tajikistan 14 are complicated in terms of time, cost and paperwork involved Finland 4 Ecuador 12 (see Box 8.8). In order to import goods, a Tajik importer spends France 4 Congo, Dem. 12 44 days, $3,550 and fills out 10 documents, while a Tajik exporter Rep spends 72 days, $4,300 and fills out 14 documents during export Germany 4 Uganda 12 procedures.9 Norway 4 Sudan 12 cost (US$ per container) 8.2.4 UNOFFICIAL SOLUTIONS DURING FOREIGN TRADE PROCE- least most DURES ARE COMMON Tonga 265 Tajikistan 4,300 China 335 Gabon 4,000 The complicated foreign trade procedures in Tajikistan are very Israel 340 Rwanda. 3,840 New Zealand 355 Mauritania 3,733 often the reason entrepreneurs try to solve issues unofficially. In Singapore 382 Burundi 3,606 fact, almost 50% of small and medium companies used unofficial United Arab Emirates 392 Guyana 3,625 solutions during foreign trade operations (see Chart 8.10). Fiji 418 Zimbabwe 3,177 Congo, Dem. 8.3 technical reGulation: standardiZation and certifica- Finland 420 Rep 3,120 tion Gambia 422 Mongolia 3,007 Hong Kong, China 422 Kazakhstan 2,780 The current system of standardization and certification used in Source: IFC/World Bank (2006) Tajikistan represents a serious constraint to foreign trade opera- tions. Chart 8.10. SMALL AND MEDIUM COMPANIES VERY 8 OFTEN SOLVE ISSUES WITH FOREIGN TRADE UNOFFICIALLY On the one hand, exported goods need to meet international % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS standards to be marketed abroad, while standards used in 47 23 9IFC/World Bank (2006). Individual Small and medium entrepreneurs companies Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 165 FOREIGN TRADE AND TECHNICAL REGULATION Tajikistan are typically not recognized in international markets, BOX 8.9. DEFINITION OF STANDARDIZATION AND and as such require double certification, which increases time CERTIFICATION and cost spent. Standardization and certification are two proc- On the other hand, imports that are subject to recognized stand- esses within a system aimed at ensuring prod- ards are in most cases also subject to certification requirements, uct quality and consumer safety. They should adding an additional burden to the already complex foreign be clearly divided and each process should be trade procedures. considered separately. Technical regulation, including development, control and issu- standardization is an activity to establish norms, ance of standards and certificates for products and services, is rules and characteristics (further ­ requirements) closely connected to foreign trade, but involves products pro- to secure: duced and sold in the domestic market as well. · Products and services compliance with life, health, property, and environmental protec- Although regulations are necessary to protect the health and tion safety regulations; safety of its citizens, regulations in Tajikistan are a serious constraint · Requirements on compliance and inter- to the development of the SME sector and the economy in gen- changeability of products; eral. · Products and services quality to comply with their intended functional use, in accord- 8.3.1 STANDARDS AND CERTIFICATES IN TAJIKISTAN: THE BACK- ance with scientific and technological develop- GROUND ments; · Protection of consumers' interests and Standardization and certification are two processes within a sys- rights.10 tem aimed at ensuring both product quality and consumer safety. They should be clearly divided, and each process should be con- Certification of products is an activity to confirm sidered separately. While standardization refers to the establish- the compliance of the products with established ment of a range of norms and requirements for products, services requirements.11 and methods of production which are likely to be replicated on a large-scale or long-term basis, certification is a process of veri- fication for product and service compliance with the established norms, rules and established characteristics, i.e., standards (see Box 8.9). 8.3.2 STANDARDS: OUTDATED Government regulation of standardization process is carried out by the Agency for Standardization, Metrology, Certification, and Trade Inspections under the Government of RT (hereafter, "Tajik- Standart"). The standardization system also includes other govern- ment agencies as mandated by the law (see Box 8.10). The very comprehensive system of mandatory standards dating back to the Soviet Union has been largely retained in Tajikistan. Unfortunately the current system is extremely costly to administer and maintain up-to-date, and represents a serious obstacle to for- eign trade as it is not always recognized by other countries. For 10Law of RT No. 333 "On Standardization," dd. December 14, 1996, Article 1. 11Law of RT No. 313 "On Certification of Products and Services," dd. December 13, 1996, Article 1. 166 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION instance, due to unrecognized Tajik standards, exported cotton is certified according to Uzbek standards. Tajikistan bears remark- BOX 8.10. GOVERNMENT AGENCIES INVOLVED IN able profit losses due to lower prices set by Uzbek standards: Tajik STANDARDIZATION ACTIVITIES12 cotton is mainly gathered manually and is of higher quality than the Uzbek cotton gathered by combiners.15 With the support of In addition to TajikStandart, the following state the World Bank, Tajikistan started addressing this issue in 2007. Part bodies develop standards in specific areas: of the plan is to create a joint venture for grading cotton in ac- cordance with international standards. 1. State Committee for Construction and Archi- tecture ­ for the construction industry. In addition, as a country of limited size, Tajikistan is currently unable 2. Ministry of Environmental Protection ­ for the to properly administer the complex and demanding standards use of natural resources and environmental pro- system that requires well-equipped laboratories, a highly qualified tection. staff, and effective enforcement capacity. Although the present 3. Ministry of Public Health ­ for the medical sup- system of standards is applicable indiscriminately to domestic and plies industry, pharmaceuticals industry, etc. foreign producers, the concern might be raised that the present 4. Ministry of Education ­ for curriculum guide- system fails the WTO requirement of being "least trade restrictive." lines.13 Against this background, it is recommended that Tajikistan replac- 5. Ministry of Finance ­ for accounting stand- es its vast mandatory standards system with a more compact and ards.14 simple system of mandatory technical regulations for potentially dangerous products, while making other standards voluntary. BOX 8.11. GOVERNMENT AGENCIES INVOLVED IN 8.3.3 CERTIFICATION: EXCESSIVE FOR PRODUCERS AND TRADERS CERTIFICATION ACTIVITIES TajikStandart is the principal government agency that issues cer- In addition to TajikStandart the following state tificates of compliance for products, processes, and services, as bodies issue certificates in specific areas: well as certificates authorizing the use of marks of conformity.16 It remains questionable whether authorities of standardization 1. Ministry of Transportation ­ issues vehicle qual- and certification process should be under the same authority, as ity certificates17; it may lead to a conflict of interests. As the practices of devel- 2. Ministry of Health ­ issues certificates of com- oped countries show, these two functions are usually separated pliance and quality certificates for medications, and delegated to different bodies: while standards are issued by cosmetics, medical nutrition products, medical special state bodies, certification is conducted by independent products and equipment, and food additives18; authorized institutions. 3. Ministry of Communications ­ issues certifi- cates for the right to use communication tech- Besides TajikStandart, there is a number of other government nologies19; agencies responsible for certification (see Box 8.11). 4. Chamber of Commerce and Industry ­ issues certificates of origin in the Republic of Tajikistan20; 12Law of RT "On Standardization," Article 6. 13Law of RT No. 34 "On Education," dd. May 17, 2004, Article 7. 5. Ministry of Agriculture ­ issues phyto-sanitary 14Resolution of the Government of RT No. 428 "On International Accounting certificates and pedigree livestock breeding Standards," dd. November 4, 2002. 8 15"No-name cotton," Asia-plus, dd. February 22, 2007. certificates.21 16Resolution of the Cabinet of Ministers dd. June 2, 1994, No. 249 "On the National System of Certification of Products, Work, and Services in the Republic of Tajikistan," section 2. 17Resolution No. 93 "On the Procedure for Issuing Vehicle Quality Certificates," dd. March 4, 2002. 18Resolution No. 382 "On Establishment of a Government Research Center for Expert Analysis and Certification of Pharmaceutical Products, Medical Equipment, Medical and Sanitary and Hygienic Products, Medical Nutrition Products, and Cosmetics," dd. August 29, 2003. 19Law of RT No. 39, "On Mail Service," dd. August 1, 2003. 20Resolution No 35 "On the Agency Authorized to Issue Certificates of Origin in the Republic of Tajikistan," dd. January 28, 1994. 21Law of RT No. 985 "On Pedigree Breeding," dd. July 20, 1994. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 167 FOREIGN TRADE AND TECHNICAL REGULATION Chart 8.11. EXAMPLE OF CERTIFICATION PROCEDURE 1 4 CERTIFYING AGENCY CERTIFICATE OR ETTER OF L ENTREPRENEUR CERTIFICATION DENIAL IS FORWARDED TO APPLICATION AND ANALYSIS OF ENTREPRENEUR PRODUCTS SAMPLE SAMPLE IS SENT THE RESULTS ARE SUBMITTED TO TO TESTING OBTAINED AND LABORATORY DECISION MAK - - ING 5 2 3a CERTIFIED PRODUCTS ARE EN - Product Product test TERED IN THE TATE S REGISTER samples statement Copy of product test statement 3b TESTING LABORATORY Testing of product sample Source: IFC (2004b) Chart 8.12. SHARE OF RESPONDENTS WHO UNDERWENT THE The existing system of compliance confirmation of goods and CERTIFICATION PROCEDURE services in Tajikistan is excessive, requiring certification of a large % OF RESPONDENTS WHO OBTAINED A CERTIFICATE share of products. Chart 8.11 provides an example of certification procedure. 62 31 According to the survey, 18% of SMEs were required to certify their 36 goods in 2005 (see Chart 8.12). Although there is an improvement 20 in the share of businesses who underwent certification, the cover- age is still high, in particular for individual entrepreneurs and small 5 and medium companies. In comparison, the European Union re- quires compulsory certification of just 4% of the commodity list.23 . . Individual Small and Dehkan farm- entrepreneurs medium ers22 In a market economy, it is usually in the producers' self-interest to companies complywithsetstandards,evennotmandatoryones.Certification 2002 2005 becomes a matter of marketing, and gives them an opportunity to do business with larger companies requiring minimum standard levels. Discerning consumers then have a choice between certi- fied and non-certified products, automatically leading producers to self-certification of their products. It is also important to make a shift from end-product certification to process certification, which would allow identification of risky components at the early stages of product development. There also appears to be a serious gap between the strictness and a number of certification requirements on paper and the im- 22In 2002, dehkan farmers also considered a land use certificate as a procedure of certification. However, technical regulation covers only certification of products. 23See EU (1999). 168 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION plementation capacity of certification agencies. The limited im- plementation capacity of certification bodies is described in Box BOX 8.12. IS CERTIFICATION A RESPONSIBILITY OF 8.12. CONSUMERS? Realistically, the gap needs to be closed at both ends. Implemen- It is impossible to find in the Dushanbe markets tation capacity of the relevant services and their labs needs to a fire extinguisher with the certificate of quality. be strengthened, while requirements need to be reduced and When approached in this regard, TajikStandart focused on areas with serious health and safety concerns. Even in commented that it is the responsibility of the these cases, the compliance with technical requirements is based customers to make sure that the products they less on possible control of products than on the current control of buy in the market meet the quality standards. It is production process. Additionally, a risk-based approach, which is therefore also the responsibility of the customers widely used in the European Union, could be applied in Tajikistan to approach the Agency for certification of the (see Box 8.13). fire extinguishers they bought. Another issue entrepreneurs face is repetitive certification of the certified imported goods. Focus groups indicated that entrepre- neurs have trouble importing goods in Tajikistan even with certifi- cates of conformity from the country of origin and are required to BOX 8.13. EXAMPLE OF RISK-BASED TECHNICAL recertify goods with domestic certification bodies. Though de-jure REGULATION ADOPTED IN THE EUROPEAN UN- Tajikistan accepts certificates of some countries (mostly CIS), in ION24 practice goods are required to be recertified through authorized domestic agencies. Certificates of conformity with a wide range The system of technical regulation of the Euro- of national and international standards and regulations (e.g., EU, pean Union is closely linked to risk assessment, US, and Japan) should be accepted as equivalent to a certificate where the state develops necessary manufac- of conformity with Tajik regulations. turing standards based on the risk level. An ex- ample for such regulation is a Directive 89/109/ 8.3.4 CERTIFICATION PROCEDURE: COMPLICATED FOR SMES EEC, which sets basic safety requirements for equipment manufacture. All safety require- The certification procedure remains very complicated for entre- ments in this document are grouped accord- preneurs: 37% of entrepreneurs think that the process of certifica- ing to risk level. According to this document, tion is either complicated or very complicated (see Chart 8.13). manufacturer should conduct risk assessment A possible reason for that could be the fact that the compulsory of equipment application to identify all possible requirements are set in numerous legislative documents. The pro- risk factors, and introduce the necessary manu- cedure of development and adoption of these requirements was facture changes accordingly. This directive also and still remains non-transparent. Entrepreneurs are not involved provides risk reduction guidelines. Chart 8.13. ASSESSMENT OF THE CERTIFICATION PROCEDURE % OF RESPONDENTS WHO OBTAINED A CERTIFICATE Individual entrepreneurs 17 48 27 9 Small and 8 medium companies 8 53 32 8 Dehkan farmers 3 38 45 14 . . . . 75% 50% 25% 0% 25% 50% 75% Very easy Rather easy Rather complicated Very complicated 24Shestoperov O./Belov A./Stepanyuk K. (2005). Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 169 FOREIGN TRADE AND TECHNICAL REGULATION Chart 8.14. ACCESS TO INFORMATION ON CERTIFICATION IS VERY in the process of elaboration and discussion of requirements. In COMPLICATED this context, Tajikistan needs to adopt a unified law on technical % OF ENTREPRENEURS CONSIDERING INFORMATION ACCESS COMPLICATED OR VERY regulations, especially due to the ongoing WTO accession proc- COMPLICATED Ministry of Agriculture ess. 56 Ministry of Transpor- tation 52 8.3.5 DIFFICULT ACCESS TO INFORMATION LEADING TO UNOFFI- TajikStandart 33 CIAL WAYS OF SOLVING ISSUES State Scientific Centre of the Medicine Examina- 32 tion (Ministry of Health) The certification process is made even more complicated by the fact that entrepreneurs have a difficult time obtaining informa- Chart 8.15. MORE tion on new or existing requirements from the state agencies (see ENTREPRENEURS PREFER TO SOLVE Chart 8.14). ISSUES UNOFFICIALLY % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS DURING CERTIFICATION As a result of the numerous compulsory requirements, 36% of en- trepreneurs used unofficial ways to obtain a certificate. 19% of 17 36 entrepreneurs resorted to unofficial payments to solve certifica- 19 tion-related issues (see Chart 8.15). It is also remarkable that dehkan farmers undergoing certification used unofficial solutions most often (see Chart 8.16). They applied Unofficial Other Overall unof- mostly to the Ministry of Agriculture to obtain a phyto-sanitary cer- payments unofficial ways ficial ways of solving issues tificate or a pedigree livestock breeding certificate. This high fig- ure could be due to: Chart 8.16. UNOFFICIAL WAYS OF SOLVING ISSUES DURING · Limited access to information about procedures; CERTIFICATION ARE COMMON · Low literacy of dehkan farmers in specifics of phyto-sanitary % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS DURING CERTIFICATION and livestock breeding requirements. 51 56 8.3.6 COST OF CERTIFICATION: UNEVEN DISTRIBUTION 24 Legislation does not stipulate a unified cost of certification; it is set individually by TajikStandart with approval from the Ministry of Finance.25 According to the survey findings, entrepreneurs spent Individual Small and Dehkan on average 172 somoni ($54) to obtain one certificate. However, entrepreneurs medium companies farmers the absence of unified regulation of these costs shows a high vari- ance of the expenses to obtain a certificate even within the same Chart 8.17. AVERAGE AMOUNT SPENT TO OBTAIN ONE sector of the economy. Individual entrepreneurs working in retail CERTIFICATE trade in Sughd spent about twice as much to obtain a certificate SOMONI from TajikStandart than retail traders in Dushanbe, confirming the Sughd province use of unofficial payments involved in dealing with the state bod- 218 ies (see Chart 8.17). Kurgan-Tube distirct (Khatlon province) 154 8.3.7 LONG DURATION OF OBTAINING CERTIFICATES: BURDENSOME Kulyab distirct FOR COMPANIES (Khatlon province) 118 Districts of Republican Subordination 91 The process of certification seems to be very protracted, espe- cially for small and medium companies (see Chart 8.18). This can Dushanbe 89 25Law of RT "On Certification of Products and Services," dd. May 3, 2002, Article 15. 170 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION be explained by the fact that companies are involved in business Chart 8.18. COMPANIES SPEND ONE MONTH TO GET A activities with complicated technical requirements (i.e., construc- CERTIFICATE tion, production of consumer goods, pharmaceuticals). On the BUSINESS DAYS ON AVERAGE other hand, it could indicate that state bodies deliberately drag out the process to force companies into making unofficial pay- Individual entrepreneurs 6 ments. 8.3.8 DURATION OF CERTIFICATES: UNCLEAR SITUATION Small and medium companies 21 Depending on their type and purpose, certificates may be valid for a different period of time set by respective legislative acts reg- Dehkan farmers 18 ulating the issuance of certain certificates. However, in practice even the certificate for the same activity can vary regionally, con- firming that the existing system of technical regulation does not work appropriately (see Chart 8.19). Chart 8.19. VALIDITY OF A CERTIFICATE FOR INDIVIDUAL ENTREPRENEURS WORKING IN PUBLIC CATERING VARIES REGIONALLY MONTHS ON AVERAGE Kulyab distirct (Khatlon province) 14 Kurgan-Tube distirct (Khatlon province) 13 Sughd province 8 Districts of Republican Subordination 7 Dushanbe 3 8 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 171 FOREIGN TRADE AND TECHNICAL REGULATION recommendations 1. Simplify the export trade procedure by: 1.1 Eliminating advance payment requirement for export; 1.2 Reducing the number of state bodies involved in processing of documents to avoid unnecessary duplication. For instance: - National Bank of Tajikistan confirms the presence of necessary documents for export, even though the procedure has already been completed by the seller's bank; - custom procedures are repeated by the directorate for custom supervision and regional customs office; 1.3 Elimination of mandatory requirements for certain categories of export goods at Tajik Universal Commodity Exchange (TUCE). At the very least, enforce that the products not listed in the government resolution not be subject to TUCE approval or conclusion. Expected impact: Simplified procedures would increase the number of SMEs involved in foreign trade operations, generating ad- ditional income for the national economy and increasing the foreign trade turnover. 2. Facilitate processing of imported goods by: 2.1 Creating a Valuation Dispute Resolution Administrative Tribunal to handle disputes on valuation methods dur- ing import; 2.2 Introducing acceptance of faxed import documents (e.g. letters of credit) in accordance with international practices. Expected impact: The possibility to handle disputes in a tribunal would limit the intervention of customs officials into the valuation of imported goods and reduce the possibility of unofficial solutions. Acceptance of faxed documents would allow simplification of the overall export processing and reduce the burden for entrepreneurs. 3. Facilitate transportation of goods. This can be achieved by: 3.1 Improving the domestic transport and customs regulations towards more transparency and simplification; 3.2 Continuing the dialogue with neighboring countries to simplify and increase the transit volumes of goods. Expected impact: Improved regulations could reduce the overall expenses of trade operations. In addition, improved transit could have mutual benefits for participating countries, resulting in increased export volumes on the one hand, and ad- ditional transit receipts on the other hand. 4. Development and dissemination by customs authorities of a binding summary of export/import procedures, the required paperwork, costs, and timeframes for each step. Expected impact: Availability of uniform requirements for foreign trade procedures would reduce the overall burden for entrepreneurs in terms of time and costs. 172 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION 5.Apply the risk-based approach by determining which goods and services need to be certified in order to exclude non-risky categories from mandatory certification and by abolishing the mandatory certification requirement for services; Expected impact: Reduction of the coverage of certification would result in additional cost savings for entrepreneurs. 6. Update the standard system by: 6.1 Reviewing the list of standards and abolish the ones not necessary on the grounds of health and safety in a market economy; 6.2 Considering the possibility to adopt international standards to avoid the "maintenance cost" of the system. Expected impact: Possibility for entrepreneurs to market their products in compliance with international standards. At the same time the "maintenance cost" for the bodies responsible for elaboration of standards would be reduced. 7.Reduce the need for double certification of import/export by: 7.1 Accepting the certificates of conformity from countries of EU, USA, Japan to avoid double certification of im- ported goods; 7.2 Creating internationally required laboratory facilities to certify Tajik commodities according to internationally adopted standards to facilitate their export. Expected impact: On the one hand, avoidance of double certification during import would reduce the overall burden for importers. On the other hand the possibility to certify Tajik commodities with internationally accepted standards would allow Tajik exporters easier access to international markets. 8. Accelerate WTO accession of Tajikistan by bringing the legislation in line with requirements and institutionalization of business participation in the WTO accession process. Expected impact: WTO accession would have a positive impact on the development of foreign trade in the country. 8 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 173 FOREIGN TRADE AND TECHNICAL REGULATION annex attachment 8.1. import process map (products - sausages, shoes)26 agree- on to (Resolu- dd. 2005), 2, $200-300 Costs processing cost 472 Government depend of No. cially RT According ment Custom fees custom tion of December unoffi chapter) of submis- Cus- Duration processing "Registration" after Cargo in days of Declaration 1-4 days2 sion tom Trade. details and signa- more of tures (see Development Number 1 entrepreneur of or Economic of con- cost con- con- con- VAT, fees, for agree- custom transport custom following should for of origin duties Steps individual transac- guarantee of or with and via the custom good the payments participants payments fees, fees processing, accompani- seasonal kindsc Ministry movement submitted: Documents entity Signing ment broker For goods means border documents be 1. rmingfi the Consignment Documents of 2. documents 3. rmingfi Documents goods 4. rmingfi Documents between tion's 5. rmingfi custom of payment (custom excises, custom cargo ment, specifi fees) legala Dushanbe, used SES, docu- of forms as be cate Cargo 2006, cation process- lment cate, from arrival Taxpay- Contract, importer seller, could fulfi certifi agreements phyto-vet- of Declaration cargo 3-4, ments, Identifi documents certifi of broker contract, July Examples registered custom and the compliance, exporter, be Statue, er's Number, other which by ing of between and Waybills, of quality, erinary Invoice Conclusion sale Customs of notice should provi- on docu- bodies good administration, of Procedure persona services package of custom imported Agreement sion Obtaining ments from for Import/Export operations (in to RT on of trade Seminar Agency brokers applies service foreign one Custom case them) Custom Mapping of conduct To (fol- results the Stage on Customs procedures Customs procedures 1. 2. lowing) Based 26 174 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION 1 RT of -150 rent to (150 per Decem- the $100 Costs ($47) (Resolution dd. on 2005) Government 472 2, cially According agreement somoni wagon) of No. ber Depends volumes Unoffi of Duration processing days days 1-2 2-3 signa- of tures Number 1 1 to to of the ap- cial of sam- sent to ap- the goods 4. of goods, other docu- sent of of of compli- offi cases decla- appro- charge. on goods are or state packed, pack- of the of Steps the of of sampling the of fee the lab and examination and of are body warehouse temporary Custom examination authentic Processing Samples examination After Submission Submission Sampling warehouse enterprise; cate Submission plication 1. makes for check in ration provision priate 2. statement pling 3. for custom respective bodies; 4. samples ments stamped custom 1. plication; 2. documents age; 3. from storage or the Issuance certifi ance. docu- cus- the Dec- of forms of of on research examina- Statement Customs invoices, of of ments, lab, sampling act Examples Application Conclusion tom on goods Application Cargo laration, agreement delivery Protocol and tion the CIS of the con- of in storage for examina- from of accept- conformity without Procedure cargo or of cate cate Placement the temporary warehouse Sampling duction tion Issue ance certifi Examination Acceptance certifi countries examination stand- metrol- cation inspection for Agency 8 certifi trade Agency ardization, ogy, and "TajikStandart" a Stage cate Obtaining conformity certifi 3. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 175 FOREIGN TRADE AND TECHNICAL REGULATION on Costs somoni type depends 400-500 ($125-126) Cost product 2 of to 3 up to Duration processing days2 hours2 from weeks days3 from days signa- of tures Number 1 1 1 ap- ra- (if the of stored of are ap- nec- the the of ex- be of of of cate where measure- of the time); and neces- neededIf con-is submit- and veterinary market. of Steps the are issuedis of can to of once); (every conclusion crossing the on that documents phyto- certifi documents conducted of quarantine Submission Visit Conduction Provision Preparation ed product When Based documents cate 1. plication; 2. storehouse products (done 3. diometric ments; 4. samples good 5. unifi for premises. 1. border sary checked. samplinga After Submission Submission Submission Examination Issuance ducted 2. ted and inspection amination certifi 3. products released 1. plication 2. essary 3. copy sanitary required) 4. 5. import permits cate docu- SES of forms of certifi ments, Examples Application Contract Conclusion Veterinary 1. 2. ra- of export measure- vet- cates of veterinary of certifi of Procedure cates quarantine Conduction diometric ments Issuance erinary instead certifi country Import permits vet- on on of of border plants plants Agricul- Agri- of of Agency of adminis- agency board agency surveillance state of Central, the transport inspection district SES Ministry ture Central trative veterinary State erinary on and Ministry culture state quarantine or quarantine with vet- a of cate of Stage origin: products certifi quarantine Obtaining sanitary- epidemiological conclusion For Obtaining Obtaining 4. 5. animal a) erinary b) import permits 176 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 9. methodoloGy of the survey METHODOLOGY OF THE SURVEY 9. methodoloGy of the survey The survey was conducted by an independent research company in May 2006. Interviewers of the company person- ally conducted interviews via a questionnaire consisting of 178 questions. Interviews in the provinces (oblasts) were conducted in province centers and surrounding rural areas. 9.1 sample selection The selection of the respondents was random, based on established quotas for each region, sector of business activity, and small and medium business category. The survey sample includes 700 dehkan farmers, 1,000 individual entrepre- neurs, and 800 small and medium companies located in Sughd province, Khatlon province (Kurgan-Tube and Kulyab districts), Gorno-Badahkshan Autonomous Province (GBAO), Districts of Republican Subordination, and the capital city of Dushanbe. The respondents were owners or managers of enterprises, firms, or farms, responsible for decision-making. In an effort to include all sectors of the economy and all regions of the country, sample selection was based on official data made available by the State Statistics Committee of the Republic of Tajikistan, as of January 1, 2006.1 Sampling was based on the following criteria: 1. Sectors of business activity in which small and medium businesses operate; 2. Regions of Tajikistan where small and medium businesses operate; and 3. Number of businesses, by category: · Number of individual entrepreneurs and dehkan farmers, by region; · Number of small and medium companies, by region, sector of business activity, and number of employees. The total sample includes representatives of small and medium businesses engaged in the following lines of business and located in the following regions of the Republic of Tajikistan: 1. DEHKAN FARMERS Region Official number of dehkan farmers % of dehkan farmers Number of questionnaires Dushanbe city 9 0 0 Districts of Republican Subordina- 10,126 39 269 tion (DRS) Gorno-Badakhshan Autonomous 175 1 30 Province (GBAO) Kulyab district (Khatlon province) 4,229 16 110 Kurgan-Tube district (Khatlon 6,119 24 155 province) Sughd province 5,219 20 136 Total 25,877 100 700 1 For reconstruction of the sample representativeness, a weighting procedure was used in analysis. 2 Firms with 50 or fewer employees are classed as small enterprises, while firms between 51-200 employees are classed as medium enterprises. 178 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 METHODOLOGY OF THE SURVEY 2. INDIVIDUAL ENTREPRENEURS Region Official number of individual entre- % of individual entrepreneurs Number of questionnaires preneurs Dushanbe city 21,452 25 250 Districts of Republican Subordina- 16,066 19 187 tion (DRS) Gorno-Badakhshan Autonomous 2,265 3 26 Province (GBAO) Kulyab district (Khatlon province) 5,460 6 63 Kurgan-Tube district (Khatlon 13,247 15 155 province) Sughd province 27,365 32 319 Total 85,855 100 1000 3. SMALL AND MEDIUM COMPANIES Enterprises with 50 or fewer employ- Enterprises with 51 -200 employees Total ees Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 795 12 94 83 37 9 878 13 103 Construction 890 13 104 34 15 3 924 13 108 Agriculture 394 6 48 62 28 6 456 7 54 Trade and public catering 1,240 18 147 9 4 1 1,249 18 147 Health 116 2 14 2 1 0 118 2 14 Transport and communication 156 2 20 8 4 1 164 2 20 Other 3,161 47 350 24 11 3 3,185 46 353 Total 6,752 97 777 222 3 23 6,974 100 800 9 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 179 METHODOLOGY OF THE SURVEY Distribution of the small and medium companies by regions is as follows: Dushanbe city Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the city Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 195 7 20 11 32 1 206 7 21 Construction 275 10 30 11 32 1 286 10 31 Agriculture 25 1 3 1 3 0 26 1 3 Trade and pub- lic catering 511 19 55 3 9 0 514 18 55 Health 59 2 6 0 0 0 59 2 6 Transport and communication 57 2 6 2 6 0 59 2 6 Other 1626 59 173 6 18 1 1632 59 174 total 2748 99 293 34 1 3 2782 40 296 Districts of Republican Subordination (DRS)3 Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the DRS Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 152 13 18 13 34 1 165 14 19 Construction 245 21 29 10 26 1 255 21 30 Agriculture 94 8 11 7 18 0 101 8 11 Trade and pub- lic catering 285 24 33 2 5 0 287 23 33 Health 17 1 3 0 0 0 17 1 3 Transport and communication 15 1 3 1 3 0 16 1 3 Other 376 32 42 5 13 1 381 31 43 total 1184 97 139 38 3 3 1222 18 142 Gorno-Badakhshan Autonomous Province (GBAO) Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the Province Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 11 15 6 1 33 0 12 16 6 Construction 11 15 4 0 0 0 11 15 4 Agriculture 6 8 3 1 33 0 7 9 3 Trade and pub- lic catering 29 41 11 0 0 0 29 39 11 Health 2 3 1 0 0 0 2 3 1 Transport and communication 1 1 1 0 0 0 1 1 1 Other 11 15 4 1 33 0 12 16 4 total 71 96 30 3 4 0 74 1 30 3 In an effort to better address uneven development of economy and business ena- bling environment in Districts of Republican Subordination due to geographical differences, we divided them into two parts: i) DRS A (Hissar valley) ­ representing more developed part of DRS with existence of some industry and availability of irrigated land plots; ii) DRS B (Rasht valley) - more mountainous regions with low economical development. 180 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 METHODOLOGY OF THE SURVEY Kulyab District of Khatlon Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the District Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 35 10 4 7 37 1 42 11 5 Construction 97 27 11 4 21 0 101 27 12 Agriculture 36 10 4 6 32 1 42 11 5 Trade and pub- lic catering 45 13 5 0 0 0 45 12 5 Health 3 1 0 0 0 0 3 1 0 Transport and communication 3 1 0 0 0 0 3 1 0 Other 140 39 16 2 11 0 142 38 16 total 359 95 41 19 5 2 378 5 43 Kurgan-Tube District of Khatlon Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the District Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 49 12 6 8 35 1 57 13 7 Construction 70 16 8 1 4 0 71 16 8 Agriculture 60 14 7 11 48 1 71 16 8 Trade and pub- lic catering 69 16 8 1 4 0 70 16 8 Health 4 1 0 0 0 0 4 1 0 Transport and communication 7 2 1 0 0 0 7 2 1 Other 167 39 19 2 9 0 169 38 19 total 426 95 49 23 5 3 449 6 52 Sughd Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the Province Official % of total Number of Official % of total Number of Official % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 353 18 40 43 41 5 396 19 45 Construction 192 10 22 8 8 1 200 10 23 Agriculture 173 9 20 36 34 4 209 10 24 Trade and pub- lic catering 301 15 35 3 3 0 304 15 35 Health 31 2 3 2 2 0 33 2 4 Transport and communication 73 4 8 5 5 1 78 4 9 Other 841 43 96 8 8 1 849 41 97 total 1964 95 225 105 5 12 2069 30 237 9 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 181 METHODOLOGY OF THE SURVEY 9.2 additional survey on unofficial solutions To better address the changing relationships between officials and entrepreneurs, IFC together with the survey com- pany elaborated a special questionnaire which was rolled-out in a separate survey conducted among 1,000 entrepre- neurs in June 2006. This survey studied in particular the issues with unofficial solutions during select procedures. Therefore it should be distinguished between: · Unofficial payments, i.e., use of payments during procedures not foreseen by legislation to solve issues positively; · Unofficial solutions, i.e., a broader definition of methods to solve issues positively like presents, lunches, unofficial payments and other services. According to these definitions unofficial payments are assumed to be an integral part of unofficial solutions. 9.3 indexes and definitions used in the report CAGR (Compound Annual Growth Rate) - presents the average annual growth over a period. It is calculated as fol- lows: CAGR (t0, t) = [W(t)] 1/N W(t0) - 1 where: W(t) ­ Final value; W(t0) ­ Initial value; N ­ Number of years. In our survey we distinguish between start-up and existing businesses based on a year a company started its activity: · start-ups ­ entities which started their activity after 2005; · existing businesses ­ entities which started their activity prior to 2005. 4 Even if in some cases start-up sampling does not fully reflect the statistical signifi- cance, it is supposed to show the general trend. 182 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 a. statistical appendixes SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 184 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.1. SMES, BY TYPOLOGY OF BUSINESS Chart A1.2. SMES: START UPS VS EXISTING BUSINESSES1 - . % OF RESPONDENTS % OF RESPONDENTS 73% Individual a1 entrepreneurs Existing 87% 6% Small and businesses 91% 93% medium companies Start-ups 13% 9% 7% 21% Dehkan farmers Individual Small and medium Dehkan farmers entrepreneurs companies Chart A1.3. INDIVIDUAL ENTREPRENEURS BY SECTORS OF ACTIVITY , Chart A1. 4. SMALL AND MEDIUM COMPANIES BY SECTORS OF ACTIVITY , % OF RESPONDENTS % OF RESPONDENTS Retail trade 66% Consumer services 17% Catering 11% Retail trade 16% Wholesale trade 7% Construction 13% Consumer services 6% Production of consumer goods 11% Transport 6% Catering 7% Production of consumer goods 2% Wholesale trade 6% Communication 0.7% Tourism, hotel business 4% Processing of agriculture production 0.3% Consulting services 3% Medical services 0.2% Agriculture 3% Construction 0.2% Processing of agriculture production 3% Tourism, hotel business 0.1% Transport 2% Other 0.8% Communication 1% Medical services 1% Pharmaceutics 0.7% Other 11% 1Start-ups and existing businesses are considered by year of starting of the activity. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 185 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.5. AVERAGE TURNOVER BY TYPOLOGY OF BUSINESS , Chart A1.6. AVERAGE PROFITABILITY BY TYPOLOGY OF BUSINESS , SOMONI % 216,000 32% 28% 15% 30,900 17,090 Individual Small and medium Individual Small and medium entrepreneurs companies Dehkan farmers entrepreneurs companies Dehkan farmers Chart A1.7. DISTRIBUTION OF TURNOVER Chart A1.8. AVERAGE TURNOVER BY SECTORS OF ACTIVITY2 , % OF RESPONDENTS SOMONI INDIVIDUAL ENTREPRENEURS 39 % Processing of agriculture production 157,633 29% 21% Construction 121,429 5% 3% 1% 2% Wholesale trade 59,578 Communication 54,844 SMALL AND MEDIUM COMPANIES Production 50,208 36 % of consumer goods Agriculture 34,135 16% 11% 10% 9% 13% 5% Retail trade 27,033 Consumer services 16,250 DEHKAN FARMERS 53 % Catering 11,668 Transport 10,253 28% Other 139,715 9% 4% 3% 3% to 1,000 3,000 somoni to somoni 15,000 somoni 30,000 somoni 50,000 than somoni somoni somoni somoni than to to to 100,000 to 100,000 more less 1,000 3,000 15,000 30,000 500,000 50,000 5,000,000 2Category "other" includes Pharmaceutics, Medical services, 186 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 Tourism, Hotel business and Consulting services. SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.9. AVERAGE PROFIT BY TYPOLOGY OF BUSINESS , Chart A1.10. SMALL AND MEDIUM COMPANIES GAINED PROFIT ' , SOMONI BY SECTORS OF ACTIVITY3 SOMONI 19,690 a1 Retail trade 20,420 Construction 13,442 Catering 9,430 Production of consumer goods 8,370 Consumer services 6,250 5,790 4,000 Communication 5,532 Other 34,950 Individual Small and medium entrepreneurs companies Dehkan farmers Chart A1.11. AVERAGE PROFIT GAINED BY NDIVIDUAL ENTREPRENEURS BY I , Chart A1.12. AVERAGE PROFIT GAINED BY NDIVIDUAL ENTREPRENEURS I , SECTORS OF ACTIVITY4 BY REGIONS SOMONI SOMONI Dushanbe 6,395 Retail trade 4,940 Sughd province 5,960 Catering 2,305 Whole sale trade 2,130 Kurgan-Tube district (Khatlon province) 3,362 Consumer services 1,990 Kulyab district 2,524 Other (Khatlon province) 2,220 Gorno-Badakshan Autonomous Province 2,439 Districts of Republican Subordination A 1,693 Districts of Republican Subordination B 1,327 Chart A1.13. AVERAGE PROFIT GAINED BY DEHKAN FARMERS BY REGIONS , SOMONI Kurgan-Tube district (Khatlon province) 15,105 Kulyab district (Khatlon province) 8,123 Sughd province 4,567 Districts of Republican Subordination A 2,009 Districts of Republican Subordination B 1,750 3Category "other" includes Pharmaceutics, Medical services, Tourism, Hotel business, Agriculture, Transportation, Wholesale Trade, and Consulting services. 4Category "other" includes Pharmaceutics, Medical services, Tourism, Hotel business, Agriculture, Transportation, Construction, Production of Consumer Goods, and Consulting services. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 187 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.14. PROFIT IN RANGES Chart A1.15. EMPLOYMENT IN SME SECTOR BY TYPOLOGY OF BUSINESS , % OF RESPONDENTS AVERAGE # OF EMPLOYEES INDIVIDUAL ENTREPRENEURS 2 43% Individual entrepreneurs 0.2 34% Small and 15 medium companies 6 11% 7% 2% 3% Dehkan farmers 13 . . 13 SMALL AND MEDIUM COMPANIES 42% Permanent Seasonal 15% 16% 12% 10% 4% Chart A1.16. EMPLOYMENT IN SME SECTOR BY SECTORS OF ECONOMY5 , AVERAGE # OF EMPLOYEES DEHKAN FARMERS Processing of agriculture 18 46% production 5 Construction 17 17 32% Agriculture 13 13 5% 8% 4% 4% Production 6 of consumer goods 0.7 200 1,000 5,000 than Communication 5 than somoni to somoni to somoni 10,000 somoni 20,000 somoni somoni 5 to to less 200 more 1,000 5,000 20,000 Consumer services 4 10,000 1 Catering 3 0.4 Wholesale trade 3 0.6 Transport 2 0.2 Retail trade 2 0.2 . . Others 8 3 Permanent Seasonal 5Category "other" includes Pharmaceutics, Medical services, 188 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 Tourism, Hotel business and Consulting services. SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.17. AVERAGE MONTHLY SALARY OF EMPLOYEES BY SECTORS OF ACTIVITY6 , Chart A1.18. AVERAGE MONTHLY SALARY OF EMPLOYEES BY, SOMONI TYPOLOGY OF BUSINESS Construction 150 SOMONI Production a1 of consumer goods 141 122 120 Retail trade 130 Transport 112 Communication 104 Catering 100 Consumer services 100 46 Wholesale trade 88 Processing of agriculture production 64 Agriculture 46 Other 145 Individual Small and medium entrepreneurs companies Dehkan farmers Chart A1.19. AVERAGE MONTHLY SALARY BY REGIONS , SOMONI INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Districts of Republican Subordination A 164 109 45 Gorno-Badakshan Autonomous Province 152 143 Dushanbe 149 143 Districts of Republican Subordination B 119 114 Sughd province 94 101 40 Kulyab district (Khatlon province) 93 85 35 Kurgan-Tube district (Khatlon province) 79 105 36 6Category "others" includes Pharmaceutics, Medical services, Tourism, hotel business and consulting services. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 189 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.20. KNOWLEDGE OF THE LEGISLATION REGULATING BUSINESS ACTIVITY % OF RESPONDENTS Individual entrepreneurs 15% 51% 21% 12% Small and medium companies 34% 59% 6% 0.7 Dehkan farmers 26% 59% 13% 3% Have fairly Have cursory Have poor Have no good knowl- knowledge knowledge knowledge edge Chart A1.21. KNOWLEDGE OF THE LEGISLATION REGULATING BUSINESS ACTIVITY % OF RESPONDENTS Existing businesses 19% 52% 19% 10% Start-ups 16% 6 2% 14% 9% Have fairly Have cursory Have poor Have no good knowl- knowledge knowledge knowledge edge Chart A1.22. MAIN SOURCES TO FOLLOW THE CHANGES IN THE CURRENT LEGISLATION %OF RESPONDENTS7 Mass media 71% Friends and colleagues 70% State bodies 17% Lawyers 6% Professional association 3% Other 2% IT software "Adlia" 0.6% IT software "Right" 0.6% 7Respondents could select more than one answer. 190 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.23. AWARENESS OF INTRODUCED LEGISLATIVE NORMS DURING 2004-2005 %OF RESPONDENTS INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS a1 Tax Code dd. January 1, 2005 41% 84% 76% Law "On Licensing" dd. May 17, 2004 16% 51% 22% Custom Code dd. January 1, 2005 14% 48% 19% Law " On Collateral of Movable Property" dd. March 1, 2005 11% 38% 18% Chart A1.24. INFLUENCE OF THE INTRODUCED NORMS OF THE DAILY ACTIVITY BY TYPOLOGY OF BUSINESS %OF RESPONDENTS INDIVIDUAL ENTREPRENEURS Law " On Collateral of Movable Property" dd. March 1, 2005 34% 48% 13% Law "On Licensing" dd. May 17, 2004 50% 45% 5% Custom Code dd. January 1, 2005 41% 50% 10% Tax Code dd. January 1, 2005 51% 36% 14% SMALL AND MEDIUM COMPANIES Law " On Collateral of Movable Property" dd. March 1, 2005 48% 45% 7% Law "On Licensing" dd. May 17, 2004 54% 39% 7% Custom Code dd. January 1, 2005 47% 47% 7% Tax Code dd. January 1, 2005 57% 33% 10% DEHKAN FARMERS Law " On Collateral of Movable Property" dd. March 1, 2005 50% 44% 6% Law "On Licensing" dd. May 17, 2004 64% 29% 3% Custom Code dd. January 1, 2005 50% 45% 5% . . . Tax Code dd. January 1, 2005 77% 18% 5% Positive influence No influence Negative influence Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 191 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.25. AWARENESS ABOUT ANTIMONOPOLY AGENCY Chart A1.26. MEMBERSHIP IN ANY BUSINESS PROFESSIONAL ASSOCIATION / % OF RESPONDENTS % OF RESPONDENTS 61% 6% no answer no 98% no 87,4 96% no 74% no 51% no 20% no 20% under considera- tion 54% 39% 49% yes 2% yes yes 4% yes 26% yes yes Do you know about Have you ever ap- Did you succeed Individual Small and Dehkan the Agency for plied for assistance by applying to the entrepreneurs medium farmers Anti-Monopoly Policy from the Agency? Agency? companies and Support of the Entrepreneurship? Chart A1.27. ASSOCIATIONS SMES BELONG TO % OF RESPONDENTS INDIVIDUAL SMALL AND DEHKAN FARMERS ENTREPRENEURS MEDIUM COMPANIES Association of SMB 2% 10% 1% Centre for support and devel- opment of entrepreneurship 0.7% 9% 0.7% Professional association 0.7% 5% 0.1% Union of exporters 0.3% 0.2% 0.3% Association of DFH 0.2% 0.5% 44% Association of water users 0.1% 0.1% 7% Branch association 0.1% 3% Other 0.4% 3% 0.8% 192 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.28. REASONS PROVIDED BY SMES FOR NOT BEING A MEMBER IN ANY BUSINESS PROFESSIONAL ASSOCIATION / %OF RESPONDENTS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS a1 I don't know about their existence 61% 34% 33% No practical use 22% 42% 37% Too little time 16% 22% 22% Difficult to answer 8% 7% 14% Unofficial fees 1% 2% 3% High membership fees 1% 4% 4% Other 4% 2% 3% Chart A1.29. FREQUENCY OF REPORTING %OF RESPONDENTS INDIVIDUALENTREPRENEURS Fund for social protection of population 56% 8% 16% 20% 1% Statistical report 85% 3% 7% 4% 1% Statement on financial results 43% 17% 18% 21% 2% Balance sheet 65% 14% 11% 10% 0.5% SMALL AND MEDIUM COMPANIES Fund for social protection of population 27% 64% 2 % 3% 4% Statistical report 47% 37% 2% 6% 8% Statement on financial results 26% 36% 2% 18% 18% Balance sheet 23% 38% 1% 26% 13% DEHKAN FARMERS Fund for social protection of population 9% 62% 5% 18% 5% Statistical report 22% 45% 20% 9% 4% Statement on financial results 3% 24% 4% 15% 54% . . . . . Balance sheet 7% 50% 4% 12% 27% Monthly Quarterly Every six months Annually Never Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 193 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.30. REPORTING TO DIFFERENT AGENCIES %OF RESPONDENTS INDIVIDUALENTREPRENEURS Tax Department 82% 18% Fund for Social Protection of Population 40% 60% State Statistics Committee 9% 91% Khukumat 3% 97% Commercial Bank 1% 99% Ministry of Agriculture 100% Ministry of Justice 100% SMALL AND MEDIUM COMPANIES Tax Department 91% 9% Fund for Social Protection of Population 92% 8% State Statistics Committee 90% 10% Khukumat 10% 90% Commercial Bank 8% 92% Ministry of Agriculture 1% 99% Ministry of Justice 4% 96% DEHKAN FARMERS State Statistics Committee 96% 4% Fund for Social Protection of Population 92% 8% Tax Department 92% 8% Ministry of Agriculture 15% 85% Khukumat 15% 85% Ministry of Justice 1% 99% Commercial Bank 0.3% 99.7% . . No Yes 194 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.31. OVERALL BURDEN FOR REPORTING IN MONETARY TERMS INCLUDING SALARY UNOFFICIAL PAYMENTS OVERHEADS PER ONE REPORT , , SOMONI 39 a1 28 22 Individual entrepreneurs Small and medium companies Dehkan farmers Chart A1.32. RENT OF PREMISES %OF RESPONDENTS INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Market location 49% 6% 3% Shop location 9% 3% 1% Trade center location 4% 4% 0.7% Part of private house 3% 6% 0.3% Part of production facility 1% 6% 2% Office in administrative building 1% 20% 0.8% Apartment 0.8% 4% Other 4% 3% 0.1% Chart A1.33. Average AMOUNT SPENT PER YEAR FOR RENTING Chart A1.34. AVERAGE AMOUNT SPENT PER YEAR FOR RENTING THE PREMISES THE PREMISES INCLUDING UNOFFICIAL PAYMENTS PUBLIC SERVICES ( , ) BY NDIVIDUAL ENTREPRENEURS INCLUDING UNOFFICIAL PAYMENTS PUBLIC SERV I ( , - SOMONI ICES), BY REGIONS 3000 2,934 SOMONI Gorno-Badakshan Au- tonomous Province 2,259 Dushanbe 919 1500 Kurgan-Tube district (Khatlon province) 859 811 621 Sughd province 697 Districts of Republican Subordination A 590 0 Districts of Republican Subordination B 532 Individual entrepre- Small and medium Dehkan farmers Kulyab district (Khatlon neurs companies province) 370 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 195 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.35. DISTRIBUTION OF THE EXPENSES FOR RENTING THE PREMISES %OF RESPONDENTS INDIVIDUAL ENTREPRENEURS 31% 29% 24% 15% up to 300 somoni 300 to 600 somoni 600 to 1,200 more than 1,200 somoni somoni SMALL AND MEDIUM COMPANIES 48% 25% 16% 11% up to 300 somoni 300 to 600 somoni 600 to 1,200 above 1,200 somoni somoni DEHKAN FARMERS 58% 21% 12% 9% up to 300 somoni 300 to 600 somoni 600 to 1,200 above 1,200 somoni somoni 196 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS Chart A1.36. BASED ON YOUR EXPERIENCE WOULD YOU START YOUR ACTIVITY AGAIN , %OF RESPONDENTS a1 Individual entrepreneurs 65% 25% 10% Small and medium companies 63% 24% 13% . . . Dehkan farmers 66 26% 8% Yes No I don't know Chart A1.37. ENTREPRENEURS' EXPECTATIONS FOR CHANGE IN BUSINESS ENVIRONMENT OVER THE NEXT 12 MONTHS IN THE REGION OF ACTIVITY %OF RESPONDENTS 2005 62% 18% 20% . . . 2002 52% 37% 11% Improve Worsen Remain same Chart A1.38. ENTREPRENEURS' EXPECTATIONS FOR CHANGE IN BUSINESS ENVIRONMENT OVER THE NEXT 12 MONTHS BY REGIONS , %OF RESPONDENTS Dushanbe 54% 29% 17% Districts of Republican Subordination B 92% 1% 7% Districts of Republican Subordination A 73% 12% 15% Sughd province 62% 16% 23% Kurgan-Tube district (Khatlon province) 51% 24% 25% Kulyab district (Khatlon province) 69% 12% 19% . . . Gorno-Badakshan Autonomous Province 57% 16% 28% Improve Worsen Remain same Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 197 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS 198 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION Chart A2.1. ENTREPRENEURS REGISTERED IN2005 Chart A2.2. DISTRIBUTION OF THE REGISTRATION DURATION % OF RESPONDENTS % OF RESPONDENTS INDIVIDUAL ENTREPRENEURS 100% 48% 20% 20% 9% 3% 0.3% a2 22% 24% SMALL AND MEDIUM COMPANIES 41% 24% 24% Individual Small and entrepreneurs medium companies Dehkan farmers 10% Chart A2.3. AVERAGE DURATION OF THE REGISTRATION FOR INDIVIDUAL ENTREPRENEURS BY REGIONS , DEHKAN FARMERS BUSINESS DAYS 37% Kulyab district (Khatlon province) 7 24% 27% Dushanbe 6 7% 5% Gorno-Badakshan Autonomous Province 5 up to 1 1 to 5 5 to 10 10 to 25 25 to 50 50 to 100 more than Districts of Republican day days days days days days 100 days Subordination A 5 Sughd province 5 Kurgan-Tube district (Khatlon province) 5 Districts of Republican Subordination B 3 Chart A2.4. AVERAGE COST FOR REGISTRATION FOR INDIVIDUAL ENTREPRENEURS BY REGIONS , SOMONI Dushanbe 181 Gorno-Badakshan Autonomous Province 132 Kurgan-Tube district (Khatlon province) 114 Kulyab district (Khatlon province) 108 Districts of republican subordination B 105 Sughd province 93 Districts of republican subordination A 58 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 199 REGISTRATION Chart A2.5. DISTRIBUTION OF THE REGISTRATION COST Chart A2.6. DEHKAN FARMERS WHO RECEIVED A SHARE OF DEBTS % OF RESPONDENTS BY THE RESTRUCTURING OF STATE FARMS INDIVIDUAL ENTREPRENEURS % OF RESPONDENTS 44% Yes No 73% 27% 23% 24% 7% 2% 0.4% SMALL AND MEDIUM COMPANIES 60% Average amount of restructured debt 34,400 somoni 20% 17% 3% DEHKAN FARMERS 44% 23% 16% 8% 9% up to 50 50 to 100 100 to 250 250 to 500 500 to 1000 more than somoni somoni somoni somoni somoni 1000 somoni Chart A2.7. THREE MAJOR PROBLEMS OCCURRED DURING REGISTRATION %OF RESPONDENTS UNDERGOING REGISTRATION Lack of access to information Non-transparent requirements Large number of required documents Individual entrepreneurs 16% 6% 12% Small and medium companies 18% 14% 28% Dehkan farmers 19% 8% 23% 200 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING Chart A3.1. THREE MAJOR OBSTACLES TO OBTAINING A LICENSE % OF RESPONDENTS UNDERGOING LICENSING Necessity to make unofficial payment High cost of licenses Necessity to obtain several licenses Individual entrepreneurs 7% 19% 16% Small and medium companies 4% 26% 8% Dehkan farmers 6% 13% 27% Chart A3.2. DISTRIBUTION OF COSTS FOR OBTAINING LICENSES % OF RESPONDENTS UNDERGOING LICENSING INDIVIDUAL ENTREPRENEURS a3 39% 25% 17% 12% 7% SMALL AND MEDIUM COMPANIES 27% 25% 17% 20% 11% DEHKAN FARMERS 39% 25% 17% less than 100 100 to 200 200 to 400 400 to 800 more than somoni somoni somoni somoni 800 somoni Chart A3.3. APPLICANTS WHO OBTAINED LICENSES Chart A3.4. AVERAGE VALIDITY PERIOD OF LICENSES, % OF RESPONDENTS UNDERGOING LICENSING BY GOVERNMENTAL AGENCY MONTHS Individual entrepreneurs 92% Ministry of Health 18 Small and medium companies 95% Ministry of Agriculture 12 Dehkan farmers 75% Ministry of Economy and Trade 9 Ministry of Energy 9 Ministry of Transportation 9 State Scientific Centre of the Medicine Examination 5 (Ministry of Health) Transport Inspection 4 Others 3 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 201 LICENSING 202 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS Chart A4.1. AVERAGE NUMBER OF PERMITS BY REGION , #OF PERMITS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Gorno-Badakshan 6 4 5 Autonomous Province Districts of Republican 4 5 1 Subordination A Kulyab district 3 6 2 (Khatlon province) Districts of Republican 2 4 1 Subordination B Sughd province 2 5 1 Kurgan-Tube district 1 4 2 (Khatlon province) Dushanbe 2 3 Chart A4.2. DISTRIBUTION OF THE NUMBER OF PERMITS Chart A4.3. AVERAGE NUMBER OF PERMITS %OF RESPONDENTS # OF PERMITS INDIVIDUAL START-UPS ENTREPRENEURS a4 62% 4 4 2 20% 10% 9% SMALL AND MEDIUM COMPANIES EXISTING BUSINESSES 32% 4 27% 20% 20% 2 1 DEHKAN FARMERS 61% Individual Small and medium Dehkan entrepreneurs companies farmers 20% 10% 8% 1 permit 2 to 3 permits 4 to 5 permits more than 5 permits Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 203 PERMITS Chart A4.4. AVERAGE COST OF OBTAINING ALL PERMITS BY REGIONS , SOMONI INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Gorno-Badakshan 182 Autonomous Province Kulyab district 118 476 208 (Khatlon province) Districts of Republican 72 21 Subordination B Districts of Republican 69 291 2 Subordination A Dushanbe 64 372 Sughd province 56 396 16 Kurgan-Tube district 51 286 28 (Khatlon province) Chart A4.5. AVERAGE COST OF OBTAINING ALL PERMITS Chart A4.6. DISTRIBUTION OF COSTS FOR OBTAINING ALL PERMITS SOMONI % OF RESPONDENTS 451 INDIVIDUAL ENTREPRENEURS 365 58% 252 163 71 16% 12% 14% 44 Individual Small and medium Dehkan entrepreneurs companies farmers SMALL AND MEDIUM COMPANIES 2002 2005 34% 35% 13% 18% Chart A4.7. TIME REQUIRED TO OBTAIN ONE PERMIT DEHKAN FARMERS business days, on average 74% 8 7 7 7 4 4 11% 6% 9% up to 50 50 to 100 100 to 200 more than 200 somoni somoni somoni somoni Individual Small and medium Dehkan entrepreneurs companies farmers 2002 2005 204 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS Chart A4.8. TIME REQUIRED TO OBTAIN ALL PERMITS BY REGIONS , BUSINESS DAYS ON AVERAGE , INDIVIDUALENTREPRENEURS SMALLAND MEDIUM COMPANIES DEHKAN FARMERS Gorno-Badakshan 25 Autonomous Province Districts of Republican 9 10 6 Subordination A Kulyab district 8 8 7 (Khatlon province) Sughd province 7 8 6 Dushanbe 6 8 Districts of Republican 6 2 Subordination B Kurgan-Tube district 5 5 3 (Khatlon province) Chart A4.9. TIME NEEDED TO OBTAIN ALL PERMITS % OF RESPONDENTS INDIVIDUAL ENTREPRENEURS a4 66% 21% 6% 7% SMALL AND MEDIUM COMPANIES 34% 30% 16% 20% DEHKAN FARMERS 60% 31% 7% 3% up to 3 3 to 7 7 to 12 more than 12 days days days days Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 205 PERMITS Chart A4.10. THREE MAJOR OBSTACLES TO OBTAINING PERMITS %OF RESPONDENTS WHO OBTAINED PERMITS Lack of access to information Non-transparent requirements Large number of required documents Individual entrepreneurs 17% 9% 10% Small and medium companies 19% 12% 20% Dehkan farmers 18% 9% 16% Chart A4.11. UNOFFICIAL PAYMENTS MADE WHILE OBTAINING PERMITS BY , GOVERNMENTAL AGENCIES %OF RESPONDENTS WHO OBTAINED PERMITS State Scientific Centre of the Medicine Examination 44% Committee for Architecture and Construction 38% Road police (GAI) 30% Gas supply authority 28% State Industrial safety en- forcement agency 22% Ministry of Internal Affairs 22% Energy safety authority 22% Sanitary-Epidemiological Service 19% Energy distribution/Barki Tojik 19% Regional department of Internal affairs 19% Fire safety authority 19% Khukumat 18% Ministry of communication 16% Water supply authority 11% Environmental safety authority 11% Other 10% Labor and social protection authority 10% Trade inspection (Ministry of Economy and Trade) 10% Antimonopoly agency 9% National Bank of Tajikistan 3% Ministry of Finance 1% 206 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE Chart A5.1. MAIN REASONS FOR NOT HAVING A BANK ACCOUNT %OF RESPONDENTS HAVING NO BANK ACCOUNT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No need/ no practical benefits 96% 86% 95% Difficulty withdrawing cash 6% 13% 7% High commission fees 5% 8% 2% Bank bureaucracy 4% 6% 4% Avoiding taxation 2% 6% 1% Other 1% 0.2% 1% Chart A5.2. PROBLEMS ENTREPRENEURS FACED WHEN USING THEIR BANK ACCOUNT %OF RESPONDENTS HAVING BANK ACCOUNT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No problems 66% 74% 49% Long duration of the payment transactions 19% 8% 17% Multiple requirements 18% 8% 15% Difficulty withdrawing cash 13% 11% 23% a5 Bank bureaucracy 6% 11% 13% High commission fees 4% 7% 7% Need for unofficial payment 4% 4% 12% Length of time to convert somonis to hard currency 2% 3% Usage of the information of my account by state bodies 3% 6% Others 0.5% 5% Chart A5.3. ENTREPRENEURS WHO BELIEVE THAT THEIR BANK DISCLOSES INFORMATION TO STATE AGENCIES WITHOUT APPROVAL %OF RESPONDENTS HAVING BANK ACCOUNT Individual entrepreneurs 16% Small and medium companies 22% Dehkan farmers 36% Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 207 ENTREPRENEURS AND FINANCE Chart A5.4. AGENCIES ENTREPRENEURS BELIEVE BANK DISCLOSES INFORMATION TO % OF RESPONDENTS HAVING BANK ACCOUNT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS National Bank of Tajikistan 43% 12% 15% Tax inspection 28% 37% 33% Tax police 13% 20% Prosecutor's office 16% 9% Ministry of internal affairs 2% 2% Khukumat 14% 16% Other 29% 6% 5% Chart A5.5. TYPES OF INVESTMENTS SMES MADE IN 2005 % OF RESPONDENTS MAKING INVESTMENTS INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKANFARMERS Major building repairs 18% 26% 4% New equipment 6% 22% 2% New construction 4% 10% 2% Major equipment repairs 3% 12% 6% Transportation 2% 7% 5% Other 2% 2% 1% Chart A5.6. SOURCE OF FUNDING FOR INVESTMENT % OF RESPONDENTS CONDUCTING INVESTMENT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Personal savings 87% 83% 85% Non-bank loan (friends, relatives) 11% 12% 8% Banking loan 4% 12% 5% Loan from MFOs 4% 3% Other 3% 5% 3% Direct investment (local or foreign investor) 3% 5% Future companies 0.6% 16% State funds 0.6% 0.1% 208 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE Chart A5.7. ACCESS TO BANK LOANS BY SMES Chart A5.8. ACCESS TO MFO LOANS BY SMES %OF RESPONDENTS % OF RESPONDENTS INDIVIDUAL ENTREPRENEURS INDIVIDUAL ENTREPRENEURS no no no no no no 66% 83% 9% 66% 87% 4 34% 91% yes 17% yes yes 34% yes 13% yes 96 yes SMALL AND MEDIUM COMPANIES SMALL AND MEDIUM COMPANIES no no no 56% 64% 33% no no no 56% 98% 44% 67% yes 36% yes yes 44% yes 2% yes 100% yes DEHKAN FARMERS DEHKAN FARMERS no no no 62% 87% 48% no no 9% no 62% 94% a5 38% yes 13% yes 52% yes 38% yes 6% yes 91% yes Did your company Did you apply for a Did you get a bank Did your company Did you apply for an Did you get an MFO need external bank loan? loan? need external MFO loan? loan? funding in 2005? funding in 2005? Chart A5.9. REASONS FOR NOT APPLYING FOR LOAN %OF RESPONDENTS WHO DID NOT APPLY FOR BANK LOAN INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS High fees 44% 44% 39% No need (found another source of funding) 38% 38% 33% Collateral requirement 18% 19% 20% Banking bureaucracy 6% 12% 6% Necessity for unofficial payment 6% 8% 7% Lack of long term loans 5% 10% 19% Long procedure of pledge 2% 2% 3% Insufficient loan amount 2% 8% 4% Lack of a business plan 2% 3% 4% Other 2% 0.5% Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 209 ENTREPRENEURS AND FINANCE Chart A5.10. AVERAGE TIME REQUIRED TO OBTAIN LOANS Chart A5.11. DISTRIBUTION OF TIME REQUIRED TO OBTAIN LOANS BUSINESS DAYS BY INDIVIDUAL ENTREPRENEURS % OF INDIVIDUAL ENTREPRENEURS WHO OBTAINED A LOAN 25 22 81% 19 77% 14 16 9 14% 12% 4% 5% 5% . . . Individual. Small and more than 80 entrepreneurs medium companies Dehkan farmers 1-20 days 20 to 40 days 40 to 80 days days Bank loan MFO loan Bank loan MFO loan Chart A5.12. LOAN MATURITY ON AVERAGE , Chart A5.13. INTEREST RATES ON LOANS , ON AVERAGE MONTHS % PER ANNUM 54% 11 11 11 10 10 39% 8 36% 38% 35% 35% . . . . Individual Small and Individual Small and Dehkan farmers entrepreneurs medium companies Dehkan farmers entrepreneurs medium companies Bank loan MFO loan Bank loan MFO loan Chart A5.14. CORRELATION OF LOAN MATURITY AND INTEREST RATE ON BANK Chart A5.15. ENTREPRENEURS PROVIDING COLLATERAL FOR LOANS LOANS PROVIDED TO NDIVIDUAL ENTREPRENEURS I % RESPONDENTS WHO OBTAINED A LOAN INTEREST RATE P A . . 84% 44% 36% 35% 48% 28% 41% 17% 2% 3% Individual Small and medium companies Dehkan farmers up to 3 3 to 6 6 to 12 12 to 24 . months months months months . entrepreneurs Bank loan MFO loan 210 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE Chart A5.16. COLLATERAL TO TOTAL AMOUNT OF THE LOAN AMONG Chart A5.17. DISTRIBUTION OF THE LOAN COLLATERAL PROVIDED ENTREPRENEURS WHO PROVIDED COLLATERAL TO NDIVIDUAL ENTREPRENEURS I %OF COLLATERAL % OF INDIVIDUAL ENTREPRENEURS 158% 144% 53% 123% 94% 60% 20% 44% 13% 10% 5% . Individual . Small and No collateral up to 50% 50 to 100% 100 to 150% more than entrepreneurs medium companies Dehkan farmers 150% Bank loan MFO loan Chart A5.18. SHARE OF UNOFFICIAL PAYMENTS IN THE TOTAL BANK LOAN AMOUNT %RESPONDENTS WHO MADE UNOFFICIAL PAYMENTS WHEN OBTAINING LOAN 18% a5 6% 5% Individual Small and entrepreneurs medium companies Dehkan farmers Chart A5.19. PROBLEMS WITH UNTIMELY PAYOFF OF THE LOAN %RESPONDENTS WHO OBTAINED A LOAN PRESENCEOF PROBLEMS WITH PAYOFF MAIN REASONS FOR UNTIMELY PAYOFF no Changes of the market 73% situation (prices) 53% Long procedure to convert somonis to hard currency 19% State regulations (limitations, quotes, license) 4% Tax and customs regu- lation changes 4% 27% yes Other 20% Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 211 ENTREPRENEURS AND FINANCE 212 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS Chart A6.1. ENTREPRENEURS WHO UNDERWENT AT LEAST ONE INSPECTION BY, Chart A6.2. ENTREPRENEURS WHO UNDERWENT AT LEAST SECTORS OF ECONOMY ONE INSPECTION BY REGIONS , % OF RESPONDENTS % OF RESPONDENTS Transport 100% Gorno-Badakshan Autonomous Province 100% Medical services 100% Districts of Republican Subordination B 99% Pharmaceuticals 100% Kulyab district (Khatlon province) 98% Wholesale trade 100% Dushanbe 98% Construction 100% Districts of Republican Subordination A 97% Processing of agriculture production 100% Sughd province 96% Retail trade 99% Kurgan-Tube district (Khatlon province) 91% Production of consumer goods 98% Catering 97% Consumer services 96% Others 93% Agriculture 88% Communication 86% Consulting services 80% a6 Tourism, hotel business 75% Chart A6.3. AVERAGE NUMBER OF INSPECTIONS PER BUSINESS IN ONE YEAR BY REGION , # OF INSPECTIONS INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Dushanbe 25 12 Gorno-Badakhshan Autonomous Oblast 19 22 District of Republican Subordination B 18 4 Kulyab district (Khatlon province) 15 17 7 District of Republican Subordination A 14 14 3 Kurgan-Tube district (Khatlon province) 14 9 4 Sughd province 8 8 4 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 213 INSPECTIONS Chart A6.4. DISTRIBUTION OF THE NUMBER OF INSPECTIONS Chart A6.5. DISTRIBUTION OF THE DURATION OF ALL INSPECTIONS % OF RESPONDENTS WHO WERE INSPECTED %OF RESPONDENTS WHO WERE INSPECTED INDIVIDUAL ENTREPRENEURS 52% INDIVIDUAL ENTREPRENEURS 83% 20% 16% 12% SMALL AND MEDIUM COMPANIES 35% 11% 32% 4% 2% 16% 18% SMALL AND MEDIUM COMPANIES 57% DEHKAN FARMERS 62% 18% 19% 5% 17% 14% DEHKAN FARMERS 7% 90% up to 3 4 to 6 7 to 10 more than 10 inspections inspections inspections inspections 7% 2% 2% up to 3 3 to 6 6 to 8 more than days days days 8 days Chart A6.6. AVERAGE TIME SPENT FOR ALL INSPECTIONS BY REGION , BUSINESS DAYS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS Dushanbe 16 29 Kulyab district 5 (Khatlon province) 6 12 District of Republican Subordination B 6 1 District of republican subordination A 4 9 1 Kurgan-Tube district (Khatlon province) 3 15 3 Sughd province 3 14 3 Gorno-Badakhshan Autonomous Oblast 2 13 214 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS Chart A6.7. AVERAGE COST OF INSPECTIONS INCLUDING UNOFFICIAL PAYMENTS ( ),BY REGIONS SOMONI INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKANFARMERS Dushanbe 456 1378 Districts of Republican 19 Subordination A 156 276 Gorno-Badakhshan Autonomous Oblast 346 184 Sughd province 165 940 93 Kulyab district (Khatlon province) 149 315 112 Kurgan-Tube district (Khatlon province) 205 1392 103 Districts of Republican Subordination B 103 14 Chart A6.8. DISTRIBUTION OF INSPECTION COSTS INCLUDING UNOFFICIAL ( Chart A6.9. DISTRIBUTION CHANNELS FOR NSPECTION I REGISTRATION BOOK PAYMENTS ) % OF RESPONDENTS WHO WERE INSPECTED % OF RESPONDENTS INDIVIDUAL ENTREPRENEURS 73% 69% 12% 8% 12% 18% SMALL AND MEDIUM COMPANIES 4% 3% 2% 64% a6 agency bodies Other 17% inspection 9% 10% state Tax Associations/NGOs Other DEHKAN FARMERS Antimonopoly 87% 8% 3% 2% up to 100 100 to 300 300 to 600 more than somoni somoni somoni 600 somoni Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 215 INSPECTIONS Chart A6.10. KNOWLEDGE OF THE LEGISLATION REGULATING INSPECTION PROCEDURE %OF RESPONDENTS Have sufficiently good knowledge Have cursory knowledge Have poor knowledge Have No knowledge Individual entrepreneurs 18% 51% 22% 8% Small and medium companies 40% 52% 8% 0.2% Dehkan farmers 32% 47% 18% 3% Chart A6.11. THREE MAJOR PROBLEMS OCCURRED DURING INSPECTIONS % OF RESPONDENTS WHO WERE INSPECTED Lack of access to information Non-transparent requirements Duplicate inspections by several bodies Individual entrepreneurs 20% 12% 10% Small and medium companies 21% 10% 13% Dehkan farmers 20% 9% 4% Chart A6.12. ASSESSMENT OF THE OVERALL INSPECTION PROCEDURE % . OF RESPONDENTS WHO WERE INSPECTED Very easy . Rather easy . Rather complicated . Very complicated Individual entrepreneurs 8% 51% 37% 5% Small and medium companies 4% 48% 44% 5% Dehkan farmers 8% 54% 35% 3% 75% 50% 25% 0% 25% 50% 216 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION Chart A7.1. ASSESSMENT OF THE TAX PAYMENT COMPLEXITY BY NDIVIDUAL ENTREPRENEURS IN I 2005 % OF RESPONDENTS Sales tax (on cotton fiber and primary aliminium) 100% Vehicle tax 54% 46% Minimal tax on profit of enterprise 50% 50% Real estate tax 45% 55% Customs fees 44% 56% State duty 39% 61% Land tax 36% 64% Retail tax 34% 66% Road users' tax 30% 70% Income tax for individuals 26% 74% Social tax (Fund for Social Security of the Population) 25% 75% Patent payment 23% 77% Value Added Tax (VAT) 20% 80% . Complicated . Not Complicated a7 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 217 TAXATION Chart A7.2. ASSESSMENT OF THE TAX PAYMENT COMPLEXITY BY MALL AND MEDIUM COMPANIES IN S 2005 % of respondents Custom fees 20% 80% Retail sale tax 18% 82% Land tax 18% 82% Real estate tax 18% 82% Tax for sub soil users 16% 84% Excise 16% 84% Vehicle tax 15% 85% State duty 15% 85% Tax paid via simplified system 14% 86% Minimal tax on enterprise rev- enues 14% 86% Value Added Tax (VAT) 13% 87% Social tax (Fund for Social Security of the Population) 12% 88% Income tax for individuals 10% 90% Corporate profit tax 10% 90% Road users' tax 9% 91% Sales tax (on cotton fiber and . . primary aliminium) 4% 96% Complicated Not Complicated 218 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION Chart A7.3. ASSESSMENT OF THE COMPLEXITY OF THE PAID TAXES BY DEHKAN FARMERS IN2005 % OF RESPONDENTS Sales tax (on cotton fiber and primary aliminium) 48% 52% Real estate tax 32% 68% State duty 30% 70% Tax for sub soil users 24% 76% Income tax for individuals 23% 77% Retail sale tax 22% 78% Unified tax for farmers/producers of agriculture products 17% 83% Social tax (Fund for Social Security of the Population) 16% 84% . . Vehicle tax 11% 89% Complicated Not Complicated Chart A7.4. AVERAGE AMOUNT OF THE TAXES PAID EXCLUDING INCOME TAX ( ) Chart A7.5. AVERAGE AMOUNT OF THE TAXES PAID BY SME, BY REGION SOMONI SOMONI a7 20,000 Gorno-Badakhshan Autonomous Oblast 4,730 17,561 Dushanbe 3,845 10,000 Sughd province 2,558 1,161 2,026 Kulyab district 00 (Khatlon province) 2,100 Individual Small and entrepreneurs medium Dehkan farmers Kurgan-Tube companies district 1,477 (Khatlon province) District of Republican 828 Subordination B District of Republican 639 Subordination A Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 219 TAXATION Chart A7.6. REPORTED SHARE OF BUSINESSES HIDING SALES Chart A7.7. REPORTED SHARE OF SALES CONCEALED FROM FROM TAXATION TAXATION %OF RESPONDENTS %OF RESPONDENTS 65% 59% 60% 10% 9% 8% 8% 7% 28% 26% 3% 12% . . . . Individual Small and Individual Small and entrepreneurs medium Dehkan farmers entrepreneurs medium Dehkan farmers companies companies 2002 2005 2002 2005 Chart A7.8. MAIN REASONS FOR HIDING SALES Chart A7.9. PAYMENTS FOR LANDSCAPING AND PROPERTY MAINTENANCE " " % OF RESPONDENTS HIDING SALES %OF RESPONDENTS Avoiding taxation 64% 68% 60% I don't want to pay taxes, since i don't know how 35% Government uses them 50% Unwilling to draw the attention of authorities 30% Unwilling to sell production to 6% state Impossible to obtain cash legally from 2% an account in bank Other 6% Individual Small and entrepreneurs medium Dehkan farmers companies Chart A7.10. PAYMENTS FOR LANDSCAPING AND PROPERTY " MAINTENANCE ", ON AVERAGE SOMONI 340 141 69 Individual Small and entrepreneurs medium Dehkan farmers companies 220 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION Chart A8.1. REASONS FOR NOT GETTING INVOLVED IN EXPORT TRADE %OF RESPONDENTS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No need- production is demanded on domestic 89% 91% 85% market Absence of information about foreign market 4% 4% 7% Complicated export procedures 2% 3% 6% Product is not competitive on the foreign market 2% 2% 4% Cost of procedures 2% 2% 3% Complicated custom regulation 2% 2% 3% Necessity of unofficial payment 0.9% 1% 3% Companies are not enjoying equal rights 0.6% 0.6% 3% 100% advance payment 0.3% 0.1% 2% Other 5 4 46 a8 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 221 FOREIGN TRADE AND TECHNICAL REGULATION Chart A8.2. REASONS FOR NOT HAVING IMPORTED GOODS SERVICES / %OF RESPONDENTS NOT INVOLVED IN IMPORT INDIVIDUALENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No need 83% 87% 86% Complicated import procedures 8% 7% 5% Absence of information about foreign market 6% 3% 5% Complicated custom regulation 4% 5% 6% Cost of procedures 4% 4% 3% Necessity of unofficial payment 4% 1% 5% Restrictions on import procedures 0.6% 2% 1% Companies are not enjoy- ing equal rights 0.5% 0.9% Other 3% 3% 2% Chart A8.3. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE FOR Chart A8. 4. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE BY , GOVERN- INDIVIDUAL ENTREPRENEURS BY REGIONS , MENTAL AGENCY BUSINESS DAYS BUSINESS DAYS Districts of Republican Subordination 9 Ministry of Health 18 Sughd province 8 Ministry of agriculture 13 Kulyab district (Khatlon province) 6 Gorno-Badakhshan Tajikstandard 7 Autonomous Oblast 6 Dushanbe 5 Chamber of Commerce and Industry 6 Kurgan-Tube district (Khatlon province) 4 Ministry of transportation 3 222 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION Chart A8.5. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE BY Chart A8.6. DISTRIBUTION OF THE TIME REQUIRED TO OBTAIN ONE CERTIFI- TAJIKSTANDART, BY REGIONS CATE BUSINESS DAYS % OF RESPONDENTS WHO OBTAINED A CERTIFICATE INDIVIDUAL Sughd province ENTREPRENEURS 10 77% Districts of Republican Subordination 10 Kulyab district (Khatlon province) 6 11% 4% 8% Dushanbe 5 SMALL AND MEDIUM COMPANIES Kurgan-Tube district (Khatlon province) 3 56% 22% 8% 14% DEHKAN FARMERS 60% 28% 8% 4% up to 7 days 7 to 14 days 14 to 21 days more than 21 days Chart A8.7. VALIDITY PERIOD OF ONE CERTIFICATE ON AVERAGE , Chart A8.8. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE OBTAINED BY INDIVIDUAL ENTREPRENEURS BY REGIONS , MONTHS MONTH 18 16 Kurgan-Tube district (Khatlon province) 27 11 Kulyab district (Khatlon province) 17 Sughd province 10 a8 Districts of Republican Subordination A 8 Individual Small and medium entrepreneurs companies Dehkan farmers Dushanbe 7 Gorno-Badakhshan Autonomous Oblast 6 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 223 FOREIGN TRADE AND TECHNICAL REGULATION Chart A8.9. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE, Chart A8.10. DISTRIBUTION OF THE VALIDITY PERIOD OF ISSUED CERTIFICATE BY GOVERNMENTAL AGENCIES % OF RESPONDENTS WHO OBTAINED A CERTIFICATE MONTHS INDIVIDUAL ENTREPRENEURS Chamber of Commerce and Industry 44 37% Ministry of Health 16 29% 23% Ministry of Agriculture 15 11% Tajikstandart 8 SMALL AND MEDIUM COMPANIES Ministry of Transportation 6 52% 16% 18% 14% DEHKAN FARMERS 41% 24% 21% 14% 1 to 3 months 3 to 6 months 6 to 12 months more than 12 months Chart A8.11. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE ISSUED Chart A8.12. AVERAGE COST OF OBTAINING ONE CERTIFICATE BY BY AJIK TANDART BY REGION T S , INDIVIDUAL ENTREPRENEURS BY REGION , MONTHS SOMONI Kulyab district Sughd province 245 (Khatlon province) 12 Kurgan-Tube district Kurgan-Tube district (Khatlon province) 187 (Khatlon province) 11 Dushanbe 146 Sughd province 9 Kulyab district (Khatlon province) 127 Districts of Districts of Republican Republican Subordination 7 Subordination 126 Gorno-Badakhshan 76 Dushanbe 6 Autonomous Oblast 224 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION Chart A8.13. DISTRIBUTION OF COST FOR ONE CERTIFICATE Chart A8.14. AVERAGE COST FOR OBTAINING OF ONE AJIK T - % OF RESPONDENTS WHO OBTAINED A CERTIFICATE STANDARD CERTIFICATE BY REGIONS , INDIVIDUAL ENTREPRENEURS SOMONI 36% 36% Sughd province 286 14% 15% Kurgan-Tube district (Khatlon province) 210 Districts of Republican Subordination 134 SMALL AND MEDIUM COMPANIES 50% Dushanbe 122 25% Kulyab district 121 14% (Khatlon province) 11% DEHKAN FARMERS Chart A8.15. AVERAGE COST OF OBTAINING ONE CERTIFICATE , 35% 35% BYGOVERNMENTAL AGENCY SOMONI 18% 12% Ministry of Health 265 up to 50 to 100 100 to 200 more than 200 50 somoni somoni somoni somoni Ministry of Agriculture 252 Tajikstandart 175 Chamber of Commerce and Industry 134 Ministry of Transportation 23 Chart A8.16. THREE MAJOR PROBLEMS DURING CERTIFICATION PROCESS %OF RESPONDENTS WHO OBTAINED CERTIFICATE Necessity to obtain several certificates High cost of certificates Too many required documents Individual entrepreneurs 10% 23% 6% Small and medium companies 8% 23% 8% a8 Dehkan farmers 3% 37% 25% Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 225 REFERENCES references adB (2004). Country Governance Assessment of the Republic of Tajikistan. asia-plus (2006). Tajikistan: economical perspective., dd. November 20, 2006. asia-plus (2007). Information blitz Asia Plus., dd. January 31, 2007. Banca d'italia (2006). Quaderni di Economia e Finanza. n.1, July 2006. eu (1999). Safety control problems. eurostat (2007). Statistics of EU, Eurostat release 41/2007-20 March 2007. fao/eBrd (2006). Kyrgyzstan and Tajikistan: expanding finance in rural areas. Rome, Italy: FAO. fias (2006). Strengthening Investment Climate and Investment Facilitation Capacity. Washington DC. 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Tajikistan: trade diagnostic study. Washington DC: World Bank. world Bank (2006a). A strategy for Agriculture Sector Development in Tajikistan. Washington DC: World Bank. world Bank (2006b). World Development Indicators database, http://devdata.worldbank.org/wdi2006/contents/Sec- tion5.htm. world Bank (2006c). Reforming the regulatory procedures for Import and Export: Guide for practitioners. Washington DC: World Bank. 226 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 international finance corporation, the private sector arm of the World Bank Group, promotes open and competitive markets in developing countries. IFC supports sustainable private sector compa- nies and other partners in generating productive jobs and delivering basic services, so that people have opportunities to escape poverty and improve their lives. Through Financial Year 2006, IFC Financial Products has committed more than $56 billion in funding for private sector investments and mobilized an additional $25 billion in syndications for 3,531 com- panies in 140 developing countries. IFC Advisory Services and donor partners have provided more than $1 billion in program support to build small enterprises, to accelerate private participation in infrastructure, to improve the business enabling environment, to increase access to finance, and to strengthen environmental and social sustainability. For more information, please visit www.ifc.org. the state secretariat for economic affairs (seco) is the Swiss Confederation's competence center for all the core issues related to the economic policy. SECO's aim is to create the basic regulatory and economic policy conditions to enable business to flourish for the benefit of all. SECO represents Switzerland in the large multilateral trade organizations as well as in international negotiations. SECO is also involved in efforts to reduce poverty and help developing countries with transition economies build sustainable democratic society and viable market economy. Each year Switzerland spends ap- proximately 1.9 bln. Swiss francs on development cooperation and transition assistance to countries. Tajikistan Business Enabling Environment - SME Policy Project 7 Abdullo Komandir Str. Dushanbe, Tajikistan 734 001 Tel.: (992 48) 701 14 40 Fax: (992 48) 701 14 48 www.ifc.org/tajikistan/sme