EBRD Business Support Office Armena [EBRD

Table of contents

Table of contents ...... 2 List of abbreviations and terms...... 3 Introduction...... 4 Background, structure and organisation of the BSC ...... 4 Developments in the BSC since the establishment of the assignment...... 6 Results achieved since the establishment of the project...... 7 Technical progress of the assignment ...... 14 Reporting to the Bank ...... 16 Conclusions...... 18 LIST OF ANNEXES...... 22 ANNEX 1 Members’ lists...... 23 ANNEX 2 Key structural developments within the BSC ...... 25 ANNEX 3 Frequency of BSC meetings ...... 26 ANNEX 4 Minutes of the BSC Meeting 15 May 2008 ...... 27 ANNEX 5 Minutes of the BSC Meeting 4 July 2008...... 38 ANNEX 6 Speech of the Senior Consultant at the BSC Meeting 4 July 2008 ...... 43 ANNEX 7 Local press coverage of the BSC Meeting 4 July 2008 ...... 45 ANNEX 8 Comparative analysis of business environment in Armenia 2000-2008 ...... 46 ANNEX 9 Mapping of obstacles for exporting in Armenia ...... 83 ANNEX 10 Mapping of the work of donor organisations in developing small and medium businesses and improving business environment...... 87 ANNEX 11 Brief analysis of the 2008 state budget and its provisions for improvement of business environment ...... 91 ANNEX 12 Presentation on the BSC ...... 95 ANNEX 13 Presentation on business climate in Armenia...... 102 ANNEX 14 Minutes of the BSC Meeting 19 November 2008...... 107

List of abbreviations and terms

ADA Armenian Development Agency

ATDA Armenian Tourism Development Agency

BSC Business Support Council

Council Business Support Council

Office Business Support Office established by the EBRD

Introduction In recent years Armenia has registered impressive economic growth as well as improvement in business environment indicators. However, many problems in this area remain unresolved. Armenia has exposed significant asymmetry between its business climate indicators; having a very favourable position in registering property, it is at a worryingly low level with tax collection, trade deficit, investor protection and other indicators. An effective solution to these problems is only possible through intensive cooperation between the government and the private sector. The BSC, being the only formal platform for dialogue between the authorities and the business community, should play a crucial role in facilitating the public-private cooperation. Increasing the efficiency of the work of the BSC is vital for addressing the problems of the private sector of Armenia as well as for introducing the necessary reforms aimed at achievement of a truly business enabling environment in the country. It is with the objective of upholding and maintaining the dialogue between the government and the business community on a high level and increasing the efficiency of the work of the BSC that the EBRD’s Business Support Office was established in mid-May 2007.

In order to evaluate the progress of the assignment since its establishment, this Report starts with a brief overview of the BSC and the developments affecting the BSC since the start of the project, and then focuses on the specific results achieved by the project.

Background, structure and organisation of the BSC The BSC was initially created in 2000 upon the initiative of the World Bank and its Foreign Investment Advisory Service (FIAS) and as a result of a joint effort of these structures and the government of Armenia. The BSC was established as a governmental structure. The legal basis for the establishment of the BSC was a presidential decree, and the Prime Minister was to be in charge of the structure. The BSC is comprised of 15 members, seven of whom are state officials and permanent members of the BSC.

The composition of the permanent membership is as follows:  Prime Minister of Armenia (Chairman) 4

 Advisor to the President of Armenia on Economic Affairs (Deputy Chairman)  General Manager of ADA (Executive Secretary, as ADA also acts as the BSC Secretariat)  Minister of Economy  Minister of Finance  Mayor of Yerevan  Chairman of the Chamber of Commerce and Industry of Armenia.

The other eight members are included in the BSC from a wider list of 50 businesses on a rotational basis. For the full list of the BSC, current members and those that can be included in the BSC through rotation, please refer to Annex 1.

However, as the Armenian economy and the needs of the business community were evolving with time, the BSC’s structure underwent changes accordingly. Originally it was comprised of only 28 members. Later, with the expansion of the Armenian economy, this number seemed to be inadequate and in 2002 the number of members was increased to 44. In 2006 the number was further increased to 50 members. But that last change was not just a mere addition of six new members – the whole composition of the BSC altered. Many of the oligarchs that had had vast representation in the former list were excluded. The current composition includes many players of a more modest weight category, and the percentage of both unions and development agencies has almost doubled in terms of their ratio in total, reaching 13 and 12 per cent respectively.

The BSC members can be classified into three categories, namely: - businesses - unions that are groups of companies - development agencies and programmes.

For more information on the development of the structure of the BSC please refer to Annex 2.

The BSC Charter acts as a regulatory document for all the BSC activities and for decision making within the Council. Between the sessions, the work of the Council is carried out through a mechanism called a “Pool of Problems”. The concept of the “Pool of Problems” involves a database of issues, based on actual complaints received from businesses. Once a complaint is received, it is re-addressed to a relevant decision maker (a ministry, an agency, etc.) who is in charge of the area. The responses from appropriate organisation(s) with added recommendations from ADA are then passed back to the company where the complaint has been generated.

Developments in the BSC since the establishment of the assignment The Senior Consultant was recruited with the aim to establish and maintain, through the BSC, policy dialogue at the highest level between the government, the business community and the donors in Armenia. However, when the Senior Consultant started in May 2007, the BSC was undergoing a passive period. The number of meetings per year was steadily declining and no meetings were held in 2007 (please see Annex 3).

The circumstances were not favourable to hold a BSC meeting. From January 2007 to May 2008, the BSC changed three Chairmen and three Executive Secretaries due to changes in the government structure. In March 2007, Prime Minister Andranik Margaryan passed away and in April Serzh Sargsyan was appointed Prime Minister hence becoming the Chairman of the BSC. However, timing did not work for the BSC’s advantage since the May 2007 parliamentary elections were underway followed by the presidential election campaign for the February 2008 elections. Upon winning the presidential elections in February 2008, Mr Sargsyan automatically stopped being the Chairman of the BSC and in April of 2008 a new Prime Minister was appointed. Mr. Tigran Sargsyan, former Central Bank Chairman, became a new Prime Minister and according to the BSC Charter took the position of the Council Chairman.

During the first 12 months of the appointment of the Senior Consultant, the BSC Secretariat has also undergone changes in leadership thus resulting in three different BSC Executive Secretaries (as the ADA General Director is also the Executive Secretary of the BSC). In September 2007 former General Director of ADA Mr Vahagn Movsisyan left his position for diplomatic service and was succeeded by former Deputy Minister of Trade and Economic Development Mr Tigran Davtyan. Following the presidential elections in February 2008 Mr Davtyan was subsequently appointed Minister of Finance, which in turn caused some slowdown of ADA’s operations as the BSC Secretariat.

On the positive side, though, during the time of working with Mr Davtyan, good working relationship was developed, and mutual cooperation effectively continues to date. In the end of May 2008 Mr Robert Harutyunyan was appointed the General Director of ADA (previously he was Executive Director of the Foreign Financial Programmes Management Centre in the Ministry of Finance). Mr Harutyunyan currently leads ADA and acts as the head of the BSC Secretariat.

It has been challenging to work productively under the constant changes of key figures. The challenges were doubled by the fact that until mid-June 2008 the Senior Consultant was operating without any expert assistance as the contracts of the other staff of the EBRD’s Business Support Office were only issued by mid-June (the delay caused by the transition period due to the elections in the country). Also, the team had to operate without any office space since the office premises were only acquired in the beginning of September 2008, and the space is currently in the process of being made fit for use. Nevertheless, solid achievements have been recorded in the assignment and they are listed in the section to follow.

Results achieved since the establishment of the project Despite its limited resources and adverse circumstances the project managed to record substantial progress and to exhibit results that are presented below:

Inclusion of the BSC as a priority into the Government Programme for the coming five years. Five-Year Government Programme is a key strategic document that defines the priorities of the government for the given period of time. It was adopted in June 2007, and as a result of active efforts, it was possible to include a provision on the necessity to intensify the activities of the BSC and to increase its efficiency as well as a specific requirement on identification and removal of barriers to business. These important provisions were inserted as a separate paragraph in the Programme under 4.3.2 “Business and Investment Climate” with the following wording: "With the aim of improving business environment and attracting investments, the Government will intensify the work of Armenian Development Agency and the Business Support Council, and will increase the efficiency of their activities, in parallel with identifying the impediments to ensuring competition-based environment and unconditional implementation of laws."

Previously the Government Programme had not had any specific mention of ADA or the BSC. Inclusion of this paragraph served as a good base for our efforts to rehabilitate and intensify the work of the BSC since it gave us grounds to refer to the BSC as a clearly defined government priority.

Rehabilitation of the BSC sessions. As it was noted earlier, the BSC was rather passive from October 2006 till May of 2008. The one and a half year gap between the BSC meetings was largely due to the period of elections in the country which diverted the attention of the key players from the BSC activities. In April 2008 Mr Tigran Sargysan was finally appointed Prime Minister and became the new Chairman to the BSC.

The BSC is not the only council with the Prime Minister that is competing for the government’s attention. It was therefore vital to properly present our project to the Prime Minister as well as to draw his attention to the need of revitalising the BSC as the only existing platform for dialogue between the business community and the government, and the necessity to increase the quality of this dialogue. The Senior Consultant had a series

8 of meetings with the Prime Minister1 and, as a result of the effective cooperation, on 15 May 2008 the BSC finally convened a full-scale meeting. The agenda, the minutes, the Prime Minister’s speech as well as the main outcome of the meeting are attached in Annex 4. After the first BSC meeting, through intensive work and continuing meetings with the Prime Minister, a second BSC meeting was held on 4 July 2008, in less than two months’ time (for the minutes of the meeting please refer to Annex 5). The first point on the agenda was the issue of intensifying the work of the Council and raising the efficiency of its work. The Senior Consultant presented a number of suggestions aimed at strengthening the BSC, and ultimately all of them were accepted by the BSC. For the full speech of the Senior Consultant at the BSC meeting 4 July 2008, please refer to Annex 6. The Senior Consultant’s speech was mentioned in the local press coverage of the BSC meeting (see Annex 7).

Making suggestions on raising the BSC’s efficiency that were welcomed by the Council. The Office came forth with suggestions on a number of issues listed below. All of them were accepted by the Council. a) Frequency of BSC meetings. Ensuring a regular frequency of the BSC meetings is absolutely essential for the smooth and efficient operation of the Council. The Senior Consultant raised this point in all her meetings with Prime Minister and Chairman of the Council Mr Tigran Sargsyan; Deputy Chairman of the Council Mr Vahram Nercisiants; ADA General Director and Executive Secretary of the BSC Mr Robert Harutyunyan; Minister of Finance Mr Tigran Davtyan; Minister of Economy Mr Nerses Eritsyan, as well as during the BSC meetings. Now, the BSC meetings are back on track and the upcoming BSC meeting2 is scheduled for mid-November.

1 Four meetings since the Prime Minister’s appointment in April 2008. 2 The Annual Report 2007-2008 has already been submitted when the last BSC Meeting took place on November 19, 2008. However, in order to make the document more comprehensive and informative, it was decided to add the Agenda and Minutes of this Meeting (see Annex 14) to this Report, without any further amendments to the core text of the document.

b) Format of working groups. The choice of an optimal format for the working groups of the BSC has been the subject of recent discussions within the BSC. Several suggestions have been made on the issue. The Senior Consultant proposed the following: to allow for maximum flexibility and not to confine the Council to a limited framework of pre- selected topics, it would be most efficient to create both permanent and temporary working groups. Permanent working groups should deal with challenges that are of long- term nature and require ongoing monitoring, such as export promotion, investment promotion, etc. Temporary working groups should deal with tasks of short-term nature, which also require serious time and professional effort.

Participation of businesses in the working groups is completely voluntary, while for the efficient operation of these structures serious expertise, time investment and organisational effort are required. Considering the limited BSC related human resources of ADA the EBRD’s Business Support Office can become a valuable asset and a driving force behind the operation and the day-today activities of the working groups. c) Rotation of the BSC members. The last rotation among non-permanent members of the BSC took place back in 2006. Thus, it is important to organise a new rotation of members as part of normal operation of the Council. Our Office initiated and was actively involved in the process of rotation of the BSC members. We have been in favour of a balanced representation of different types of members to include:  different areas of business activity  unions, that are collective bodies and, thus, have more representative value  knowledge centre/consultancy/think-tank. The rotation of the BSC members is to be discussed at the coming meeting of the BSC3. In the meantime the suggestion on the members to be included according to the BSC procedure has already been approved by the Prime Minister. Once approved, in

3 See Footnote 2 and Annex 14. 10 compliance with the BSC Charter, the list of new members will be sent to the President for final entry into force. d) BSC agendas. We have continuously underlined the importance of the BSC agendas. Currently, our Office together with ADA is involved in the formation of the BSC agendas. The Senior Consultant suggested a thorough mechanism of formation of the agendas based not only on recommendations of the BSC Secretariat, appropriate ministries and business community, but also on findings of analytical work, conclusions of round tables and knowledge of the donor organisations in the area. This will ensure a more comprehensive and versatile picture of challenges when prioritising the issues for entry into a BSC agenda. e) Inclusion of results of analytical work in the work of the BSC. It is impossible to come up with well-grounded solutions on how to annihilate the obstacles to favourable business environment without analytical work. The expert team of the Office now contributes to the analytical expertise in this area on different levels, both when tackling specific issues under discussion within the BSC framework and proposing quality analysis of the issues related to business climate improvement. Our suggestion on providing quality analysis to the BSC has been much welcomed by ADA and the government, and we have already submitted detailed papers and suggestions.

Creating a unique research on the business environment in Armenia. The Office has undertaken a research on the “Comparative Analysis of Business Environment in Armenia 2000-2008” which is unique in its kind in Armenia (please refer to Annex 8 for the full document). There are a number of reputable surveys and indexes depicting the state of enabling environment for business in the country. However, prepared by different organisations they are conducted throughout different periods of time and different frequency, and have diverse comparison dimensions (cross-country, cross-industry, etc), use different sets of indicators and result in a big pool of scattered information.

The uniqueness of the paper is that it is the only document in Armenia where all this information is organised and analysed in one research, as well as the period covered. Thus, the “Comparative Analysis of Business Environment in Armenia” stands out as the first attempt to present a comprehensive analysis of enabling environment for business in Armenia for the period of 2000-2008, i.e. the time of the establishment and operation of the BSC (thus, the observations made may serve as an indirect indicator on the efficiency of the BSC). At the same time, it should be noted that most of other studies are conducted for shorter time periods, while the length of the duration we have chosen allows us to draw a more comprehensive picture of the development in Armenia and adds to the value of the paper.

The report is comprised of two parts; the first part presents the analysis derived from main findings of surveys conducted by leading international donor organisations, such as the EBRD and World Bank, as well as based on the data from leading rating institutions, such as Fitch, Moody and Heritage Foundation, while the second part examines the reforms underlying the present level of business environment, current challenges in the area and future targets.

The initiative of the Office was welcomed by the government that requested the Office to produce a similar research on a yearly basis and valued the necessity of such an analytical paper as a useful tool for a more efficient tracking of international donor (or specialised agencies) evaluation of Armenia’s business environment as well as a source of valuable analysis of current challenges and recommendations on the reforms.

Roadmap thematic planning. To make the work of the BSC more streamlined, we have proposed to generate long-term thematic planning of the BSC meetings. Under this format, in addition to the pending problems raised by the business community or the government, the agenda will include a key topic for discussion, e.g. challenges faced by the exporters, challenges faced by the banking sector, etc.

In addition to enabling a longer-term planning strategy within the BSC, this working method may bring an additional benefit of allowing to detect and to raise specific problems existing in the key sectors of entrepreneurship in Armenia; the problems that are often viewed as part of a general package and may be missed. This approach will also allow for more result-oriented and organised steps within the Council, apart from the Council’s work related to massive reform packages.

Full involvement in the work of the BSC. Despite the fact that neither the EBRD, nor any other donor organisation are members of the BSC, the EBRD’s Business Support Office has now become fully involved in everyday work of the Council. It is an active participant and initiator in forming the agendas of the BSC meetings, it introduces and participates in the implementation of recommendations that will allow for a substantial increase in the efficiency of the BSC, it takes an active part in the BSC meetings as well as the operational work of the Council between the meetings. The Office is involved in collecting and organising information on challenges faced by the business community, as well as in the follow-up work of providing recommendations and solutions to pending problems. For instance, in the course of the meetings of the staff of the Office with the Exporters Union of Armenia a document has been created (see Annex 9) reflecting the current challenges faced by the Armenian exporters. We envisage the inclusion of the problems discussed into one of the upcoming BSC sessions, and the Office will be involved in finding solutions to the concerns raised in the post-BSC-meeting period as well.

Donor cooperation. The Senior Consultant has introduced the project and established relations with all major donor organisations operating in the country. We have mapped the projects that other donors are implementing in the area of improvement of business climate in Armenia (for detailed information see Annex 10). In the framework of donor cooperation the Office participated in the on-line conference held between the World Bank Working Group in Washington and the Armenian delegation comprised of the officials from the Ministry of Economy, Ministry of Finance, Tax and Customs

Inspectorate and ADA, with an aim to discuss the progress of improvement of “Doing Business” indicators of Armenia.

However, the absence of an office space and the delay in hiring the staff have been major technical obstacles in deepening the scope of cooperation, and when these are resolved we are hopeful to take our cooperation with donors further.

Technical progress of the assignment Acquisition of the office premises From the point of view of work efficiency the most logical location for the EBRD’s Business Support Office is the Armenian Development Agency that is responsible for everyday operations of the Council. Through series of negotiations it was possible to achieve a preliminary agreement on the lease of premises in the ADA building. However, by a government decree this space was due to the Armenian Tourism Development Agency (ATDA). The issue of space has been raised on the highest levels, including that of the Prime Minister. With the support of ADA’s former Director General Mr Tigran Davtyan and through many negotiations with both the ATDA and Ministry of Economy (responsible for tourism sector) it was possible to submit to a government session an amendment to the previous government decree that further enabled generation of a tri- lateral contract between the EBRD, Armenian Tourism Development Agency (ATDA) and ADA. The EBRD’s Business Support Office has been facing heavy competition from other projects seeking the same office space as office premises in the centre of Yerevan are of big demand. To succeed in the negotiations was even more challenging because of the lengthy legal procedures required by the EBRD to conclude a lease agreement; also, the Senior Consultant managed to negotiate a much lower than average market rent which was not to be missed. The efforts of the Senior Consultant as well as understanding of the importance of the project on the part of the government and ADA made it possible to achieve the signing of the lease agreement. The lease of the premises started in the beginning of September. Then the Office (with the help from the EBRD Resident Office)

14 had to explore the local market in order to obtain competitive offers for renovation and equipment.

Involvement of staff In compliance with the EBRD procedures a professional team of three experts has been recruited to assist the Senior Consultant. Head of the EBRD Resident Office Michael Weinstein, former General Director of ADA (currently Minister of Finance) Tigran Davtyan and the Senior Consultant (with the kind assistance from Angela Levitsky of the EBRD Consultancy Service Unit responsible for consultant recruitment) were involved in the selection of the team of professionals. However, due to the passive operation of the BSC followed by the parliamentary and presidential elections in Armenia, it was decided to postpone the contracts until after the elections. The expert team was enrolled in mid- June and it greatly enhanced the capacity of the Office, allowing for better work distribution and efficiency.

Reporting to the Bank As defined by the terms of reference of the Senior Consultant, reports on the current state of the project should be submitted to the Bank’s Headquarters and the Resident Office in Yerevan on a quarterly basis. Thus, the Senior Consultant (the staff has joined later) submitted four reports to the Bank. The reports contained the following key points:

Report No 1  Comprehensive overview of the BSC, including background, structure, organisation, membership, trends and dynamics in the operation of the BSC for 2000-2007.  Inclusion of the BSC as a priority in the Government Programme for the coming five years.  Introduction of the project and establishment of contacts at the top government levels, and with representatives of business community.  Advertising the positions, selection of candidates for interviews.  Negotiations with ADA over rent of office space within the ADA premises, preliminary agreement with ADA over an extremely lucrative rent about 2.5 times lower than an average market offer.

Report No 2  Selection of experts in accordance with the EBRD procedures. A decision by the London team to defer issuing the contracts to the staff until later, due to the political transition period in the country. Raising the issue of significance of rehabilitating the BSC with the Prime Minister, and at other top government levels.  Change of ADA leadership, resulting in change of BSC Executive Secretary. Arrival of a new ADA Director General.  Participation of the Senior Consultant in the budget 2008 discussions. Provisions in the 2008 budget on improvement of business environment (See Annex 11 for brief analysis of the document and relevant provisions).

 Negotiations with ADA and ATDA over the rent of office premises as, despite the ADA’s willingness to provide the BSC with the premises, the space is claimed by ATDA. At the same time the premises are sought after by other projects as well. The Senior Consultant raises the issue at top levels, up to the Prime Minister; the outcome is positive. At this stage a local legal counsel is hired by the EBRD to check the compliance of the lease agreement with the Bank’s requirements.

Report No 3  Participation of the Senior Consultant in an offsite training session with the heads of similar EBRD structures in other Early Transition Countries; exchange of information and experience.  Within preparation for an upcoming BSC Meeting a brief analysis of ‘Doing Business’ indicators for Armenia has been undertaken.  Mapping of donor community projects in the area of business support and business environment improvement.  Through close cooperation with ADA and with involvement of the Ministry of Economic Development, after a series of negotiations an agreement with ATDA on a new format of a tri-lateral lease contract has been achieved. For the document to have legal force, a change of the government decree is required. To bring the issue into a government session, a draft lease agreement is circulated in the Ministry of Economic Development and gets approved by the Ministry of Justice. Efforts are made to insert the issue in the agenda of the upcoming government session.  Report on presidential elections in the country and tragic post-electoral events.

Report No 4  New Prime Minister who is also the Chairman of the BSC is appointed. The Senior Consultant meets with the new Prime Minister introducing the project and urging on the need to rehabilitate the Council. The Prime Minister responds most positively to the need to rehabilitate the Council and as a result after a dormant period of one and a half years the first BSC session chaired by the Prime Minister

follows. The Senior Consultant continues a series of meetings with the Prime Minister4.  Principles and priorities of the government in the area of business climate improvement as envisaged by the Prime Minister.  Recent developments and reforms introduced/envisaged in Armenia, directed towards increasing the country’s entrepreneurship/quality of life and allowing for a more business friendly environment in the country.  The staff finally joins the Senior Consultant greatly enhancing the efficiency of the project. At the same time the work is distributed more rationally among the team members rather than the Senior Consultant dealing with the whole volume of work.  The government decree containing the provisions on the disputed office premises is through many efforts of ADA former General Director Tigran Davtyan and the Senior Consultant is amended in the beginning of April to allow rent the space by the EBRD5.  Agenda, minutes, list of participants of the BSC full-scale meeting (including 50 members) of May 15, 2008, speech of the Prime Minister in the BSC Meeting.

Conclusions The assignment faced numerous challenges throughout the course of its operation. It was adversely affected by numerous and frequent changes of the BSC leadership, the electoral period in the country, the delay in contracting the staff (up to mid-June 2008 the Senior Consultant was running the Office alone) and the absence of office premises which will become available only by the beginning of December 2008. At first glance it may seem that the assignment had low chances for meeting its targets. However, despite these circumstances the summary of the work carried out shows that the objectives of the

4 In less than two months time another BSC meeting takes place, with a main agenda point on raising the efficiency of the Council, where all the suggestions presented by the Senior Consultant are accepted by the Council. 5 In the months to follow the Legal Department of EBRD and the local consulting company were finalising the contract, which was finally ready for signature in September. 18 project have been largely met in an annual perspective and the assignment has achieved tangible results as described in the core text of this report.

The EBRD has colossal experience and knowledge in promoting the interests of private sector and steering public-private dialogue. However, prior to the establishment of the assignment this invaluable potential was little utilized within the BSC, due to the natural limitation of the EBRD not being a member of BSC. Currently, the EBRD’s Business Support Office is the only international donor organisation that is directly involved in day-to-day operation of the Council, is an active participant and organiser of the Council sessions and acts as a driving force behind the Council, and in the last two BSC meetings was the only representative from the donor community. Thus, in a relatively short period of time it was possible to move from the level of little involvement to a maximum possible involvement in the BSC as well as to become the most knowledgeable player in the matters concerning the Council.

The Office has become an integral and valuable element of the BSC. In Senior Consultant’s meetings with the government representatives, the latter have repeatedly emphasised the value they attach to the expertise of the EBRD’s Business Support Office. Given the dedicated but quite limited resources ADA possesses for operating the BSC, the involvement of the EBRD’s Senior Consultant’s team is vital if the Council is to run efficiently and to carry out fully-fledged work.

The work of the Office with the BSC has been two-fold. On the one hand, the Office has been actively involved in the core work of the Council, participating in the running of the BSC’s “Pool of Problems”, holding regular discussions with businessmen and dealing with their issues of concern. This has been accompanied by active and regular meetings with the government side and miscellaneous meetings at the top level: with the Prime Minister of the country, Minister of Finance, Minister of Economy, Chief Economic Advisor of the President, etc. The Office has now become an important tool in upholding a constant dialogue between the decision makers and the private sector.

On the other hand, the Office, in compliance with the terms of reference of the assignment and based on real needs and interests of the Council, has made a number of suggestions to improve the efficiency of this important platform for public-private dialogue. It is worth noting that all the suggestions have been ultimately approved by the Council, and currently work is carried out to implement these proposals. Many of the points suggested are already in progress to be fitted into the Council’s operating mechanism.

The Office in cooperation with ADA became a key driving force in rehabilitating the Council after a substantive dormant period. This was achieved through close cooperation with the Prime Minister, who has the final decision-making power in the Council as its Chairman. Once the process started moving it became possible to reform the Council to meet the needs of the business community and to raise efficiency of different components constituting the work of the Council. This has been accompanied by intensive work on the issues raised by businesses through the Council.

Last but not least, in a relatively short period of time after issuing the contracts of the experts, the Office has come up with a research summarising and analysing the key surveys/indexes on business environment in Armenia. Both the government and the BSC have expressed profound interest in the paper as this initiative represents the first attempt of presenting a comprehensive picture of all evaluations of the business climate in the country. In addition to being a useful guideline on the business environment in the country, the paper provides a set of recommendations on future targets to be followed for optimal lifting of impediments to business in Armenia. The uniqueness of the paper is also the large period that it covers (from 2000 to 2008), thus giving a most comprehensive overview of the developments in the business environment within the country and compared with the region and internationally. The government has already recommended producing a similar paper on a yearly basis.

However, to become fully functional the Office still has a few technical problems to solve. Although through a series of very successful negotiations the office space has been 20 obtained in a convenient location within the ADA premises, it now has to be renovated and equipped. The absence of office space interferes with everyday work of the Senior Consultant and the experts, resulting in loss of time and tangible inconveniences; and it makes maintaining routine contacts with other organisations a much more cumbersome process. We are hopeful that once this technical point is solved, it would be possible to further enhance the capabilities of the Office for more efficient work in many different aspects, like routine contacts with counterparts, project awareness and PR efforts, discussions of meetings and round tables, etc.

In December last year the Senior Consultant participated in an offsite meeting of the heads of similar organisations in other ETC countries. It was useful to share the Armenian experience and to receive information on the activities and procedures of EBRD initiated Investment Councils in other countries. The Office stands eager to continue such exchanges of information.

It should also been emphasised that if the Office is to be able to continue the reforms it has launched and to leave a tangible impact, the mandate of the operation of the Office is to be extended for a longer duration of time.

To finalise the achievements and the current state of the assignment, it should be mentioned that within a year of its establishment the project managed to move on from a zero level of involvement into an Office which now plays an important role in facilitating the dialogue between the highest levels of the government of Armenia and the business community of the country. It has also initiated the important process of reforms within the BSC which needs to change to be able to meet the evolved demands of the private sector in the country. However, as the BSC, the EBRD’s Business Support Office itself is in the process of constant development not only to meet but to continuously upgrade the targets set for the team.

LIST OF ANNEXES

1. List of BSC Permanent Members List of BSC Non-Permanent Members (as after Rotation in October 2008), List of Members that can be included in BSC according to Rotational Principle (Club of 50)

2. Key structural developments within the BSC

3. Frequency of the BSC meetings

4. Minutes of May 15, 2008 BSC Meeting Main points of the 15 May, 2008 BSC Meeting. 5. Minutes of July 4, 2008 BSC Meeting-

6. Speech of the Senior Consultant on July 4, 2008 BSC Meeting

7. Local press coverage of July 4, 2008 BSC Meeting (Arka News Agency coverage included as an example)

8. Comparative Analysis of Business Environment in Armenia 2000-2008

9. Mapping of obstacles for exporting in Armenia

10. Mapping of donor organization work in the area of small and medium business development and business environment improvement

11. Brief analysis of the State Budget 2008 and its provisions on the improvement of the business environment

12. Presentation on the Business Support Council 13. Presentation on the Business Climate of Armenia. 14. Minutes of November 19, 2008 BSC Meeting. 22

ANNEX 1 Members’ lists

List of current members of BSC

List of BSC permanent members NAME 1 Prime Minister (Chairman) 2 Advisor to the President of Armenia in Economic Affairs (Deputy Chairman) 3 General Manager of ADA (Executive Secretary, also ADA acts as BSC Secretariat) 4 Minister of Trade and Economic Development of RA 5 Minister of Finance and Economy of RA 6 Mayor of Yerevan 7 Chairman of the Chamber of Commerce and Industry of RA

List of BSC non-permanent members (as of after rotation in October 2008)

NAME 1 Ameria 2 Armenian Copper Programme 3 Yerevan Jewelry Company 4 Liqvor Pharmaceuticals 5 Electrasark 6 Union of Banks of Armenia 7 Rusal Armenia 8 Tosp Textiles Factory

List of Members that can be included in BSC according to Rotational Principle (Club of 50)

1 Centre for Agricultural Business Development 2 Gyumri Hydro Power Station after Professor Mnjoyan 3 American Chamber of Commerce 4 Armenia TV 5 Armenian Copper Programme 6 Ameria 7 Armeg 8 Business Support Centre 9 BioChim

10 Geghard Meat Products Company 11 Glass World Company 12 Golden Palace Hotel 13 Grand Thornton Amyot 14 DCA Armenian Diamond Processing Company 15 Dolmama 16 Euroterm 17 Yerevankahouik (Yerevan Furniture) 18 Yerevan Jewelry Company 19 Yerevan Chemical-Pharmacuitical Firm 20 Electrasark (Electrical Equipments) 21 Elite Group 22 Ecoperlit 23 AWI 24 Erebouni Medical Centre 25 Leda Campus 26 Manufacturers and Businessmen (Employers) Union of Nagorno Karabakh 27 Liqvor Pharmaceuticals 28 Converse Bank 29 Manufacturers and Businessmen (Employers) Union of Armenia 30 Union of Banks of Armenia 31 ACBA-Credite Agricol Bank 32 Union of Constructors of Armenia 33 Merchants of Armenia 34 National Centre of Small and Medium Business Development of Armenia 35 Union of European Trade Companies in Armenia 36 Armenian Tourism Development Agency 37 HayEconomBank 38 Hermes-Art 39 Movsisyan Natural Stones Processing Enterprise 40 Multi-Agro 41 Union of Importers of Construction Materials 42 RusAl Armenia 43 Sis Natural 44 Solaren 45 Village Group 46 IT Teaching Centre 47 AEPLAC 48 Tosp Textiles Factory 49 KPMG Armenia 50 First Travel and Service

ANNEX 2 Key structural developments within the BSC

Categories of BSC Members Prior to Restructuring in 2006

Categories of Members Prior to BSC restructuring in 2006

7% 5% Unions

Development Agencies/Programmes Businesses

88%

Categories of BSC Members Prior to Restructuring in 2006

Categories of Members in Current BSC Full List of Membership

13% Unions 12%

Development Agencies/Programmes Businesses 75%

ANNEX 3 Frequency of BSC meetings

Frequency of BSC Sessions Annually

Number of BSC Sessions Per Year

10 9 8 7 6 5 4 3 2 Number of Sessions of Number 1 0 2001 2002 2003 2004 2005 2006 2007 2008(as of Sep) Years

ANNEX 4 Minutes of the BSC Meeting 15 May 2008

Transcript # 16-38(1)

of the meeting of Business Support Council

Yerevan

May 15, 2008

Chairing:

T. Sargsyan Prime Minister of the Republic of Armenia Chairman of Business Support Council

Participating:

V. Nersisyants Chief Adviser to President of the Republic of Armenia on Economic Affairs Deputy-Chairman of Business Support Council

T. Davtyan Minister of Finance of the Republic of Armenia

E. Zakharyan Mayor of Yerevan

M. Sargsyan President of Chamber of Commerce and Industry the Republic of Armenia

A. Ghazaryan President of Union of Manufacturers and Business (Employers) NGO

D. Atanesyan President of American Chamber of Commerce in Armenia Union of Legal Entities

G. Mkrtchyan Executive Director of Armenia TV CJSC

G. Arzumanyan Executive Director of Armenian Copper Program CJSC

G. Abrahamyan Chairman of Board of Directors of DCA Diamond-cutting Company of Armenia CJSC

E. Movsisyan President of Movsisyan Natural Stone Processing Enterprise LLC

Invited

D. Sargsyan Head of Staff of Government of the Republic of Armenia

V. Barseghyan Head of State Tax Service by Government of the Republic of Armenia

G. Khacahtryan Acting Chairman of State Customs Committee by Government of the Republic of Armenia

A. Shahnazaryan Chairman of State Commission of Protection of Economic Competition of the Republic of Armenia

V. Danielyan Deputy Minister of Economy of the Republic of Armenia

A. Davtyan Director of Agribusiness Development Center CJSC

N. Nahapetyan General Director of Gyumri Hydro Power Plant named after A. L. Mnjoyan, academician, LLC

A. Mkrtchyan Executive Director of Ameria CJSC

A. Hoveyan Executive Director of Arpeg LLC

S. Gevorgyan Director of Business Support Center CJSC

A. Avetisyan Executive Director of Bio-Chem LLC

B. Sedrakyan General Director of Glass World Company Glass Packing Manufacturing Enterprise CJSC

S. Ghazaryan General Director of Golden Palace LLC

A. Pinarbasi Director of Grand Thornton Amyo LLC

A. Mirzoyan Director of Dolmama LLC

E. Ghazaryan Chairman of Board of Euroterm CJSC

T. Hovhannisyan Executive Director of Yerevan Furniture OJSC

S. Matevosyan Executive Director of Yerevan Chemical-Pharmaceutical Firm OJSC

A. Mkoyan General Director of Elite Group CJSC

N. Mamikonyan General Director of Erebuni Medical Center CJSC

S. Matevosyan Director of Liqvor Pharmaceutical Company LLC

A. Ghukasyan General Director of Converse Bank CJSC

E. Soghomonyan President of Union of Banks of Armenia Union of Legal Entities

S. Gishyan General Executive Director of ACBA Credit Agricole Bank CJSC

G. Galstyan President of Construction Union of Armenia Union of Legal Entities

T. Gevorgyan President of Traders of Armenia NGO

I. Karapetyan Executive Director of Small and Medium Enterprises Development National Center fund

F. Simonyan General Director of Armenian Tourism Development Fund

D. Sukiasyan Executive Director of Armeconombank OJSC

L. Shamyan Director of Hermes-Art LLC

R. Tsarukyan General Director of Multi-Agro LLC

R. Shahmuradyan President of Union of Importers of Construction Materials NGO

V. Afyan Director of Solaren LLC

K. Dumikyan President of Village Group LLC

A. Mkhitaryan General Director of Information Technologies Training CJSC

T. Jrbashyan Director of Armenian-European Economic Policy and Legal Advisory Center program funded by European Union within the scope of TACIS

S. Bekirsky General Director of Tosp Textile Factory OJSC

E. Kokshell Executive Director of KPMG Armenia CJSC

A. Arakyan Interpreter of Executive Director of KPMG Armenia CJSC

K. Andreasyan Director of First Travel and Service LLC

A. Vardanyan President of newly formed Canada-Armenia Chamber of Commerce and Industry

M. Weinstein Director of Armenia office of European Bank for Reconstruction and Development

S. Kananyan Interpreter of Director of Armenia office of European Bank for Reconstruction and Development

L. Harutyunyan Senior Consultant of European Bank for Reconstruction and Development

G. Nikoghosyan Head of Department of Production Infrastructures of Staff of Government of the Republic of Armenia

S. Ghonakhchyan Head of Economic Department of Staff of Government of the Republic of Armenia

M. Harutyunyan Head of Department of Information and Public Relations of Staff of Government of the Republic of Armenia

V. Chughuryan Chief Specialist of Department of Production Infrastructures of Staff of Government of the Republic of Armenia

E. Hovhannisyan Chief Specialist of Department of Production Infrastructures of Staff of Government of the Republic of Armenia

J. Aramyan Head of Secretariat of Business Support Affairs of Armenian Development Agency

H. Tortikyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

O. Hayrapetyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

A. Gasparyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

Agenda

1. On the strategy and further activities of Business Support Council stemming from the program of Government of the Republic of Armenia.

(T. Sargsyan)

2. Discussions

1. On the strategy and further activities of Business Support Council stemming from the program of Government of the Republic of Armenia

(T. Sargsyan)

1. Take the speech of T. Sargsyan, Prime Minister of the Republic of Armenia and Chairman of Business Support Council, at the meeting of Business Support Council, into consideration, in particular, on appreciation of further activities of Business Support Council by the newly formed government, the priority of emergence and development of business environment in the country in line with international competition as its main objective, the ways to achieve those goals and objectives, implementation of reforms of different sectors, ensuring private sector participation in realization of government programs, deepening of cooperation and strengthening trust between the state and the business community as well as on improving the further strategy and activities of Business Support Council and other organizational issues (the full text of the speech of Tigran Sargsyan, Prime Minister of the Republic of Armenia, is attached). 2. Receive the message of T. Sargsyan, Prime Minister of the Republic of Armenia and Chairman of Business Support Council on pending submission of the concept of improvement of tax administration and the plan and schedule of measures and actions to Business Support Council for consideration and that issues of involvement and participation of Council in implementation, monitoring and control of those measures and activities will also be discussed.

2. Discussions

(A. Ghazaryan, T. Gevorgyan, T. Jrbashyan, G. Abrahamyan, A. Mkhitaryan, A. Davtyan, T. Sargsyan)

3. Take into consideration recommendations and suggestions made during the discussions by A. Ghazaryan, Chairman of Union of Manufacturers and Businessmen (Employers) NGO, T. Gevorgyan, Chairman of Traders of Armenia NGO, T. Jrbashyan, Director of Armenian-European Economic Policy and Legal Advisory Center program funded by European Union within the scope of TACIS, A. Mkhitaryan, General Director of Information Technologies Training CJSC, G. Abrahamyan, Chairman of Board of Directors of DCA Diamond-cutting Company of Armenia CJSC, A. Davtyan, Director of Agribusiness Development Center CJSC, on the further strategy of Business Support 31

Council, the need to discuss strategic issues related to reforms of different sectors of the economy within the Council, further improvement of the legislation regulating inspections and administrative violations, the urgency to carry out reforms not only in the tax and customs frameworks but in the entire framework of regulation of business environment, ensuring engagement and participation of the private sector in development of infrastructures of the country, organization of critical discussions of export barriers and challenges within Business Support Council, special attention to and treatment of the issues of development of information technologies by the state, revision of criteria of classification of small and medium enterprises, further simplification of company liquidation procedures.

4. Take into consideration the message of T. Sargsyan, Prime Minister of the Republic of Armenia and Chairman of Business Support Council on that provision of tax privileges is not a positive step for development of any sector of business, and, instead, consistent work will be taken up for ensuring equal conditions for development of business, creation of attractive and effective mechanisms for involving the private sector in realization of national projects, material reduction in expenses incurred and time spent by businessmen though improvement of administration in tax, customs and other sectors, and that in future it will be possible to discuss suggestions for lowering of tax rates when the tax collection volume reaches 20-25% of Gross Domestic Product of the country and the responsibility of the private sector in implementation of state social programs increases and its participation is on a certain adequate level.

5. To the members of Business Support Council and the participants of the meeting: To submit objections and suggestions on the strategy of activities of Business Support Council within a period of two weeks to secretariat of Business Support Council with the purpose of preparing a summary document outlining those suggestions and organizing discussions at the next meeting of Business Support Council for presenting it in the next extended meeting of Business Support Council.

T. Sargsyan Chairman of Business Support Council Prime Minister of the Republic of Armenia

Speech of Tigran Sargsyan, Prime Minister of the Republic of Armenia, at the Full Scale Meeting of Business Support Council

The meeting of Business Support Council should receive a new momentum and the newly formed government values the activities of the Council, especially that you are aware of the main stipulations of the government program. We intend to establish such business environment in the Republic of Armenia, which will be considered the best not only in the region but will also be in line with international competition. This means that we together with you are to do a serious job. In the meantime it is possible to objectively evaluate that job as there are a number of authoritative international institutions in this field, which are well known for their evaluation methodologies and are always able to put business environments of different countries of the world into comparative perspective and present findings thereof to the international community. Those indicators will stay at the center of the attention of the government and we will thoroughly examine and identify, based on that methodology, our relative advantages and the key gaps, shortfalls and weaknesses, where the government must put effort so that we together with you can overcome all impediments to business development. And I assure you that this is one of the priorities of the government. The second thing I would like to communicate to you is the fact that in the region, taking into account the outstanding geopolitical issues, Armenia obviously has competitive constraints. Many businesses are more expensive in Armenia than in our neighboring countries. And it is clear that we have to set off these negative factors, which are in existence (while they are factors that are going to maintain long-term impact on our economic system) with favorable conditions of the very business environment, which will become our relative advantages. And in such settings doing business in Armenia should become more feasible than in our neighbor states. This means that even more efforts will be required from us to improve the business environment. You may be aware that we have started to develop and implement very serious programs in tax and customs sectors. The assignment drafts may have already reached you: we are going to introduce you the concept of improvement of tax administration as well as the plan and timetable of measures and actions. And we together with you will have the opportunity to discuss both the concept and those measures and actions as well as will discuss your participation in realization, monitoring and control of those measures and actions. A monitoring group will be set up attached to the Prime Minister, which will supervise the customs and tax administration in the Republic of Armenia as well as there will be a direct line (hot line), through which we will record all comments, considerations, complaints arising from tax and customs administration aspects and we will respond to those comments and suggestions promptly. This is to say that we will conduct monitoring, group those comments and suggestions and will try to understand the factors that prevent improvement of tax and customs administration in the Republic of Armenia. This means cardinal changes in the sectors of tax and customs administration and we look at those cardinal changes from the standpoint that we can record success only if we have your support. The first task is to overcome the psychological complex of specialists performing tax and customs administration. They have to learn to work in a new way, give up the methods they are used to work with, including with direct involvement of the business as our studies show that those bilateral arrangements which the tax and customs officials reach with businessmen are beneficial 33 for both parties, only the state suffers and it is clear that this psychological complex has to be tackled and this is quite a difficult task. We will significantly reinforce the punitive measures against our officers, on the other side we will significantly raise their salaries and will start offering social packages. This will provide them with long-term stable jobs, salaries and those social packages will give a hope that they are able to, for a long-term basis, plan their career and meet their social needs associating the latter with the state and demonstrating that having a stable long-term job in that sector is much more advantageous than risking and taking opportunistic steps. On the other side, we think that if there is no support from the private sector in this regard, we will definitely not have success. We have already received positive feedback from the business environment, businessmen are ready to sign under this agreement with us to carry out these civil reforms and that of course encourages us. The only issue is that the business should be confident that our reforms are serious, long-term and irreversible, and that we will not tolerate illegal practices and naturally this atmosphere of trust is what will enable us to push the reforms forward.

We have a very powerful tool, which is publicity. From that point of view we think that it is the businessmen who should work with and control us so that all cases of abuse and similar cases, which may from time to time be identified, become a matter of discussion for the public. I have already instructed our tax service to present a concept based on the best international experience on how punitive measures are applied, against whom and in what part of them the public can be informed of who are the major violators of the law. The experience shows that the most powerful instrument to fight corruption and shadow economy is publicity. And naturally we together with you have to ensure such publicity, it cannot come out unilaterally. That is, only the government or respective authorized bodies cannot identify and make cases of abuse public unless there is support by the public itself. Our main problem is that whenever we detect suspicious cases we fail to receive support from the business in the sense that objective data and information are needed so that such cases become a matter of investigation with the law enforcement bodies. Everyone avoids cooperation because there is no confidence that the case will be uncovered and that the parties guilty will be recognized and punished and that the case will be taken to its logical end. This is the challenge that is permanently raised against us by representatives of private business community. You may be aware that under direct coordination of President of the Republic of Armenia there have been several discussions with representatives of small and medium business and in particular there have been closed upfront discussions and the representatives of small and medium businesses have, in an open and straightforward manner, pointed out all the issues and challenges which at present hinder the development of the sector also mentioning individuals who abuse their position and because of whom documentation gets lost in some phases of the documentation flow in the Republic of Armenia and we are unable to close the chain bringing the cases to their ends – taxation and realization stages. And naturally all this is going to become a subject of discussion. I think that if on your side there is trust and confidence in the newly formed government and the programs we present to you, if you collaborate with us, this will make up the guarantee that we will have success. The government cannot have success unilaterally as well as it is obvious that the business

34 community, our businessmen, cannot achieve success unless there is such cooperation – state-private partnership.

The purpose of our today’s meeting is, first, to discuss the approaches which have already been undertaken by the newly formed government and which underlie the program of the government. I am sure that you all are aware of the basic points of that program. Secondly, we need to discuss, what issues have been accumulated in your opinion and what organizational solutions you suggest in order for our Council to work more efficiently, maybe the meetings should become more frequent, what your opinions are on the formats of discussions. We also need to plan for our activities for 2008-2009; what issues and problems do you consider as priority, which we may take as subject of our upcoming discussions?

Department of Information and Public Relations of Staff of Government of the Republic of Armenia

Main points of the 15 May, 2008 BSC Meeting

During the BSC Meeting the Prime Minister confirmed the importance the Government attaches to the BSC and the business environment in general as an important part of the Government Programme and within the framework of second generation reforms underway in Armenia currently. Some of the important points/messages to be outlined among the views Prime Minister expressed during the Council Meeting are the following,  Taxes/GDP ration in the state budget has been fixed at 17 percent for this year (with a final goal to achieve 20-25 percent tax collection ratio). Government needs to make a serious effort to reach this target as for the previous years the tax collection has been only at 15 percent of GDP. In order to fulfill the target fixed in the Law on State Budget for this year and to collect additional tax money the Government has to seriously tackle the obstacles to the improvement of business environment to ignite growing gains from a more vigorous economic growth as well as to tackle the shadow economy, for the budget to be able to engage new tax incomes, meaning a more fair competition.  Government is adopting policy of not providing tax incentives or favourable taxing regimes that are classical fiscal tools for encouragement of growth in particular areas of economy. The policy of refraining from the use of protectionizing policies can be one of the important steps for decreasing unequal competition among the different players of the market and creating prerequisites for more fair competition in the country.  A big package of tax and customs administration reforms is under preparation, for fundamental reforms in these areas of public administration, and a Monitoring Group adjacent to the Prime Minister is to be created.  The new Prime Minister is adopting the policy of publicity as a working method of dealing with the businessmen. The main trend is going to be holding of public meetings, as well as public follow-ups, where discussions with the business community will take place as opposed to the culture of closed meetings with a reserved number of participants.

 Business persons participating in the BSC Meeting were given two weeks time to formulate and present their concerns on the matter of the obstacles they are facing in their business activities and suggestions on the improvement of the situation. It is envisaged that the BSC Meetings will be of regular nature, and currently already several meetings are envisaged to prepare for the upcoming BSC meeting. In particular on July 4th a Meeting of the Business Community of the BSC is scheduled to take place, it is also envisaged to have another BSC preparatory meeting (prior to the full scale one) with a smaller format of participants.

ANNEX 5 Minutes of the BSC Meeting 4 July 2008

Transcript # 2

of the meeting of Business Support Council

Yerevan July 04, 2008

Chairing:

V. Nersisyants Chief Adviser to President of the Republic of Armenia on Economic Affairs, Deputy-Chairman of Business Support Council

Participating:

R. Harutyunyan General Director of the Armenian Development Agency CJSC, Deputy-Chairman of Business Support Council

D. Atanesyan President of American Chamber of Commerce in Armenia, Union of Legal Entities

A. Davtyan Director of Agrobusiness Development Center CJSC

N. Nahapetyan General Director of Gyumri Hydro Power Plant named after A. L. Mnjoyan, LLC

S. Gevorgyan Director of Business Support Centre CJSC

R. Shahmuradyan President of the Union of Importers of Construction Materials NGO

A. Hoveyan Executive Director of Arpeg LLC

A. Avetisyan Executive Director of Bio-Chem LLC

R. Tsarukyan General Director of Multi-Agro LLC

F. Simonyan General Director of Armenian Tourism Development Fund

L. Grigoryan President of the Council of Directors of Yerevan Jewellery Plant OJSC

E. Kokshell Executive Director of KPMG Armenia CJSC

K. Andreasyan Director of First Travel and Service LLC

A. Khudoyan Press secretary of State Tax Service by Government of the Republic of Armenia

A. Zargaryan Head of Division of Tax Administration Reforms of State Tax Service adjacent to the Government of the Republic of Armenia

A. Kurbanyan Chief Tax Inspector of State Tax Service by Government of the Republic of Armenia

S. Hairapetyan Head of Spandarian 1 Regional Tax Inspectorate of State Tax Service by Government of the Republic of Armenia

S. Voskanyan Senior Tax Inspector of State Tax Service by Government of the Republic of Armenia

G. Qaryan Head of the Division of Customs Work Development of State Customs Committee adjacent to the Government of the Republic of Armenia

G. Makaryan Executive Director of Republican Union of Employers of Armenia NGO

M. Sargsyan President of Chamber of Commerce and Industry the Republic of Armenia

T. Khachatryan Financial director of Armenian Copper Programme CJSC

K. Gyozalyan Head accountant of Solaren LLC

L. Harutyunyan Senior Consultant of the European Bank for Reconstruction and Development

J. Aramyan Head of Secretariat of the Business Support council of the Armenian Development Agency

H. Tortikyan Leading Specialist of Secretariat of the Business Support Council of the Armenian Development Agency

O. Hayrapetyan Leading Specialist of Secretariat of the Business Support Council of the Armenian Development Agency

A. Gasparyan Leading Specialist of the Secretariat of the Business Support Council of the Armenian Development Agency

M. Meliqyan Public Relations Specialist of the Armenian Development Agency

AGENDA

1. On Intensifying the Work of the Business Support Council. 2. On discussion of suggestions of the Draft Conception of Improvement of Tax Administration of the Republic of Armenia and Timetable of Actions (Activities). 3. Other Relevant Business.

1. On Intensifying the Work of the Business Support Council.

(V. Nersisyants, R. Harutyunyan, T. Khachatryan, E. Grigoryan, L. Harutyunyan, G. Makaryan)

V. Nersisyants, the Deputy Chairman of the Business Support Council, the Chief Adviser to President of the Republic of Armenia on Economic Affairs, opened the session of the Business Support Council. He welcomed the members of the Business Support Council and briefly presented the spheres of activity of the Business Support Council, organizational setup and the work carried out up to now. He suggested creating working groups that would occupy themselves with raising issues of concern for the business community as well as suggestions for tackling these problems and will present these issues to the Government.

Afterwards, the floor was taken by the General Director of the Armenian Development Agency CJSC, the Executive Secretary of the Business Support Council R. Harutyunyan, who noted that such meetings attempt to explain to the businessmen what steps is the Government taking to improve the business environment. He emphasized that it is extremely important for them to get the opinion of the business community on the activities of the Government in these area and to ensure awareness of the Government actions within the private sector. On one hand, presenting the Government policies and programs to the private sector and on the other hand receiving the private sector’s opinion on the problematic issues will create an opportunity for more effective organization of the work of the Business Support Council. In the end of his speech Mr Harutyunyan reminded of Government’s position on the importance of the deepening the cooperation between the private sector and the state as well as increasing the frequency of such dialogues.

T. Khachatryan, the Financial Director of the Armenian Copper Program CJSC, suggested creating working groups according to the level of priority of the raised issues.

E. Grigoryan, the Chairman of the Board of Directors of the Armenian Jewelry Factory OJSC expressed his concern that currently the participation of the business community in the formation of the legislation has decreased and conveyed hope that in case of more frequent sessions of the Business Support Council the cooperation between the private sector and the state will deepen.

L. Harutyunyan, the Senior Consultant of the European Bank of Reconstruction and Development, in her speech emphasized the importance of stable frequency of the sessions of the Business Support Council in creating a room of opportunity for increasing the efficiency of the Council. As far as the working groups format is concerned in her opinion the work can be organized both through operation of temporary working groups to deal with specific issues as well as through permanently operating working groups, and these two types of groups will effectively supplement each other.

G. Makaryan, the Executive Director of the Republican Union of the Employers of Armenia, noted that the Business Support Council is regarded as a serious structure that ensures the dialogue between the highest levels of the Government and the private sector. He stated that the Council creates valuable platform for meetings and discussions of a wide range of issues of concern to the business community, and that the Government is attempting through its actions to decrease the burden of administration, and to put distinction between small and medium business, which will contribute to reducing corruption.

2. On Discussion of Suggestions of the Draft Conception of Improvement of Tax Administration of the Republic of Armenia and Timetable of Actions (Activities)

(V. Nersisyants, Z. Aramyan, G. Makaryan)

Before proceeding to the second point in the Agenda, V. Nersisyants, the Deputy Chairman of the Business Support Council, informed the members of the Council that all reforms within tax and customs administration will be of cultural nature, the Government will take the best international practice as its guideline, and will adjust it to local framework.

The Head of the Business Support Issues Department, Z. Aramyan, informed that the Secretariat is still in the process of receiving suggestions on the Draft Conception of Improvement of Tax Administration of the Republic of Armenia and Timetable of Actions, and requested the members of the Business Support Council to be more active. He noted, that the Government of the Republic of Armenia is pursuing very active pace of reforms and that the business community of the country should be more organized so that not to stay aside of the current programs, and to have active participation in the reforms under progress.

Besides the business community representatives, the representatives of the State Tax Service and State Customs Committee adjacent to the Government were also present at 41 the meeting. They listened to the suggestions of the businessmen, in particular, the suggestions concerning to simplification of procedures, compensation of advance payments, etc.

In this regard, G. Makaryan, the Executive Director of the Republican Union of the Employers of Armenia, attached importance to the idea of creation of internal audit in the tax system, taking into consideration, that currently during the check-ups the impartiality of the audit is not ensured, i.e. all the bodies that are carrying out check-ups should have consulting and prevention mechanisms that would also insure feedback channel.

Summarizing the meeting V. Nersisyants, the Deputy Chairman of the Business Support Council, urged the members of the Council, to present their suggestions and comments to the Secretariat of the Business Support Council, so that there will be enough time for reviewing and summarizing their recommendation to make them ready for discussion in the upcoming Business Support Council Meeting.

Secretary of the Council, (signature) R. Harutyunyan

ANNEX 6 Speech of the Senior Consultant at the BSC Meeting 4 July 2008

EBRD Senior Consultant Speech at BSC 4th of July session

First of all I would like to introduce myself – Lucine Haroutunian, I am the Head of the EBRD project office, the mission of which is specifically BSC support with an aim of increasing the productivity of the dialogue between the business community and the Government. Our office will start to function fully from September once we have solved certain technical issues. However, before commencing our full-scale operations we already have certain, observations in regard of increasing BSC productivity that I would like to share with you. Firstly, I would like to attach importance to the fact, that even though less than two months have passed since the BSC met last in May, one more meeting has been convened specifically, having increase of the productivity of the BSC activities as its first agenda point. May I remind you, that before this the BSC sessions have had a quite lengthy break from October 2006 to May 2008, and this clearly hints that there is need to introduce certain amendments into the work of the BSC.

In my opinion, the most important issue is ensuring the stable frequency of the BSC sessions since, without solving this problem it is virtually impossible to carry out productive work. I think that frequent organization of the sessions, for instance, at least once in three months, will be an important step towards ensuring continuality and goal- driven manner of the work. I believe that this is also important in terms of increasing trust of the business community towards BSC.

The second challenge in ensuring a productive BSC work, refers to the issue of formation of the agendas of BSC sessions. There is a need for considerable preparatory work and recurrent meetings with the representatives of business community, during which the problematic issues can be specified and also necessary conditions for the discussion of these issues should be prepared. It is important that the list of problematic issues is formed taking full advantage of both possible mechanisms, i.e. both the practical source 43 of accumulating information on current challenges based on the experience of business community representatives as well as recommendations generated in the result of the analytical work in this area.

The third issue, which I would like to draw your attention to, is the choice of the optimal format of the business community involvement in the BSC activities, through which principles the BSC members are chosen , rotation issues, etc.

Finally, I would like to address is the current topic under discussion, namely the optimal identification of the working groups of the BSC. In my opinion, to allow maximum flexibility and not to bind ourselves with unnecessary constraints, the BSC should have both permanent and temporary working groups. The permanent working groups should be created for tackling problems that are of continuous nature and require ongoing monitoring of the situation, such as lifting obstacles on export, investment promotion, etc. While the temporary working groups can occupy themselves with tusks of short-term nature, that, however, require serious time and professional effort investment, as for example, the current package on tax reforms we are going to discuss under the next agenda point. Our team stands ready to be actively involved and to support the work of the working groups.

Concluding my speech I would like to point out the importance of the second issue in the agenda. It can serve as a successful precedent when the approaches, strategies and programmes developed by the Government become subject to prior discussions within the framework of the business community before their actual entry into force. This is not only manifestation of respect towards the business community, but also an efficient mechanism for timely discovering some of the potential future challenges.

ANNEX 7 Local press coverage of the BSC Meeting 4 July 2008

Today 15/10/2

Economy

Armenia needs to promote council for entrepreneurship support-private sector cooperation

YEREVAN, July 4. /ARKA/. Armenia needs to foster cooperation between the private sector and the Council for Entrepreneurship Support (CES) to open new business prospects, General Director of the Armenian Development Agency (ADA) Robert Harutyunyan said during the CES meeting.

He believes the private sector plays a crucial role in the current reforms.

Commenting on the suggestion of CES Deputy Chairman Vahram Nersisyants that CES should set up working groups to discuss the existing problems and prospects of local business.

“This will help us introduce relevant authorities to the private sector’s attitude to a range of issues,” the ADA General Director said.

Harutyunyan called on the private sector to take the initiative, while ADA will organize meetings for local businessmen to come together.

In his turn, Financial Director of the Armenian Copper Program (ACP) Tigran Khachatryan said CES should be well aware of the key problems in the private sector and the steps undertaken to promote business development in Armenia.

“This mainly concerns jeweler’s art, the sector having to face a number of challenges, as it has remained in the background for the past years,” he added.

The efficiency of CES will first of all depend on regular discussions and meetings, said Lusine Harutyunyan, EBRD Senior Consultant.

ANNEX 8 Comparative analysis of business environment in Armenia 2000-2008

EBRD BUSINESS SUPPORT OFFICE ARMENIA

CCOMPARATIVE AANALYSIS OF BBUSINESS EENVIRONMENT IN AARMENIA

22000000--22000088

OCTOBER 2008

INTRODUCTION

The “Comparative Analysis of Business Environment in Armenia” is the first attempt to present comprehensive analysis of business enabling environment in Armenia for the period 2000-2008. The report is based on the results of various surveys, carried out by the leading international institutions and provides analysis of the factors underlying the quality of business environment in Armenia. The report is comprised of two parts. Part I presents the analysis derived from main findings of surveys conducted by such world leading international donor organizations as European Bank for Reconstruction and Development (EBRD) and World Bank (WB), as well as based on data from world famous rating institutions as Fitch, Moody and Heritage Foundation. Part II examines reforms underlying the present level of business enabling environment.

PPART II:: SSURVEYS’’ FFINDINGS AND AANALYSIS

1. Comparative Analysis Based on “Administrative and Regulatory Costs Survey”

Introduction The below presented comparative analysis is based on the “Administrative and Regulatory Costs Survey” (ARCS). The ACRS has been carried out on a regular basis since 2000 by the World Bank in partnership with the Armenian government to identify the existing administrative and regulatory constraints to doing business in Armenia. It measures the extra cost that the country’s private sector incurs, while dealing with existing impediments in the business environment and evaluates the impact of administrative and regulatory changes undertaken by the Government since 2000. The ARCS covers a wide range of factors the in the whole compose the quality of the Armenia’s business climate including evaluations of general constraints to business establishment and operations, business registration, licensing, financing, foreign trade operations, taxes, inspections, construction permits, certification, judiciary, etc. Additionally, it includes data on the availability of financial and banking services to the private enterprises.

Key Findings The comparative analysis of the factors that form country’s business environment for the period 2000-2007 provide a sound basis to assess the quality of the legislative and regulatory changes undertaken by the Armenian Government since 2000, directed to creating a business enabling environment. According to the findings of ARCS during the past eight years a considerable improvement is registered in the level of general satisfaction with the quality of regulations, administrative requirements and bureaucratic behavior of state agencies. As the figure 1.1 below shows the number of companies responding very dissatisfied has decreased almost six times since the beginning of the study in 2000 (from 26.5% to 4.3%). There is also a significant drop in the number of dissatisfied companies from 26.5% in 2000 to 15.3% in 2007. Contrary to this, the relative number of somewhat 49 satisfied companies has more than doubled, while the number of very satisfied respondents remains almost the same (about 2.0%):

Figure 1.1

According to the latest 2007 ARCS survey only 28.3% of respondents has indicated that “The quality of regulations, administrative requirements and bureaucratic behavior of state agencies” is a problematic constraint with an average rating being equal to 3.68 on a six point scale, where 6 stands for very satisfied, 5- satisfied, 4- somewhat satisfied, 3- somewhat dissatisfied, 2-dissatisfied, 1-very dissatisfied. This percentage is calculated as a sum of the number of companies responding very dissatisfied, dissatisfied and somewhat dissatisfied. It is a considerable improvement over the results received during previous studies (see Figure 1.2).

Figure 1.2

In addition, the survey results indicate that the small companies are more dissatisfied (30.53% of small companies) with Government regulations than medium (24.19%) and large (8.33%) companies. Also, among the companies operating in different sectors of the economy the highest dissatisfaction is among commercial firms. For more detailed picture “The quality of regulations, administrative requirements and bureaucratic behavior of state agencies” indicator has been divided into the range of areas that affect the operations and growth of the private sector entities. In the Table 1.1 the evaluation of the most problematic areas for 2007 are presented on a four point scale, with 1 providing no obstacle, 2 –minor obstacle, 3 – moderate obstacle and 4 – major obstacle. Table1.1 Regulatory area % Average rating* Taxes and tax administration 40.3% 2.14 Infrastructure (telephone, electricity, water, roads, land) 15.3% 1.29 Policy instability/uncertainty 38.7% 2.16 Financing 29.7% 1.84 Corruption 27.3% 1.71 High tax rates 38.3% 2.06 Anti-competitive practices by government/private firms 34.3% 1.92 Functioning of the judiciary 16.0% 1.48 Complexity, non-transparency of government policies 16.0% 1.45 Price instability/inflation 59.0% 2.69 Exchange rate 58.3% 2.66

Customs/foreign trade regulations 19.7% 1.36 Documentation requirements (accounting forms, etc) 22.3% 1.7 Organized crime/mafia 9.0% 1.16 Regulations on getting premises (land/building) 22.0% 1.63 Labor regulations 17.7% 1.56 Street crime/theft/disorder 9.0% 1.23 Standards and certification 11.7% 1.14 Sanitary regulations 7.7% 1.24 Fire safety regulations 6.0% 1.20 Business licensing 9.7% 1.13 Environmental regulations 18.7% 1.52 Business registration 7.3% 1.13 * %of firms judging as a moderate or a major obstacle

In the Figure 1.3 below the comparative evaluation of different regulatory areas by the surveyed Armenian companies for the 2006 and 2007 is presented. It includes both the percentage of firms judging particular regulatory area as a moderate or major obstacle, presented as a bar-chart, and average evaluation of particular regulatory area, presented as a line-chart. Figure 1.3

As Table 1.1 suggests, the main constraints affecting the operations and growth of Armenian companies, as it was in the last year, are price instability/ inflation and exchange rate. This is followed by taxes and tax administration the severity of which, as it is obvious from the Figure 1.3, decreases compared with the results of the previous study (2.14 vs. 2.86 in 2006). The evaluation of corruption is improved compared with the previous year – it shifted from fourth to eighth place, along with the severity of the constrain – 1.71 vs. 2.58 last year. Moreover, as the Figure 1.3 shows, a decrease of severity for the majority of surveyed regulatory areas, i.e. infrastructure (1.29 vs. 2.25 in the last year), functioning of the judiciary (1.48 vs. 2.10), financing (1.84 vs. 2.56) and taxes and tax administration (2.14 vs. 2.86). However, on contrary to the observed trend, in two areas a noteworthy increase, both in the level of dissatisfaction and the severity, has been registered. Those environmental regulation (1.52 vs. 1.23 in the last year) and regulation on getting premises (1.63 vs.1.47 in the last year). Overall analysis of perceptions and trends during the period from 2000 through 2007, is based on the illustration in the Figure 1.4. The latter presents a comparative evaluation of the most problematic regulatory areas by the surveyed Armenian companies since 2000. Again, it includes the percentage of firms judging particular regulatory area as a moderate or major obstacle.

Figure1.4

The comparison of the data and evaluation of trends for the observed period, presented in the Figure 1.4, suggest clear distinction of the regulatory framework into two parts: 2000- 2003 and 2004-2007. In almost all areas the level of dissatisfaction had decreased having 54 as a base year 2000, whereas years 2003 and 2004 seem to be the “breaking points” followed by an improved trend of the satisfaction levels. Subsequently, starting from 2004 through 2007, the previously observed trend for years 2000, 2001 continued its downward direction. Therefore, the main findings inferable from the data in Figure 1.4 are (i) the obvious downward trend, i. e. improvement of the main constraints affecting the operations and growth of the private sector for the observed period (except exchange rate and price instability), (ii) the structure of constraints remains almost the same for the observed 8 year period with some minor changes, (iii) the sharp deterioration during 2003-2004, when increased number of business entities complained about constraints while conducting their businesses. As it is shown in Figures 1.5 and 1.6 the structure of the top constraints remains almost the same if the 8 year time period is being divided into two parts: 2000-2003 and 2004- 2007. Figure 1.5 Regulatory areas

Customs/foreign trade regulations 2000 2001 2002 Price instability/inf lation 2003

Complexity, non-transparency of government policies

Corruption

Policy instability/uncertainty

Inf ras truc ture

Taxes and tax administration/regulation

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 % of dissatisfied respondents

Figure 1.6

Regulatory areas

Exchange rat e

Policy instability/uncertainty

Tax and tax administration 2004

Price instability/inflation 2006 2007 High tax rates

0% 20% 40% 60% 80% 100%

% of dissatisfied respondents

Therefore, for the period 2000-2003 (see Figure 1.5) the main constraints affecting the operations and growth of Armenian companies were taxes and tax administration/regulations, policy instability/uncertainty and infrastructure. Additionally when compared with the survey findings of the previous years (2000, 2001, 2002) it becomes clear that the overall number of dissatisfied respondents somewhat increased, with some increase in dissatisfaction level for price instability/inflation, policy instability/uncertainty and taxes and tax administration/regulation. At the same time, there is some improvement in the level of satisfaction with such constraints as the transparency and complexity of Government policies and customs/foreign trade regulation (the respondents are considered dissatisfied if they evaluate particular regulatory area as a moderate and major obstacle). Meanwhile, analyzing the period 2004-2007 (Figure 1.6), the overall number of dissatisfied respondents decreased, especially in such areas as high tax rates, tax administration and policy instability/uncertainty. However, the main constraints affecting the operations and growth of Armenian companies, as it was in last year, are price instability/ inflation (with 59.0% of respondents judging as a serious problem - moderate or major obstacle) and exchange rate (58.3%). One of the possible explanations is the

56 non-predictable strengthening of the national currency observed during the past years due to constant economic growth, which makes costs of exports more expensive, hence creating problems for exporting and supplying industries. This is followed by taxes and tax administration/regulation (40.3 %), high tax rates (38.3%) and policy instability/uncertainty (38.7%). Though the tax administration/regulation became less problematic area compared with the results of the last studies (40.3% in 2007, 66.3% in 2006, 84% in 2004) it is still the third main constraint. The analysis of the ARCS data shows that within the tax and tax administration the most problematic factors are “frequency of changes in rules and rates”, “extra-legal requirement for advance payment of taxes” and “frequency of reporting”. The highest drop is registered for frequency of changes in rules and rates (from 53.7% in 2004 to 30.3% in 2007), inspections and audits (from 37.3% in 2004 to 18.3% this year) and extra-legal requirement for advance payment of taxes (from 58.6% in 2004 to 30.3% in 2007), which could be an indicator of the efforts made to improve these aspects of tax administration by the Government. According to the 2007 survey data, medium-size firms face to some extent more taxes and tax administration related obstacles (45% vs.83% in 2004) than small (40% vs.81% in 2004) and large (16% vs.98% in 2004) companies do. Similarly, commercial firms are more constrained with taxes and tax administration (57% vs.86% in 2004), followed by service-providing (40% vs.82% in 2004) and manufacturing firms (28% vs.87% in 2004). Meanwhile, when comparing the results of 2007 study with the previous years’ results, the noteworthy drop in dissatisfaction level is registered especially among the large and manufacturing companies. The next constraint which seriously hinders the private sector entities’ operations is the customs procedures. Though this area is not in the top 5 constraints’ list (customs procedures and foreign trade regulations impose serious constraints for only 19.7% of Armenian firms in 2007), however, analysis of the ARC surveys’ data show that this area changes very slowly, almost no change compared with the previous year (19.5% in 2007 vs. 18.7% in 2006). More to the point, this figure is much higher for those companies which actually came across with the customs procedures, i.e. 53.1% of companies engaged in import operations and 25.9% of companies involved in export operations 57 evaluate the customs/foreign trade regulations as a major or moderate obstacle. An increase in the number of companies dissatisfied with customs/foreign trade regulations during the import operations is registered (37.1% in 2006), while number of companies dissatisfied with those procedures during export operations remains almost the same (24.3% in 2006). In addition, medium-size enterprises face relatively more obstacles with customs/foreign trade regulations than large and small-size companies do. Similarly, commercial and service providing firms are more constrained with those procedures. Policy instability/uncertainty is the fourth major constraint mentioned by the Armenian firms – 38.7% of firms consider it as a serious problem hindering growth and operations of their businesses (vs. 76% in 2004). This constraint is a comparatively greater obstacle for medium-size companies (53% in 2007 vs. 76% in 2004), as well as for commercial and service-providing ones (approximately 45% in 2007 vs. 76% in 2004). It is worth to mention that this constraint in relative terms decreased almost twice especially among large and small companies and manufacturing ones. One dimension of policy instability/uncertainty is predictability of changes in the government’s economic and financial policies. In this regard, 45.0% (vs. 38.3% in 2004) of Armenian firms think that those changes are unpredictable. The constraint is evaluated as more serious by the representatives of large companies, as well as by commercial and service-providing enterprises: Two other dimensions related to the economic instability/uncertainty – price instability/inflation and exchange rate, are considered as the most problematic constraints taking into account non-predictable strengthening of the national currency observed during the past couple of years due to constant relatively high economic growth. This strengthening makes costs of exporting goods more expensive, hence creating problems for both exporting and industries, depending on them. Almost 58.3% in 2007 (vs. 74.0% 2006) of Armenian firms think that exchange rate is a serious problem for their businesses. Similarly, almost 59.0% in 2007 (vs. 71.3% in 2006) of businesses think that price instability/inflation creates problems for growth and operation of their businesses. In addition the price instability/inflation constraint is considered as relatively bigger obstacles by medium companies, as well as by service-providing ones with very slight margin over other types of companies or companies operating in other sectors. 58

The next factor, corruption, has been identified as a serious constraint by about one third (27.3% - 2007, 57% - 2006, 71% - 2004 for previous study) of Armenian businesses. The positive trend is obvious, more than twice decreased the number of respondents considering corruption as a constraint. Form the ARC survey data it is inferable that perception of corruption as a serious problem is the highest for small and commercial companies. It is the lowest for large and manufacturing firms. The seventh major constraint for Armenian firms according to ARCS is financing: 29.7% of firms believe that the financing seriously hinders the development and growth of their businesses. This is a significant improvement while comparing with the results of the 2006 year study - 56.3% and 71% in 2004. Financing is a more problematic area for medium companies (37% in 2007 vs. 67% in 2004) followed by small firms (30% in 2007 vs. 71% in 2004). Moreover, it is a more serious problem for manufacturing companies (39% in 2007 vs. 76% in 2004) than for commercial and service-providing ones. In financing constraint among more serious hindrances are the high interest rates followed by, in case of existing credit history, possibility to receive loans without collateral, inadequate credit/financial information, and collateral requirements of banks/financial institutions. Finally the area of laws, rules and regulations registered a considerable positive trend. According to ARCS data only 9.5% (vs. 32.7% in 2006) of firms stated that businesses were not notified in advance about changes in rules and legislations that materially affect their activities and 13.9% (vs. 33.0% last survey) - indicate that when developing new rules or legislations affecting their business activities the government does not take into account their concerns. Similarly, 6.8% (vs. 29.3% last survey) of companies believe that the changes in laws, rules and legislations affecting their business activities are unpredictable; and 6.5% (vs. 23.0% last survey) - interpretations of laws and regulations are inconsistent and unpredictable.

Brief Analysis In general, there are positive trends observed in the country’s business environment since 2000. In particular, the taxes and tax administration/regulation became less problematic area. Less than half of respondents (40.3%) of surveyed Armenian firms judge this area 59 of state regulations as a serious constraint, which is a sizeable decrease compared with the subsequent data of 2004 (40.3% in 2007 and 84% in 2004). Moreover, among the different components of taxes and tax administration, the most problematic dimensions are frequency of changes in rules and rates, extra-legal requirement for advance payment of taxes and frequency of reporting. Furthermore, the majority of the companies which actually have to deal with the customs office (53.1% - for import operations and 25.9% - for export operations) have expressed dissatisfaction with the operations of this institution. Compared with the previous year results a substantial increase of dissatisfaction among importing and exporting companies has been registered. Medium enterprises face relatively more obstacles with customs/foreign trade regulations than large and small companies do. Similarly, commercial and service-providing firms are more constrained with those procedures. Though the one third of the private sector representatives, rate corruption as a serious constraint, yearly analysis showed that it decreased almost twice comparing with 2004 data. Policy instability/uncertainty, price instability/inflation and exchange rate, are considered as the most problematic constraints taking into account non-predictable strengthening of the national currency observed during the past couple of years due to constant relatively high economic growth. The financing registered a significant, twice improvement while comparing with the results over 2004. The same positive trend showed areas of laws, rules and regulations. In fact, record improvement registered infrastructure. It is now the sixteenth constraint for Armenian businesses (a drop from the tenth position) in one year, and drastic drop over 8 year period (it was being rated amongst 5 top constraints from 2000 to 2004 years). Since 2000 the complicity/ non transparency of government policies dimension improved its position almost by four times. However, a noteworthy increase in the level of dissatisfaction for environmental regulation (19% in 2007 vs. 12% in 2004) and regulation on getting premises (2% increased compared with the data in 2006) were registered.

Another noteworthy increase in the level of dissatisfaction has been registered in the labor regulation dimension. The percentage of companies that consider this area as a constraint totaled 14% in 2002, 17% in 2004, 23% in 2006 and only in year 2007 the rating decreased by 5 percentage point totaling 18%, which is 4 percentage point high comparing with the same data in 2002.

2. Comparative Analysis Based on “Doing Business” Study

Introduction

Doing Business study has been carried out by the World Bank since 2004. It is a series of annual reports investigating regulations that affect 10 stages of business life across 178 countries, hence giving comprehensive information on the level of business environment quality. To make the data comparable across countries, the indicators refer to a specific type of business, generally a limited liability company operating in the largest business city. A higher ranking on the Doing Business indicators indicates a friendlier environment for doing business.

Key Findings

Doing Business presents quantitative indicators of business regulations on 10 spheres of economy: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. Armenia currently ranks 39th out of the 178 economies measured by Doing Business on the overall ease of doing business. However, Armenia’s performance across the indicators is uneven (see Table 2.1). It is a global top- performer in registering property, ranking #2 in the world. In the same time Armenia’s tax administration is one of the world’s most burdensome for business placing it 143rd on the ease of paying taxes. Table 2.1. Armenia’s performance on the Doing Business indicators Ease of … Doing Business Doing Business Change in 2008 rank 2007 rank rank Starting a Business 47 44 -3 Dealing with Licenses 73 72 -1 Employing Workers 48 48 0 Registering Property 2 2 0 Getting Credit 36 62 +26 Protecting Investors 83 81 -2 Paying Taxes 143 137 -6

Trading Across Borders 118 133 +15 Enforcing Contracts 64 64 0 Closing a Business 42 43 +1 Overall ease of doing business 39 46 +7

Each indicator is composed of different dimensions that together define the rank of the specific category. Due to changes of methodology, rating across all indicators became feasible since 2007. Table 2.2 includes a summary of historical data of each indicator with its dimensions. Table 2.2 Doing business historical data Indicators Procedures 2008 2007 2006 2005 2004 valuation valuation valuation valuation valuation Starting a Business Procedures (number) 9 9 10 10 10 Duration (days) 18 18 19 19 19

Cost (% GNI per 4.8 5.1 6.1 7 8.4 capita)

Paid in Min. Capital (% 3.1 3.3 4 4.5 5.4 of GNI per capita)

Dealing with Procedures (number) 19 19 21 .. .. Licenses Duration (days) 116 116 151 .. ..

Cost (% income per 411.3 440.6 530.1 .. .. capita)

Employing Workers Difficulty of Hiring 33 33 ...... Index

Rigidity of Hours Index 40 40 40 40 40

Difficulty of Firing 20 20 30 30 30 Index

Rigidity of Employment 31 31 23 23 23 Index

Non wage labor cost (% 19 18 18 .. .. of salary)

Firing costs (weeks of 13 13 17 17 17 wages)

Registering Property Procedures (number) 3 3 4 4 ..

Duration (days) 4 4 6 6 .. 63

Cost (% property value) 0.4 0.4 0.5 0.6 ..

Indicators Procedures 2008 2007 2006 2005 2004 valuation valuation valuation valuation valuation Getting Credit Legal Rights Index 5 5 4 4 ..

Credit Information 5 3 3 available .. Index

Public registry coverage 2.8 1.5 2.6 available 0 (% adults)

Private bureau 13.5 0 0 0 0 coverage (% adults)

Protecting Investors Disclosure Index 5 5 5 .. ..

Director Liability Index 2 2 2 .. ..

Shareholder Suits Index 8 8 8 .. ..

Investor Protection 5 5 5 .. .. Index

Paying Taxes Payments (number) 50 50 50 .. ..

Time (hours) 1120 1120 1120 .. ..

Profit tax (%) 12.1 ......

Labor tax and 23.4 ...... contributions (%)

Other taxes (%) 1.1 ......

Total tax rate (% 36.6 34 34 .. .. profit)

Trading Across Documents for export 7 7 7 .. .. Borders (number)

Time for export (days) 30 34 34 .. ..

Cost to export (US$ per 1165 1600 1600 .. .. container)

Documents for import 8 6 6 .. .. (number)

Time for import (days) 24 37 37 .. ..

Cost to import (US$ per 1335 1750 1750 .. .. container)

Indicators Procedures 2008 2007 2006 2005 2004 valuation valuation valuation valuation valuation Enforcing Contracts Procedures (number) 50 50 50 50 50

Duration (days) 285 285 285 295 327

Cost (% of claim) 19 19 19 19 19

Closing Business Cost (% of income per 42 43 ...... capita)

Time (years) 1.9 1.9 1.9 1.9 1.9

Recovery rate (cents on 4 4 4 4 4 the dollar)

Historical data in Table 2.2 show that major improvements in core indicators started from 2006. Over the course of two years (2004-2006), remarkable changes took place only within two indicators. The first indicator is “Enforcing Contracts” (the duration of enforcing contracts had been decreased by 42 days). The second indicator is “Starting Businesses” (the cost of starting business had been decreased from 8.4% in 2004 to 6.1% in 2006 and paid in min. capital form 5.4 % in 2004 to 4% in 2006). However, since 2006, Armenia has improved its global ranking and in 2008 went up by 7 places to an overall 39-th place on Doing Business indicators (see Table 2.1). Of the 10 core indicators, Armenia has improved in 3 areas with “Getting credit” indicator improving the most (+26 in the ranking), followed by “Trading across borders” (+15) and “Closing business” (+1) in the overall ranking. At the same time Armenia performed worse in 4 areas: “Paying taxes” being the worst (-6); “Starting business” (-4), followed by “Protecting investors “(-2) and “Dealing with licenses” (-1). Situation remained unchanged in 3 areas, namely “Employing workers”, “Registering property” and “Enforcing contracts”.

Brief Analysis Figure 2.1 illustrates Armenia’s global rank on Doing Business and Figure 2.2 the rank of all indicators compared with global best and other countries in the region.

Figure 2.1 Ease of Doing Business: Global Rank

Figure 2.2 Ease of Doing Business: Indicators’ Ranks

Analysis across all indicators with their composing dimensions show that Armenia compares favorably with regional average, however below OECD countries average. Therefore, while comparing each indicator and its imposing dimensions, with regional and OECD average, the following main findings have been observed. While the “Getting credit” indicator improved the most (+ 26 rank), it is still behind the regional average and OECD mean. On an index range of 0-10, with 10 providing the strongest legal rights, Armenia scores 5 on the legal rights borrowers and lenders and 5 on the depth of credit information sharing. The “Private Credit bureau coverage (% adults)” (13.5 %) indicator is well beyond the OECD mean (59.3 %). In the same time the regional average is ahead by 2%. The “Trading across borders” indicator improved its position by 15 places. With number of documents required for export (Arm.-7, OECD-4.5, region-7) and import (Arm.-8, OECD-5, region-8.3), average time for export (Arm.-30 days, OECD-9.8, region-29.3) and import (Arm.-24 days, OECD-10.4, region-30.8), as well as cost of export (Arm.- US$ 1165 per container, OECD-$905, region-$1393) and cost of import (Arm.-US$1335 per container, OECD-$986, region-$1551) (see Table 3.2), Armenia is around the average for the region yet well below OECD means and ranks only 118 in the world on these indicators. While some progress has been made in Armenia in “Closing Business” indicator, it compares favorably with the average region indicators, however still takes on average 1.9 years to close a business and procedures takes up to 116 days at a very high cost totaling over 400 percent of the national income per capita (compared to 62 percent – OECD mean). Armenian regulations impose a relatively low total tax burden (36.6% of profits), but administrative burden in making the payments is very high. Ranked world 143, Armenia is in top 5 countries in the world in terms of time needed to comply with tax obligations (and 3-rd highest in the region). In particular, an average company would spend 1120 hours dealing with taxes as oppose to 450 as average for the region and 183 for OECD. At the same time, companies spend 3 times that of the OECD average in terms of actual transactions making tax paying a very time consuming and expensive endeavor. Overall tax regimes/rates are however lower as average for the region and OECD. 67

With “Starting business” indicator, 9 procedures to follow that take up to 18 days and costing close to 5% of the national income, Armenia compares well with other countries of the region but falls slightly behind the OECD mean indicators (6 procedures, 15 days and 5%) With rank 83-rd, “Protecting investors” indicator went 2 marks down. On an index range of 0-10, with 10 providing the highest protection, Armenia scores 5 on Investor’s protection index and is right on the region average, however below OECD mean (6). Ranked at 73-rd place, Armenia, with an average of 19 procedures to be followed that might take up to 116 days and over 400% of per capita income, performed rather slow in terms of procedures, time and costs associated with licensing, including obtaining necessary permits, completing required notifications and inspections as well as obtaining utility connections. While the number of procedures to be followed compared well with the region average, it is slightly below OECD mean but the time needed (in days) is well below region and OECD averages (116, 251 and 153 respectively), however, the costs of licensing are well higher than that of OECD mean. Standing at 48-th place in the world with the “Employing workers” indicator, Armenia is on par with the OECD mean in terms of employment rigidity index (a combination of three indices - difficulty of hiring, difficulty of firing and rigidity of hours index). A non- wage labor cost (as % of salary) is also roughly the same as OECD mean but firing costs (weeks of wages-paying wages over 30 week) is almost twice as much as the OECD and region average, thus reducing significantly the flexibility of the country’s labor market. Ranking second best in the world after New Zealand, Armenia has very favorable requirements for registering property including 3 procedures to follow that takes an average of 4 days and 0.4% of the property value. With the rank 64-th, determined by tacking time, costs and number of procedures to followed in order to enforce a contract, Armenia compares well with other countries in the region and average OECD indicators. Although it takes on average 1.5 less time to enforce the contract, the number of procedures to be followed exceeds both regional and OECD average indicators.

3. Comparative Analysis Based on Business Environment and Enterprise Performance Survey

Introduction The EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) is a joint initiative of the European Bank for Reconstruction and Development and the World Bank. The BEEPS had been carried out in three rounds in 1999, 2002, and 2005. However, for the comparative analysis of the business environment data of 2002 and 2005 years’ survey results has been used. The BEEPS covers a broad range of indicators giving a whole picture on the level of quality of the country’s business environment (see Figure 2.1). The BEEPS sample is drawn from the universe of firms in a broad range of economic activities, with the split between services and industry roughly proportional to the contribution to GDP in each country of Common Independent States (CIS) and Eastern and Central Asia (ECA) regions.

Key Findings

Below presented Figure 3.1 provides key areas that give a whole picture on the level of quality of the country’s business environment for years 2002 and 2005. The comparative analysis is based on the following indicators for key areas: unofficial payments and corruption, crime, regulations and red tape, customs and taxes, labor issues, firm financing, legal and judicial issues and infrastructure.

Figure 3.1Problems Doing Business

% of firms indicating a problem Data in Figure 3.1 demonstrate that the performance across the key indicators, that define the level of quality of the country’s business environment, is uneven. Changes toward the positive direction are notable in the areas of Infrastructure (electricity-number of firms indicating problem in this area dropped from 63 % in 2002 to 37% in 2005, Telecommunication-26% in 2002 and 8% in 2005, Transportation-20% in 2002 and 17% in 2005) and Uncertainty about regulatory policies (% of firms indicating problem in this area dropped from 63 % in 2002 to 37% in 2005). Minor positive changes noted in the areas of Cost of financing, Tax rates and administration, Customs and trade regulations, Anticompetitive practices, Skills and educations of workers. Meanwhile, in such areas as Access to financing, Access to land, Title or leasing of land, Business licensing, Labor regulations, Macroeconomic instability, Functioning of the judiciary, Corruption, Street disorder and Organized crime number of firms indicating problems were increased. .

It is important to note that over the four year period (2002-2005) the list of most burdensome areas (almost half of surveyed companies indicating problems) remains unchanged though, as stated above, yearly comparison shows that positive movements has been registered. Those areas are Tax rates and Tax administration, Cost of financing and Access to financing, Uncertainty about regulatory policies, Macroeconomic instability, Corruption and Anti-competitive practices.

Brief Analysis While comparing key indicators forming the level of quality of Armenia’s business environment with the same indicators of countries in CIS and ECA region, Armenia’s quite encouraging standing is obvious (see Figure 3.2). Problems Doing Business Figure 3.2

% of firms indicating a problem

Data in Figure 3.2 confirm that overall Armenia enjoys a comparatively better position in such areas as Contract violation, Anti-competitive practices, Organized and Street crime, Corruption, Functioning of judiciary, Uncertainty about regulatory policies, Skills of workers, Labor regulations, Business licensing, Tax rates and Electricity. Whereas, Macroeconomic instability, Customs and trade regulations, Tax administration, Title and access to land, Transportation, Telecommunication, Cost and Access to financing are areas which on comparative basis gained worse positions. The picture is more vivid in such areas as Tax administration (almost 63% firms indicated problems in this area as opposed to 50% in CIS and ECA), Access to financing (48% firms indicated problems in this area, as opposed to 37 % in CIS and ECA) and Macroeconomic instability (55% of surveyed firms indicated problem as opposed to 50% in CIS and ECA). Another noteworthy pattern is the structure of problematic areas. For Armenia, CIS and ECA the structure of most problematic areas (almost half of surveyed firms indicated problems), for both 2002 and 2005 years, were not only the same but also remained unchanged: Tax rates and administration, Cost and Access to Financing, Macroeconomic instability and Uncertainty about regulatory policies.

4. Armenia’s Business Environment Assessment: Fitch rating, Heritage Foundation, Moody’s Investors Service

For the first half of the year 2008 world’s leading international rating agency Fitch Rating upgraded Armenia’s rating profile to BB median (the country ceiling is BB +). According to Fitch, the key positive drivers for the rating were sustained macroeconomic policy leading to continued economic growth, implementation of the new government’s reformist agenda directed to creating more diverse and competitive economy. At the same time the factors that could damage investor confidence were the worsening social and political tensions and war with Azerbaijan.

While rating the country’s business environment Fitch used the WB “Doing Business” survey results and Transparency International index, ranking the country BB median. The areas that negatively influenced to the ranking were “trading across borders”, “paying taxes” and “protecting investors”. Armenia scored 3 (out of 10, with higher scores better) in Transparency International’s 2007 corruption perception index, and got the 99th place of 179 countries, which contributed to the country’s below the BB median rank.

Figure 4.1 According to Heritage foundation assessment Armenia's economy is 70.3 % free, which makes it the world's 28th freest economy. Its overall score is 1 percentage point higher than last year, reflecting some improvements in the investment regulations but decrease of labor freedom. Armenia is ranked 15th freest among the 41 countries in the European region, and its score puts it above Europe's average. The country rates significantly higher than the average country in eight of the 10 freedoms (see Figure 4.1). Low tax rates, low government expenditure, and low revenue from state-owned businesses contribute to impressive fiscal and government freedom rankings. Other fields 73 that contributed positively to the rating are low inflation, well regulated and wholly private banking sector and flexible, relatively simple commercial regulations. The fields that mentioned to be improved were property rights, freedom from corruption and judiciary system. The scoring of Moody’s Investors Service substantiates Fitch’s and Heritage Foundation’s observations on Armenia’s economy, rating it “Ba2”. However, as stated by the Moody’s, the rating could be higher if not weakened by the fact that Armenia's political class and the business elite foster entrenched vested interests, while the level of financial intermediation remains low.

PPART IIII:: UUNDERLYING REFORMS,, CCURRENT CCHALLENGES AND FFUTURE TTARGETS

Reforms Underlying the Quality of Current Business Environment

Since 2000, the Armenian Government has been actively engaged in reforming the business environment. The government made adequate progress in lifting administrative barriers for areas with the most adverse influence on business and investment. The steps taken include, inter alia, consolidating, downsizing, and clarifying mandates of various government inspections; enacting the new law on business registration; streamlining licensing procedures; issuing new accounting recommendations for small and medium-sized enterprises; establishing a regulatory framework that allows privatization of urban land by business entities; and adopting simplified procedures for obtaining site development and construction permits. Another focal point of amongst the Government’s efforts was the establishment of the Armenian Development Agency in 1998 to promote investment and exports as well as identify bottlenecks in the business environment. Two years later, in 2000, the Business Support Council was established. Through the establishment of the Council the Government started the process of direct cooperation with the private sector. This served as a critical point for the open dialogue between the policy makers and policy users, helping to identify, prioritize and gradually remove major constraints for investment and business development. The functioning of the Council also helped to increase the accountability of the Government through reporting on implementation of the agreed policies to the private sector. The reforms undertaken by the Armenian Government have been accompanied with reforms in core legal framework necessary to corroborate private sector operations. Among those were the Civil Procedure Code, the Procurement law, the Business Registration Law, the Public Auction Law and the Competition Law. The fully restructured and enacted Bankruptcy Law recently has been harmonized with the Civil Code and the Civil Procedure Code, and strengthened the enforcement mechanisms for bankruptcy procedures. The Concession law has been enacted and the National Assembly has adopted a new Labor Code, which is compatible with the requirements of a market economy and is an important instrument of flexible job-creation. The government also has made considerable progress in drafting the necessary legislation to improve the 76 lending environment through strengthening the procedures for collateral registration and for foreclosure and enhancing the knowledge of the judiciary concerning commercial contracts. Specifically, the government has adopted amendments to Civil Code, Criminal Code, Civil Procedure Law, Law on Compulsory Enforcement, and Public Auction Law.

The analysis, based on the above presented surveys’ data, and the country’s investment risk evaluations, by the world famous rating and risk assessment agencies, suggest that these efforts have already resulted in a more positive private sector perception of the business and investment environment. However, many challenges remain as obstacles to the business community in the country reducing the potential of efficient business and investment activity. The section below describes the situation in these problematic areas, as well as outlines the current challenges and future targets.

Current Situation, Challenges and Future Targets

Customs Administration The Customs administration is one of the burdensome areas for the private sector, though according to the surveys presented in the part I of the document it considerably improved its position. Despite the fact that Armenia has done a considerable efforts in this area, still almost quarter of the businesses consider it problematic area.

The Customs introduced a self declaration system and reduced the role of reference prices. It has also provided public access to customs values through the official customs website (www.customs.am). Significant structural improvements were achieved in customs administration, such as the introduction of modern software and improved personnel practices. The central reform was the institution of direct trader input (DTI) that currently covers about 70 percent of imports. DTI has initiated a systemic change away from the intimate involvement of customs officials at the declaration validation stage, where opportunities for discretionary behavior are rife. The system has the capability to provide for immediate validation and assessment of acceptable declarations.

The working of DTI was made increasingly effective through the implementation of a comprehensive post-release review program for imports. The post-release reviews are being increasingly effective in ensuring proper customs administration whilst minimizing the opportunities for poor governance.

Introduction of a bank guarantee mechanism for approved importers to facilitate the smooth flow of imports, strengthen the rules-based regime, reduce risks, and minimize the interface between importers and customs officials as is the case in all advanced countries. Legislative amendments for the implementation of guarantees were approved by the government in 2007. Progress has also been made in selectivity of customs control. With all this reforms done, it seemed that some newly adopted measures have not been well accompanied with their practical implementation. This is interpreted in traders complain on uncertainty over the VAT and tariffs charges for imported products. Specifically, customs officials frequently diverge from the given invoice and instead impose a higher price on the goods, which subsequently carries with it higher taxes and tariffs. A number of challenges still remain with exporting as well, in particular cumbersome and lengthy procedures in regards of certificates of origin for foods and food products exported to the outside markets, etc.

Tax Administration Tax administration is again in the list of top problematic areas for doing business. Though positive changes since 2000 are explicit, the tax administration is considered as one of the major obstacle for the businesses. On tax administration, the government strengthened the operation of Large Tax Payers Unit (LTPU), which should help to reduce the stock of VAT refunds owed to exporters and ensure that no additional VAT arrears will be incurred to exporters. The administrative and audit capacity of the LTPU was strengthened. Reforms focused on legislative initiatives to facilitate effective tax audits and on development of personnel, institutional and administrative infrastructures in support of LTU. An annual audit plan based on risk classification, priorities and targets was introduced. Other measures, such

78 as periodic publication of the list of 300 large taxpayers and changes in the management contributed to the ongoing improvement of this unit. The Government of Armenia merged into one inspectorate, the Large Taxpayers Inspectorate, the large taxpayers, banking and financial, excise, and mining inspectorates. One of the forthcoming reforms in this area is the development of the electronic filing and payment of business taxes.

Anti-competitive practices and Corruption Until 2004 anti-competitive practices and corruption were rated as a leading constraint for domestic and foreign businesses. However, certain steps have been taken to improve situation , in particular adoption of the Competition Law, the Government’s efforts to introduce and use in practice corporate governance with subsequent laws, regulations and formal institutions, functioning of the Competition commission, overhauling the Tax and Customs administration, cutting certain administrative procedures to reduce the direct interactions between the private sector and public officials. Still, the large informal economy is illustrative of high cost of doing business. Formal laws and institutions addressing competition and corporate governance are weak. Therefore, reforms in this area shall be continued targeting on strengthening the Competition law, further developing mechanisms for judging the pricing of products, enhance the administrative capacity of the competition commission. Last but not least, to reduce the gap between the extent of commercial legislation and the degree to which it is being implemented.

Other challenges  Streamline introduction and execution of subsequent laws, regulations and formal institutions for corporate governance implementation.  Expand customs clearance audit and improvement of efficiency; expand possibility for submitting information online; reduction in the customs clearance duration procedures and paperwork; increase transparency in the methodology for valuation of goods.  Simplify the tax administration; combine tax payments to reduce the burden on companies; introduce online filings for businesses.

 Deepen the financial system through the policies and mechanisms to reduce lending risks and the cost of borrowing. One instrument of achieving the goal is the enforcement the mandatory membership of credit organizations to credit bureau.  Further consolidate, downsize and rationalize government inspections to reduce the number of agencies with inspection power.  Liberalize licensing procedures with the objective of reducing the number of established procedures, centralizing the provision of all types of building permits in one center.  Increase the flexibility of job termination.  Strengthen mechanisms of public-private consultation to improve the government’s capacity to address problems faced by the private sector.  Abolish seal permission requirement, cut minimum capital requirement and consolidate start-up procedures in starting the business area.  Reduce the number and duration of court processes in the enforcing contract area.  Shorten the time and simplify the procedures for resolving bankruptcies.

Over and above, challenges for creating truly business enabling environment in Armenia are still numerous. The Government of Armenia increasingly recognizes the need for more focused and ambitious reforms’ implementation to improve the business and investment environment, and it is through will and professionalism that would be possible to achieve reforms in all levels allowing for a truly business friendly climate in the country.

Annex - Overlapping Indicators of Major Business Environment Indices

Doing Business BEEPS ACRS 1. Starting a Business 2. Dealing with Licenses 3. Employing Workers 4. Registering Property 5. Getting Credit 6. Protecting Investors 7. Paying Taxes 8. Trading Across Borders 9. Enforcing Contracts 10. Closing a Business 1. Contract violation 2. Anti-competitive practices   3. Organized crime   4. Street crime, disorder   5. Corruption   6. Functioning of the judiciary   7. Macroeconomic instability 8. Uncertainty about regulatory policies 9. Skills and education of workers 10. Labor regulations 11. Business licensing and permits 12. Customs and trade regulations 13. Tax administration 14. Tax rates 15. Title or leasing of land 16. Access to land 17. Transportation 18. Electricity 19. Telecommunication 20. Cost of financing 21. Access to financing 1. Tax and tax administration 2. Infrastructure 3. Policy instability/uncertainty 4. Financing 5. Corruption   6. High tax rates 7. Anti-competitive practices   8. Functioning of the judiciary   9. Complexity, non-transparency of government policies 10. Price instability 11. Exchange rate 12. Customs 13. Documentation requirements 14. Organized crime   15. Regulations on getting premises(land/buildings) 16. Labor regulation 17. Street crime   18. Standards and certifications 19. Sanitary regulations

20. Fire safety regulations 21. Business licensing 22. Environment regulations 23. Business regulations

ANNEX 9 Mapping of obstacles for exporting in Armenia

Challenges Hindering Exports Raised by the Union of Exporters of Armenia

Transportation Obstacles

-The irregular operation of the ferry that transfers the Armenian goods via the Black Sea. This causes distortions of the timetables and deadlines of the transfer of commodities from Armenia.

-Issue of development of a new route of transfer, i.e. transfer to Russia (e.g. Astrakhan) via Iran and Caspian Sea. Currently, this route is operating in an irregular manner and due to this, the route becomes either non-accessible or significantly increases the cost of cargo transportation.

-Recent increase in the tariffs of railway transportation which negatively impacted the viability of the Armenian goods in the external markets.

Certification

-Currently the Certificate of Origin is issued for each and every commodity group (even in case of small numbered specimens) and the law defines 4 days for giving out the Certificate. In case when this concerns food-products, especially fresh food, this time period is unacceptable, thus, the businessmen are often forced into unofficial payments in order to speed up the process. Changing the procedure of issuing the Certificates can serve as a way of solution of this issue.

 It would be efficient to reduce the 4 day duration to a 24 hours deadline and/or to issue a certificate for the whole lot/volume foreseen by the contract or factory/production (e.g. for a period of 1 year).

This will allow for significant downsizing of the procedure of issuing certificates from the aspect of financial and time costs and at the same time will encourage export of small lots/volumes of goods (currently, the export of small lots/volumes is economically non- beneficial since regardless the size of lot/volume the payments are fixed).

-The above mentioned arguments fully apply also to Phytho and Veterinary Certificates. The procedures concerning the duration and payments as well as the servicing are complicated, and the judicial system has wide opportunities for discouragement of the businessmen/entrepreneurs if they choose to start a legal process.

-The above mentioned issues are concerning the procedures of general certification, but the exporters are also facing challenges in regard of “special” certification. In particular, in regard of breeding SITEZ, trout category fish, there is no office in Armenia that would create opportunity for the Armenian exporters to engage in breeding, processing and export of food products made from animals registered in the Red Book.

-Absence of so called European number is an obstacle for export of fish products from Armenia. As a result it is impossible to export any other fish from Armenia to Europe besides crabs. The Government of the Republic of Armenia should develop the relevant procedure for starting the process of application.

-There are obstacles in regard of the Armenian legislature. In particular, in the Republic of Armenia the fish-breeding is exempt of the Value Added Tax (VAT), while importing the fodder is not. Thus, when importing the forage, the VAT is being paid, that is not possible to compensate later at the time of the export.

-There are number of complications regarding the procedural issues, in particular Green and Red corridors after crossing the customs boarder, i.e. implementation of Article 87. Even within the framework of the same contract, for the case of each invoice one needs to go through the same procedure, i.e. present an application, receive a reply, etc, in the result loosing additional 2-3 working days.

-The contact of the businessmen and customs officials should be brought down to minimum, in the same way as it is the current trend in the tax administration area. One of the measures in this direction may be to accept the necessary documents (in the same manner as the reports filed for taxing purposes). Afterwards, in case if there are any suspicious issues to conduct relevant checks (for example, by sending an inquiry to the tax authorities). In case of discovering any infringements strict fines can be applied but this method of organization of the process will allow for significant saving of time and resources that are currently spend in the customs point when crossing the boarder.

-When importing the raw materials, it is the contract that should be studied, and based on that document, relevant customs code should be issued for the contract, rather than for each lorry/lot of goods. The current procedure is that specimens are being sent to the Expert Laboratory of the Ministry of Justice of the Republic of Armenia, which causes additional spending of time and finance.

-Another obstacle in the export area, is that unalike the seeds of other agricultural plants, the mushroom seeds are not exempt of VAT, because they are not included in the appropriate list of exemptions within customs authorities.

-Absence of a Universally Equipped Laboratory in the country is a significant constraint to exporting, since many local exporters are forced to send specimens of their goods

85 abroad for laboratory observation and receiving the necessary conclusions and this process generates numerous financial and time costs. Should such Laboratory in the Republic of Armenia be established, this would allow to significantly increasing the competitiveness of Armenian goods in the external markets.

ANNEX 10 Mapping of the work of donor organisations in developing small and medium businesses and improving business environment

Donor Organisations Work in the Area of Small and Medium Business Development

Among these donors World Bank, USAID and UNDP seem to be most active in Small and Medium Enterprise (SME) support and development. OSCE and EU Delegation in Armenia are investing less in this area, however both organizations have certain involvement in Small and Medium Enterprise Development National Centre (SME DNC) of Armenia. When it comes to BSC in particular it is only World Bank that as the founder of BSC and stable partner of ADA has particular interest and continuous involvement with the structure. However, certain interest to BSC activities was expressed also by USAID.

UNDP UNDP Armenia Office has included SME Development projects in its country package. UNDP focuses on Support to SME Development in Armenia Project and also to Global Compact Project. The main objective of the former Project is to support the implementation of the SME State Support Programme and to introduce/to improve business support services to small and medium enterprises at regional and local levels. The main activities of the programme are namely: -Provide financial support services to SMEs at central and regional levels, -Improve knowledge and business skills of start-up SMEs, particularly in the regions, -Provide information and consulting services to the SMEs at central and regional levels, -Strengthen the capacity of the SME DNC of Armenia and development of SME support infrastructure, -Directly support the establishment of the new small and medium enterprises at local and regional levels which contributes to the increase of employment and business opportunities for the poor and socially disadvantaged. The project “Fostering multi-stakeholder partnerships to achieve MDGs in the framework

87 of the UN Global Compact” aims to harness the value-creating assets of the private sector for poverty reduction. This will be achieved through the establishment of the national Global Compact networks and promotion of multi-stakeholder partnerships for development. One type of the partnership projects will focus on coordination and sharing of partners’ resources and expertise. Whilst these will not be strictly commercial, they will be linked to companies’ core business and will make social investments into local communities.

OSCE OSCE has certain involvement in SME development, however, that economic activities are not the core of OSCE mission in Armenia and OSCE’s main focus is on human rights issues, conflict resolution, etc. On the part of SME support OSCE at the request of the Ministry of Economy, has supported the development of a system of indicators for the evaluation of state SME support programmes. Based on the system of indicators, a test run assessment has been carried out of a Government-funded SME loan guarantee scheme. The OSCE Office also supports the evaluation of other aspects of state and donor support, and has produced a handbook for professionals on ways to use the indicators and organize the evaluation and monitoring process. In March 2007, the Office signed a memorandum of understanding with the National Centre for SME Development in order to facilitate Armenia's accession to and active participation in international legal compacts (such as the European SME Charter) and related knowledge networks. The Office has also supported a number of publications for SMEs and policy makers, among them: An SME statistical reference book for 2005-06; A step-by-step guide for registering business in Armenia; A reference book of organizations providing SME support programmes and services.

USAID USAID demonstrates profound interest to the BSC activities, although USAID has not had much of direct involvement with the structure previously. However, USAID, is

88 willing to be involved more actively in future stages. USAID conducts number of activities in SME development sphere, in particular, - Private Sector Competitiveness project which is to promote competitive growth and increasing the competitiveness of SMEs in selected sectors to increase employment and improve their capacity to do business. - Tax Improvement Project which aims to improve the management of the State Tax Service to raise Armenia’s tax revenues as well as providing the Armenian public with more information about the tax system. - Business Advisory Services Programme providing technical assistance, training and firm-level consultancy to Armenian small and medium enterprises, which is a joint project where EBRD and USAID are among stakeholders. - Armenia Microlending Program that is providing technical assistance provided to Partner Banks to assist with the development of sustainable MSE lending operations, thereby resulting in sustainable access to formal finance for micro and Small Enterprises. - Development Credit Authority that is using partial guarantees extended to private banks and institutional investors, respectively, to (a) facilitate SME access to credit, and (b) encourage private investment in the issuance of commercial paper (a new investment product) by a non-bank financial institution.

EU Delegation in Armenia Although EU Delegation in Armenia does not put a special emphasis on SME Development in Armenia and has not been previously related to BSC, however, there are number of activities that address that topic in an indirect manner. EU Delegation attaches importance to the AEPLAC (Armenian-European Policy and Legal Advice Centre) activities and provisions of European New Neighbourhood Policy with an objective to increase economic competition inside Armenia. The point of particular interest is the establishment of Information Centre within this framework together with the Ministry of Economic Development that would be used to enhance information exchange in close cooperation with Small and Medium Entrepreneurship Development National Centre of Armenia.

World Bank Yerevan Resident Mission World Bank has always been an active player in the area of business environment improvement and SME Development. The Business Support Council has been established in Armenia in 2000 through active cooperation with the World Bank. Although, the Bank has never been a member of the Council, however, the Bank is supporting Armenian Development Agency, which is the Secretariat of the Council and thus is indirectly fostering the work of the BSC. Among the efforts in identifying and addressing the challenges faced by business community in Armenia on should focus on Doing Business annual studies conducted by World Bank’s FIAS (Foreign Investment Advisory Service) and recommendations that FIAS has drawn to improve country’s business attractiveness rankings. For 2008, Armenia ranks 39th among 178 countries. Country’s progress of different indicators is very asymmetric. While Armenia ranks 2nd in the world in the ease of Registering Property, however, there are bothersome indicators of being only 143rd in Paying Taxes, 118th of Trading Across Borders and 83rd in Protecting Investors. Currently, the Government of Armenian and Governmental Agencies actively cooperate with the World Bank, throughout the continuous work to improve the Doing Business indicators, as the Government has set as a goal of appearing in top 15 of the list.

In terms of evaluation of strengths and weaknesses of business environment in Armenia, the World Bank also attaches much importance to the Business Environment and Enterprise Performance Surveys (BEEPS) conducted jointly with the EBRD.

ANNEX 11 Brief analysis of the 2008 state budget and its provisions for improvement of business environment

State Budget 2008 and its Provisions on Improvement of Business Environment

The State Budget for 2008 can be classified as the most ambitious budget ever adopted as it foresees a number of challenging projections especially concerning the tax collection. Formerly taxes/GDP ratio has been below 15 percent and this was the source of the most major criticism from the international donor organizations; in 2008 Budget this indicator is set as not less than 17 percent. To achieve increased tax collection, serious elimination of the shadow portion of the economy will be required, and this is a long desired step for the improvement of the business environment to allow for more equal conditions for players in the market. The Budget is one of distinctively social nature as it envisages increase of social expenditures by 46 percent and also increase in education, health and science expenditures by nearly 20 percent each. In parallel, the Government announced the launch of the second generation reforms and Budget 2008 has been designed as the first budget of the second generation era.

A major point of interest in the State Budget is the part on “Improvement of Business and Investment Environment.” It is included in Part I-A of the Budget in the section of the Government Report on “Major Directions of Social and Economic Development and Tax and Budget Policies in 2008.” This section represents the consolidation of the major policy steps that the Government obliges to undertake in 2008 in order to improve business environment and is quoted below.

“Improvement of business environment and attraction of investments, as prerequisites of sustainable economic development, are among priorities of the economic policies of the Government of RA and will be directed to mutual accessibility of foreign capital and markets, protection of investments, simplifying procedures for starting and quitting a business, acquiring loans, administrative procedures for exporting and licensing,

91 encouragement of free competition, clear and monosemantic implementation of legislature on foreign and local investments.

The complex of the above mentioned policy steps will be directed towards advertisement and formation of the image of Armenia as of a country favourable for business, as well as towards encouragement of entry of international and foreign companies to Armenia and increase of volumes of foreign investments including investments from diaspora.

Steps will be taken towards formation of insurance system in accordance with international standards which will decrease the investment risks to a certain degree.

In order to create favourable legal framework in the investment sphere for the partner countries, the process of signing of the International Agreement on Mutual Encouragement and Protection of Investments will be continued.

Increased importance will be attached to the formation of reputation of Armenia and Armenian products and brands in the foreign markets, the strengthening of their positions and monitoring of the foreign markets for these reasons. Measures will be taken in order to enlarge and develop the system of trade representatives of Armenia abroad that will lead to improvement of economic ties with partner countries, expansion of volumes of exported goods and services and attraction of investments.

The usage of opportunities gained by the memberships to the World Trade Organization (WTO) will be further expanded, as well as the process of carrying out the obligations undertaken by this membership will be further continued. In particular, Armenian Government will continue the legal analyses of business/trade field of the country, reporting the information on economic-trade sphere to WTO based on Agreements signed with WTO and passing on the data received from WTO Secretariat to the relevant stakeholders.

In the current stage of economic development the issue of protection of the intellectual property has become quite timely, as well as increasing the quality and competitiveness of domestic products and services, insuring homogeneity and monitoring of standards, harmonization of processes to current international standards, pulling down the impediments towards free circulation of goods among WTO members.

In order to insure strong and efficient protection of intellectual property further steps will be taken aimed at development of new technologies, fair competition in the delivery of goods and services, promotion of development of sciences, literature and art, evaluation of intellectual property, registration of rights on such property and improvement of systems of protection of intellectual property, as well as insuring equal access to information.

In the sphere of patents the state policy will be directed towards development of national culture and art.

In the spheres of standardization, measurement and insurance of compatibility, the main aims of foreseen activities will be further development of these areas and harmonization with existing international systems. In particular it is envisaged, -insurance of direct implementation of certain/separate international and inter-state standards, -development of primary set of rules, that will contribute to fulfillment of obligations towards WTO under the Agreement on Elimination of Technical Barriers for Trade, -review of basic standards in standardization procedures in order to make Armenian legislature compatible with international guides on standards.

Activities will be continued in order to progress further with the improvement of the -international ISO system on quality of goods and services in consumption markets, -European CEN system, This will be done with the aim to insure direct implementation of these standards and protection of consumer interests.

In the area of protection of the domestic markets it is foreseen to undertake steps in order to reveal the main obstacles for local businesses and to eliminate them as well as to protect the interests of domestic producers and consumers, contribute to creation of fair competition and prevent abuses in result of monopolizing actions.”

Thus, it can be concluded that the major policy steps aimed at improving the business environment in the country can be grouped among the following, - Simplifying bureaucratic procedures for doing business in Armenia, -Fulfillment of obligations towards WTO, -Harmonization of standards and legislature with the international ones, -Promotion of Armenian products and services abroad, -Attraction of new investments.

ANNEX 12 Presentation on the BSC

PRESENTATION ON BSC

Slide 1

Business Support Council ARMENIA

Structure and History

Slide 2

Background

. BSC Armenia was created in 2000 . Joint initiative of the Armenian Government and World Bank’s Foreign Investment Advisory Service (FIAS). (however, World Bank has never been a BSC member) . Legal basis for creation is President’s decree . Any changes to BSC can take place only through a Presidential decree

Slide 3

. BSC Armenia is Government run . BSC is chaired by the Prime-Minister . Deputy Chairman is the Advisor of the President of Armenia in Economic Affairs . BSC Secretary is the General Manager of Armenian Development Agency . Armenian Development Agency acts as the Secretariat to BSC

Slide 4

• BSC has 15 members • 7 out of 15 members are permanent • 8 out of 15 members are included in BSC for certain time period on a rotational principle • The permanent members are government officials • The non-permanent members are businessmen

Slide 5

Permanent Members of BSC • Prime Minister of Armenia, • Advisor to the President of Armenia in Economic Affairs, • General Manager of ADA, • Minister of Trade and Economic Development of RA, • Minister of Finance and Economy of RA, • Mayor of Yerevan, • Chairman of the Chamber of Commerce and Industry of RA.

Slide 6

• 8 non-permanent members, the businessmen, are included from a larger list of 50 businesses (Club of 50)

Slide 7

The Club of 50 includes the following categories, . Businesses (overwhelming majority), . Unions that are groups of companies themselves, . Development Agencies and Specialized Programmes.

Slide 8

Evolution of the Membership of the Club of 50

. In 2000, at the time of Establishment it included only 28 members, . Later with the expansion of Armenian economy this number was increased to 44 in 2002, . In March 2006 it became Club of 50 IMPORTANT—growth from 44 to 50 members has been largely of a qualitative nature than quantitive.

Slide 9

Ratio of Old and New Members after Restructuring in 2006

Old Members; 13; 26%

Old Members Newcomers

Newcomers; 37; 74%

Slide 10

Departures

Many of the oligarchs that had vast representation in the former list were excluded. Amongst them, • All major alcohol producing companies like Yerevan Cognac Factory, Yerevan Beer, Artashat-Vinkon, etc were left out of the list, • The huge elite players in economy such as Coca-Cola Bottlers Armenia, Grand Tobacco, Mika-Armenia etc have been removed from the list as well.

Slide 11

Arrivals

• Development agencies/programmes, like EU TACIS funded Armenian-European Policy and Legal Advice Centre, IT Teaching Centre, Armenian Tourism Development Agency, etc. • Different unions, like Union of Banks of Armenia, Union of Constructors of Armenia, Union of European Trade Companies in Armenia, Union of Manufacturers and Businessmen of Armenia, etc. • Many of the new arrivals represent more modest size businesses

Slide 12

Categories of Members Prior to Restructuring in 2006

7% 5% Unions

Development Agencies/Programmes Businesses

88%

100

Slide 13

Current Composition of the Club of 50

13% Unions 12%

Development Agencies/Programmes Businesses

75%

101

ANNEX 13 Presentation on business climate in Armenia

Slide 1

Business Climate in Armenia

Developments in 2003-2005

Slide 2

Number of BSC Sessions Per Year

10 9 8 7 6 5 4 3 2 1 Number of Sessions 0 2001 2002 2003 2004 2005 2006 2007(as of Aug) Years

102

Slide 3

Recent Improvements in Business Environment It has become easier to start a business (2003- 2005), since . The cost of registration has fallen by 18 percent . Minimum capital requirement was lowered almost 60 percent . Labour regulations now allow for greater flexibility, with the index of rigidity of employment falling 50 percent, . The formal legal protection of creditors has improved

Slide 4

EBRD Transition Indicators for Selected Countries in 2007

EBRD Transition Indicators

Securities Banking reform markets & Overall Enterprise & interest Competition non-bank infrastruct restructuri rate Policy financial ure ng liberalisati institution reform on s

ARMENIA 2007 2,33 2,33 2,67 2,00 2,33

ESTONIA 2007 3,67 3,67 4,00 3,67 3,33

GEORGIA 2007 2,33 2,00 2,67 1,67 2,33

KYRGYZ REPUBLIC 2007 2,00 2,00 2,33 2,00 1,67

MONGOLIA 2007 2,00 2,33 2,67 2,00 2,00

TAJIKISTAN 2007 1,67 1,67 2,33 1,00 1,33

103

Slide 5

Index of Economic Freedom of Armenia

100 88 75 80

60 52 43 42 41 40 27 20 Rank in the W orld 0 2000 2001 2002 2003 2004 2005 2006 Years

Slide 6

Index of Economic Freedom in 2007

Rank Percentage Type

Armenia 32 69.4 Moderately Free

Estonia 12 78.1 Mostly Free

Georgia 35 68.7 Moderately Free

Kyrgys Rep 79 59.9 Mostly Unfree

Mongolia 78 60.1 Moderately Free

Tadjikistan 98 56.9 Mostly Unfree

104

Slide 7

Degree of Economic Freedom in Percentages

80 70 60 50 40

Percents 30 20 10 0 Armenia Georgia Kyrgyz Rep Mongolia Tajikistan Series1 69,4 68,7 59,9 60,1 56,9

Slide 8

Challenges of the Armenian Economy • Corruption • Taxes/GDP insufficient ratio • Unfair competition • Communicational challenges • Insufficient Access to Financing

105

Slide 9

Possible Steps for BSC Improvement Armenian business climate faces number of challenges and BSC is one of the mechanisms to provide solutions, however, the BSC activity has abruptly declined in recent period which indicates lowered efficiency. Thus in order to improve the situation the following is needed, . To research the reasons behind existing challenges, to start a discussion over it in BSC and to jointly develop solutions. . To reveal the reasons of BSC inefficiency (structural, functional, etc) and to develop and present the Government suggestions on improvement.

106

ANNEX 14 Minutes of the BSC Meeting 19 November 2008

TRANSCRIPT # 124-272(2)

OF THE MEETING OF BUSINESS SUPPORT COUNCIL

Yerevan November 19, 2008

Chairing:

T. Sargsyan Prime-Minister of the Republic of Armenia Chairman of Business Support Council

Participating:

V. Nersisyants Chief Adviser to President of the Republic of Armenia on Economic Affairs, Deputy-Chairman of Business Support Council

T. Davtyan Minister of Finance of the Republic of Armenia

M. Sargsyan President of Chamber of Commerce and Industry the Republic of Armenia

R. Harutyunyan General Director of the Armenian Development Agency CJSC, Deputy-Chairman of Business Support Council

G. Arzumanyan Executive Director of Armenian Copper Program CJSC

A. Mkrtchyan Executive Director of Ameria CJSC

E. Grigoryan Chairman of the Board of Directors of Yerevan Jewelry Factory OJSC

Z. Harutyunyan General Director of Electrasark OJSC

S. Matevosyan Director of Liqvor Pharmaceutical Company LLC

E. Soghomonyan President of Union of Banks of Armenia Union of Legal Entities

S. Bekirsky General Director of Tosp Textile Factory OJSC

107

Invited

A. Shahnazaryan Chairman of State Commission of Protection of Economic Competition of the Republic of Armenia

A. Beiburtyan Deputy Chairman of the State Incomes Committee by Government of the Republic of Armenia

M. Tumanyan Deputy Minister of Economy of the Republic of Armenia

A. Ghazaryan President of Union of Manufacturers and Business (Employers) NGO

G. Makaryan Executive Director of the Union of Manufacturers and Business (Employers) NGO

D. Atanesyan President of American Chamber of Commerce in Armenia Union of Legal Entities

R. Shahmuradyan President of Construction Materials Importers Union of Armenia Union of Legal Entities

S. Bareyan Head of Advisory Department of KPMG Armenia CJSC

K. Grigoryan Economist of the World Bank Resident Office in Armenia

L. Harutyunyan Senior Consultant of European Bank for Reconstruction and Development

S. Ghonakhchyan Head of Economic Department of Staff of Government of the Republic of Armenia

M. Harutyunyan Head of Department of Information and Public Relations of Staff of Government of the Republic of Armenia

V. Chughuryan Chief Specialist of Department of Production Infrastructures of Staff of Government of the Republic of Armenia

J. Aramyan Head of Secretariat of Business Support Affairs of Armenian Development Agency

H. Aslanyan Chief Lawyer of Armenian Development Agency

M. Meliqyan Public Relations Specialist of the Armenian Development Agency

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H. Tortikyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

O. Hayrapetyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

A. Gasparyan Leading Specialist of Secretariat of Business Support Affairs of Armenian Development Agency

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AGENDA

BUSINESS SUPPORT COUNCIL SESSION

Yerevan Scheduled at: 19 November 2008 14.00 Venue: Hall of Sessions of the Government House

1. On the rotation of the members of the Business Support Council based on Prime- Minister’s Decree N 854-A as of October 14, 2008. /R. Harutyunyan/

2. On the necessity of formation of new working groups for the Business Support Council and principles of formation of the working groups. /V. Nersisiantz/

3. On the discussion of suggestions regarding the improvement of the business and investment climate in Armenia. /R. Harutyunyan/

4. On the discussion of the Programme of the Tax Administration Strategy for 2008- 2011 of the Republic of Armenia, as well as on the suggestions concerning the Action (Activities) Plan and Timetable. /R. Harutyunyan/

5. On the challenges of financing the real sector of the economy.

/R. Harutyunyan/

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1. On the rotation of the members of the Business Support Council based on Prime-Minister’s Decree N 854-A as of October 14, 2008. /R. Harutyunyan, A. Khazaryan, T. Sargsyan/

1. Take into consideration the notification of the General Director of the Armenian Development Agency CJSC, Secretary of the Business Support Council, Mr Robert Harutyunyan, on the rotation of eight new members within the Business Support Council based on the Decree No 854-A/14.October.2008 of the Prime- Minister of Armenia. 2. Take into consideration the suggestion of the Chairman of the Manufacturers and Businessmen (Employers) Union of Armenia, Mr. A. Khazaryan, on the expediency of inclusion of Union in the Business Support Council as a permanent member in the future, based on already approved regulations framework.

2. On the necessity of formation of new working groups for the Business Support Council and principles of formation of the working groups. /V. Nersissiantz, R. Harutyunyan, A. Khazaryan, T. Sargsyan/

3. Take into consideration the notification of the Advisor to the President of Armenia in Economic Affairs, Deputy Chairman of the Business Support Council, that in between the Meetings of the Business Support Council, there are two ways of how to organize the work of the Council, either to form permanent thematic working groups involving the members of the business community and other interested organizations, or through the Secretariat of the Business Support Council create temporary working groups for facilitating the process of discussion on certain topics. 4. Define that from now on in between Business Support Council Meetings based on initiatives generated from the members of the Business Support Council, state bodies, other interested organizations or Secretariat of the Business Support Council in order to organize discussions on certain topics working groups may be created involving 111 members of the Council as well as of other bodies and organizations interested in that topic.

3. On the discussion of suggestions regarding the improvement of the business and investment climate in Armenia. / R. Harutyunyan, G. Arzumanyan, Z. Harutyunyan, E. Grigorian, A. Ghazaryan, A. Shahnazaryan, T. Davtyan, T. Sargsyan/

5. Take into consideration the results of the discussions within state bodies of the of the suggestions regarding the improvement of the business and investment climate in Armenia made by the business community of the Business Support Council and the Secretariat of the Business Support Council. 6. To the Chairman of the Manufacturers and Businessmen (Employers) Union of Armenia, Mr. A. Ghazaryan: Taken into consideration the necessity of amending and extending the list of commodities classified within codes of the List of Commodities of the External Economic Activities as of Article 6.1 of the Law on Value Added Tax of the Republic of Armenia, together with the Ministry of Finance of RA, Committee of State Revenues Adjacent to the Government of RA, and representatives of other interested organizations within the Ministry of Economy of RA, to continue works aimed at introducing relevant amendments and extensions of the given law and later, according to the existing procedures, present the result for the discussion in RA Government. 7. To the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan: Based on suggestions of the General Manager of Elektrasark OJSC and Armenian Copper Programme CJSC, within one weeks time once again to present to the discussion of the Highest Council of Introduction of New Culture of Income Administration, the draft law on “On Introducing Amendments and Extending the Law of the Republic of Armenia on the Value Added Tax” developed and put into circulation by the Ministry of Finance of the Republic of Armenia that proposes to create compatibility between the principles 112

of the moment of emerging of the value-added tax obligation and defining the moment of emerging of the right to get transfers based on previously paid value- added tax. 8. To take into consideration the notification of the Executive Director of the Armenian Copper Programme CJSC, G. Arzumanyan, that sufficient discussions of the suggestions regarding the improvement of the business and investment climate in Armenia (made by the business community of the Business Support Council and the Secretariat of the Business Support Council) within the state bodies have not been held and the approaches have not been positive, and in the future true eagerness of reaching agreements with the business community should be demonstrated, refraining from formal correspondence that avoids discussions with the business community. 9. To take into consideration the notification of the Prime-Minister of the Republic of Armenia, the Chairman of the Business Support Council, T. Sargsyan, informing that starting from 2009 the Government of RA will considerably revise the policy and administration in regards of transfer or refund of the value-added tax amounts against other tax obligations in case of transactions that are taxed with zero-level value-added tax tariff. In particular, starting from 2009 the deadlines of transfer or refund of value-added tax will be significantly tightened, during 2009 the debts that have been accumulated up to 2009 regarding the transfer or refund of the value-added tax amounts will be extinguished, in 2009 new and current debts will not be accumulated and starting from 2010 the state foresees paying fines for delays in the transfer or refund of the value-added tax amounts. 10. To the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan: Taking into consideration the suggestion of the Executive Director of the Armenian Copper Programme CJSC, G. Arzumanyan, on the necessity of implementing equal approach to violations of tax responsibilities of not only the business community but that of the state, to discuss the issue of harmonizing the amounts of fines paid by the businessmen when delaying fulfillment of the their tax responsibilities and of the state when state 113

delays its tax responsibilities towards businessmen and to present suggestions on the matter to the Highest Council of Introduction of New Culture of Income Administration. 11. To take into consideration the suggestion of the General Manager of Elektrasark OJSC, Z. Harutyunyan, on the necessity and urgency of directing the residues of the value-added tax transfers as in accordance with the Annex 1.22 of the Law of the Republic of Armenia on Value-Added Tax to the extinguishment of the tax obligations towards the customs bodies for import of commodities, based on preference of the importing businessmen. 12. To the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan: Taking into consideration the suggestions of the General Manager of Elektrasark OJSC, Z. Harutyunyan and the Executive Director of the Armenian Copper Programme CJSC, G. Arzumanyan, together with State Income Committee adjacent to the Government of RA, to present suggestion that in case if there is a letter from the taxpayer informing on his/her overpayments for other tax obligations, before studying that letter as defined by law, consider the expediency of refraining from charging the tax amounts due for transfer (including freezing of the bank account of the tax payer). 13. To the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan: taking as basis the notification of the Prime- Minister of the Republic of Armenia, the Chairman of the Business Support Council, T. Sargsyan, that the amendment of the one percent profit tax prepayment system will be in the centre of attention of the Government of the Republic of Armenia, in the future, to present suggestion on possibility of a deadline for legislative definition of the abolishment of the one percent profit tax prepayment system. 14. To take into consideration the suggestions of the Chairman of the Republic of Armenia State Committee of Economic Competition, A. Shahanazaryan, on the necessity of holding a discussion on the topic of economic competition in one of the upcoming Business Support Council Meetings, as well as that when making amendments in the Armenian legislature in general, it should be understood that 114

those amendments should be comprehensive and should cover all the inter-related spheres with similar challenges.

4. On the discussion of the Programme of the Tax Administration Strategy for 2008-2011 of the Republic of Armenia, as well as on the suggestions concerning the Action (Activities) Plan and Timetable. /R. Harutyunyan, G. Arzumanyan, E. Soghomonyan, T. Davtyan, T. Sargsyan/

15. To take into consideration the results of the discussion of the suggestion made by the business community and the Secretariat of the Business Support Council on the Programme of the Tax Administration Strategy for 2008-2011 of the Republic of Armenia, as well as on the suggestions concerning the Action (Activities) Plan and Timetable. 16. To the Chairman of the Union of Legal Entities “Union of Banks of the Republic of Armenia”, E. Soghomonyan: to summarize the suggestions on the improvement package for the issues encountered in the process of implementation of the value-added tax in the banking system and identified by the “Union of Banks of the Republic of Armenia” and to present these suggestions to the Highest Council of Introduction of New Culture of Income Administration. 17. To the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan: having listened to the suggestions of the Executive Director of the Armenian Copper Programme CJSC, G. Arzumanyan, on right interconnections between the encouragement system of the employees of tax and customs administration and correct implementation of tax and customs legislation and administration, as well as to the notification of the Minister of Finance of the Republic of Armenia, Member of the Business Support Council, T. Davtyan on foreseeing increase in the remuneration of the employees of tax and customs administration, to discuss together with the State Committee on Incomes adjacent to the Government of RA, the issue of abolishment of direct interconnection between the incomes of the Encouragement Funds within tax authorities and 115

amounts collected in the result of discovering tax obligation violations and to present suggestions to the Highest Council of Introduction of New Culture of Income Administration. 18. To take into consideration the suggestions of the Executive Director of the Armenian Copper Programme CJSC, G. Arzumanyan, that before introducing the system that foresees universal declaration of incomes, it is necessary to examine the incomes of high-ranking state officials and the experience gained through collection of their property declarations, and based on this to foresee additional measures for insuring the efficiency of the new system.

5. On the challenges of financing the real sector of the economy. /R. Harutyunyan, E. Grigoryan, E. Soghomonyan, S. Bekirsky, A. Khazaryan, T. Sargsyan/

19. To take into consideration the notification of the General Director of the Armenian Development Agency CJSC, the Secretary of the Business Support Council, R. Harutyunyan, concerning the problems in acquiring financing from banks for the development of the real sector of the country. 20. To take in to consideration the notifications of E. Grigoryan, the Chairman of the Board of Directors of the Yerevan Jewelry Factory OJSC, E. Soghomonyan, Chairman of the Union of Legal Entities “Union of Banks of the Republic of Armenia”, S. Bekirski, General Director of Tosp Textiles Factory OJSC, A. Khazaryan, Chairman of the Manufacturers and Businessmen (Employers) Union of Armenia, on the necessity and urgency of concrete and active support from the side of the Government of the Republic of Armenia to the existing and newly established enterprises in Armenia that act under the conditions of global economic crises. 21. To take into consideration the suggestion of Mr. A. Khazaryan, Chairman of the Manufacturers and Businessmen (Employers) Union of Armenia, that under conditions of global economic crises as well as intensive implementation of tax

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and customs administration reforms it is not expedient and is necessary to temporarily cease the practice of freezing the tax accounts of the enterprises, that worsens the situation of the enterprises who have already appeared in unfavourable conditions, and creates temporary unemployment and additional corruption risks, significantly damages the reputation of especially the exporting enterprises that are currently in difficult situation because of their foreign clients inability to pay them or equally because of the delays of payments from their foreign clients. 22. To take into consideration the appeal of the Prime-Minister of the Republic of Armenia, the Chairman of the Business Support Council, T. Sargsyan, to the business community, who re-assured the willingness of the Government of the Republic of Armenia to foster all the practical suggestions and well-grounded projects proposed by the businessmen who expect to receive Government support. 23. To take into consideration the notification of the Prime-Minister of the Republic of Armenia, the Chairman of the Business Support Council, T. Sargsyan, that under the conditions of global economic crises, the efforts of the Government will be directed towards ensuring the stability of the macroeconomic and financial sector, towards discovering and taking advantage of any additional resources for estimated economic growth. Prime-Minister Sargsyan also informed that in order milden the effects of the crises as well as to contribute to the development of the real sector, the Government is going to take additional measures in order to support the existing and newly created enterprises through providing them state guarantees when they apply for credits, through implementation of subsidies, through state participation within the equity of the enterprises that would correspond to the indicators set by the Government. The Prime-Minister informed that with the aim of promoting the development of small and medium enterprises access to big-volume crediting will be provided through the contributions of the World Bank, Armenian-German Fund, EBRD, Asian Bank, easening of tax administration is also foreseen, particularly, for the enterprises whose annual turnover does not exceed 100 million AMD the mandatory accounting system will be abolished and simplified tax declaration regime will be 117

introduced, as well as support will be provided to the enterprises in working out their business plans and number of other measures will be implemented.

Prime-Minister of the Republic of Armenia, the Chairman of the Business Support Council, T. Sargsyan /signed/

General Director of the Armenian Development Agency CJSC, the Secretary of the Business Support Council,

R. Harutyunyan /signed/

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