Business Environment in Tajikistan As Seen by Small and Medium Enterprises, 2006

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Business Environment

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CONTENT

Glossary...... vii foreword and acknowledGements...... ix executive summary...... xi

1. sme in tajikistan: overview of the sector, main trends and Business expectations...... 1 1.1 the sme sector within the tajik economy...... 3 1.1.1 MACROECONOMIC OVERVIEW...... 3 1.1.2 THE SME SECTOR IN THE ECONOMY...... 4 1.1.3 INDIVIDUAL ENTREPRENEURS...... 6 1.1.4 DEHKAN FARMERS...... 8 1.1.5 SMALL AND MEDIUM COMPANIES...... 9 1.1.6 INVESTMENTS: MOSTLY INTERNAL FUNDS...... 11 1.1.7 ENERGY SUPPLY: INSUFFICIENT...... 12 1.2 leGal environment and sme confidence...... 13 1.2.1 LEGAL AWARENESS...... 13 1.2.2 ROLE OF THE STATE IN THE SUPPORT OF ENTREPRENEURSHIP...... 15 1.2.3 LEGAL DISPUTES...... 15 1.2.4 EXPECTATIONS OF ENTREPRENEURS...... 16

2. reGistration...... 19 2.1 reGistration: the leGal framework...... 21 2.2 reGistration of individual entrepreneurs...... 22 2.2.1 DIFFICULTY OF REGISTERING AS INDIVIDUAL ENTREPRENEUR...... 23 2.2.2 TIME SPENT ON REGISTRATION AS AN INDIVIDUAL ENTREPRENEUR...... 24 2.2.3 COST OF REGISTRATION OF INDIVIDUAL ENTREPRENEURS...... 24 2.2.4 UNOFFICIAL PAYMENTS...... 25 2.3 reGistration of dehkan farms...... 25 2.3.1 DIFFICULTY OF REGISTERING A DEHKAN FARM...... 27 2.3.2 TIME FRAMES FOR THE REGISTRATION OF DEHKAN FARMS...... 27 2.3.3 COST OF REGISTRATION OF A DEHKAN FARM...... 28 2.3.4 UNOFFICIAL PAYMENTS...... 29 2.4 reGistration of leGal entities...... 29 2.4.1 DIFFICULTY OF REGISTRATION FOR LEGAL ENTITY...... 31 2.4.2 TIME FRAMES FOR REGISTRATION OF LEGAL ENTITIES: A LONG PROCESS...... 32 2.4.3 COST OF REGISTRATION FOR LEGAL ENTITIES...... 34 2.4.4 UNOFFICIAL PAYMENTS FOR LEGAL ENTITIES STILL AN ISSUE...... 34 2.5 economic impact estimate...... 35 recommendations ...... 36

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 iii CONTENT

3. licensinG...... 43 3.1 licensinG: the leGal framework...... 45 3.2 licensinG coveraGe: improvements overall...... 46 3.3 licensinG procedure: a two-sided situation...... 48 3.3.1 DURATION OF LICENSING PROCESS: COMPLIANCE STILL TO BE ACHIEVED...... 50 3.3.2 COST OF LICENSING: STILL A RELEVANT BURDEN...... 51 3.3.3 UNOFFICIAL PAYMENTS: STILL A COMMON WAY TO RESOLVE ISSUES...... 53 3.4 economic impact of licensinG...... 54 3.5 duration of a license: a stronG deterrent to lonG-term investments...... 55 3.6 access to information...... 57 recommendations ...... 59

4. permits...... 69 4.1 permits: the leGal framework...... 71 4.2 overall assessment: procedures are most complicated for small and medium companies...... 72 4.3 permit coveraGe and freQuency: staBle overall...... 73 4.3.1 OVERALL COVERAGE AND FREQUENCY STILL EXTREMELY WIDESPREAD...... 73 4.3.2 NUMBER OF PERMITS IS LINKED TO THE SIZE OF ACTIVITY...... 75 4.4 issuinG process: unreGulated, opaQue and unnecessarily time-consuminG...... 76 4.5 permits expenses...... 77 4.6 economic impact of permits...... 78 4.7 access to information and unofficial payments...... 78 4.7.1 DIFFICULTIES FACED WHILE OBTAINING PERMITS...... 79 4.7.2 UNOFFICIAL WAYS TO SOLVE ISSUES ARE WIDESPREAD...... 80 recommendations ...... 81

5. entrepreneurs and finance...... 85 5.1 tajikistan’s financial sector: an overview...... 87 5.1.1 LENDING: GROWING AT HIGH PACE, BUT STILL LIMITED...... 87 5.1.2 DEPOSITS: SIGNIFICANT DEVELOPMENT TO BE SUPPORTED BY AN INCREASE IN THE TRUST OF PEOPLE IN THE FINANCIAL SYSTEM...... 87 5.2 access to BankinG for small and medium Businesses still limited...... 88 5.2.1 LENDING: LIMITED DUE TO SELF-SELECTION PROCESS...... 91 5.2.2 INDIVIDUAL ENTREPRENEURS: INCREASING LENDING...... 93 5.2.3 SMALL AND MEDIUM COMPANIES: IMPROVED LENDING...... 93 5.2.4 DEHKAN FARMERS: LOW LEVEL OF APPLICATIONS...... 94 5.2.5 LOAN DURATION: STILL TO BE IMPROVED...... 95 5.2.6 COLLATERAL: STILL A HINDERING FACTOR...... 96 5.2.7 INTEREST RATES: EXTREMELY HIGH...... 98 5.2.8 UNOFFICIAL WAYS OF SOLVING THE ISSUES: VERY COMMON...... 99

iv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 CONTENT

5.2.9 LOAN PROCESS: QUITE STREAMLINED...... 99 recommendations ...... 101

6. inspections...... 107 6.1 inspections: the leGal framework...... 109 6.2 coveraGe and freQuency of inspections remain critical issues for smes....112 6.3 who is inspected? the rationale and outcomes are still unclear...... 114 6.3.1 INSPECTIONS ARE NOT RISK BASED…...... 114 6.3.2 MANY INSPECTIONS, FEW RESULTS…...... 114 6.3.3 TOO SHORT INSPECTIONS TO BE EFFECTIVE.…...... 116 6.3.4 UNOFFICIAL WAYS ARE IN MOST CASES THE EASIEST SOLUTION...... 116 6.4 inspections: a relevant Burden for smes…...... 117 6.4.1 …IN TERMS OF TIME...... 117 6.4.2 …AS WELL AS DIRECT COSTS...... 118 6.4.3 …LEADING TO AN OVERALL SIGNIFICANT ECONOMIC IMPACT...... 119 6.5 amBiGuous and unclear norms create difficulties for appealinG...... 121 6.6 outdated reQuirements and low leGal awareness make compliance more difficult...... 122 recommendations ...... 126

7. taxation...... 129 7.1 review of the current tax system in tajikistan...... 132 7.2 taxation of individual entrepreneurs...... 134 7.2.1 THE STANDARD TAXATION SYSTEM...... 134 7.2.2 THE PATENT TAXATION SYSTEM...... 135 7.2.3 TAX ACCOUNTING AND REPORTING ARE QUITE PROBLEMATIC FOR INDIVIDUAL ENTREPRENEURS...... 135 7.2.4 RETAIL TRADE TAX: CUMBERSOME ACCOUNTING AND REPORTING RESULTS IN UNOFFICIAL PAYMENTS...... 138 7.2.5 INDIVIDUAL ENTREPRENEUR: ADDITIONAL PAYMENTS ARE BURDENSOME...... 139 7.2.6 TAX INSPECTIONS OF INDIVIDUAL ENTREPRENEURS ARE INEFFICIENT...... 139 7.3 taxation of small and medium companies...... 140 7.3.1 DIFFICULTIES RELATED TO TAX REPORTING AND CALCULATIONS...... 141 7.3.2 SMALL AND MEDIUM COMPANIES: THE SIMPLIFIED SYSTEM AND SOCIAL TAX IMPOSE A HEAVY BURDEN...... 143 7.3.3 ADDITIONAL PAYMENTS ARE HIGH FOR SMALL AND MEDIUM COMPANIES...... 144 7.3.4 TAX INSPECTIONS FOR SMALL AND MEDIUM COMPANIES ARE NOT ALWAYS JUSTIFIED...... 145 7.4 taxation of dehkan farmers...... 145 7.4.1 DEHKAN FARMERS: LUMP SUM TAXATION AS A POSITIVE SYSTEM...... 146 7.4.2 TAX INSPECTIONS OF DEHKAN FARMS ARE LESS FREQUENT...... 146 7.5 tax evasion: a way to escape the system...... 147

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 v CONTENT

7.6 taxation system hinders Business Growth...... 148 recommendations ...... 150

8. foreiGn trade and technical reGulation...... 155 8.1 tajikistan foreiGn trade: the context...... 157 8.2 role of smes in foreiGn trade operations...... 158 8.2.1 ACCESS TO INTERNATIONAL MARKETS: HIGH COST OF TRANSPORTATION...... 160 8.2.2 INSTITUTIONAL SUPPORT OF SME EXPORT IS NEEDED...... 161 8.2.3 COMPLICATED PROCEDURES LEAD TO LOW INVOLVEMENT OF SMES...... 162 8.2.4 UNOFFICIAL SOLUTIONS DURING EXPORT PROCEDURES ARE COMMON...... 165

8.3 technical reGulation: standardiZation and certification...... 165 8.3.1 STANDARDS AND CERTIFICATES IN TAJIKISTAN: THE BACKGROUND...... 166 8.3.2 STANDARDS: OUTDATED...... 166 8.3.3 CERTIFICATION: EXCESSIVE FOR PRODUCERS AND TRADERS...... 167 8.3.4 CERTIFICATION PROCEDURE: COMPLICATED FOR SMES...... 169 8.3.5 DIFFICULT ACCESS TO INFORMATION LEADING TO UNOFFICIAL WAYS OF SOLVING ISSUES...... 170 8.3.6 COST OF CERTIFICATION: UNEVEN DISTRIBUTION...... 170 8.3.7 LONG DURATION OF OBTAINING CERTIFICATES: BURDENSOME FOR COMPANIES...... 170 8.3.8 DURATION OF CERTIFICATES: UNCLEAR SITUATION...... 171 recommendations ...... 172

9. methodoloGy of the survey...... 177 9.1 sample selection...... 178 9.2 additional survey on unofficial solutions...... 182 9.3 indexes and definition used in the report...... 182

a. statistical appendixes: OVERVIEW OF THE SME SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS...... 185 REGISTRATION...... 199 LICENSING...... 201 PERMITS...... 203 ENTREPRENEURS AND FINANCE...... 207 INSPECTIONS...... 213 TAXATION...... 217 FOREIGN TRADE AND TECHNICAL REGULATION...... 221

references...... 226

vi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 GLOSSARY

GLOSSARY

ADB Asian Development Bank AKF Aga Khan Foundation CAGR Compound Annual Growth Rate CIS Commonwealth of Independent States CPI Consumer Price Index DRS Districts of Republican Subordination DRS A Districts of Republican Subordination - Hissar Valley DRS B Districts of Republican Subordination - Rasht Valley EBRD European Bank of Reconstruction and Development FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investments FIAS Foreign Investment Advisory Service - the World Bank Group FMFB First Microfi nance Bank of Tajikistan GBAO Gorno Badakhshan Autonomous Oblast GDP Gross Domestic Product IFC International Finance Corporation - the World Bank Group IMF International Monetary Fund IOM International Organization of Migration IRB Inspections Registration Book MFO Microfi nance Organization MIGA Multilateral Investment Guarantee Agency - the World Bank Group MSDSP Mountain Societies Development Support Programme NBT National Bank of Tajikistan NDS National Development Strategy PWC Price Waterhouse Coopers PRS Poverty Reduction Strategy SECO Swiss State Secretariat for Economic Affairs SME Small and medium enterprises SQAM Standardization, Quality Assurance, Accreditation and Metrology TUCE Tajik Universal Commodity Exchange UNIDO United Nations Industrial Development Organization VAT Value Added Tax WB World Bank WTO World Trade Organizations

Tajik Somoni to US dollar exchange rates used in the report (NBT rates):

Average exchange rate for 2002: $1=3.00 somoni Average exchange rate for 2005: $1=3.19 somoni

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 vii viii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREWORD AND ACKNOWLEDGEMENTS

The International Finance Corporation is pleased to present the results of its second SME survey in Tajikistan, conducted by the IFC Tajikistan Business Enabling Environment - SME Policy Project. The project has been implemented since 2003 with the fi nancial support of the Swiss State Secretariat for Economic Affairs (SECO).

This survey, which builds on IFC’s previous survey conducted in 2003, provides a comprehensive tool to monitor the environment for doing business in the country by collecting the direct views of business representatives on the major regulatory procedures encountered during their activity.

This survey report is part of the broader effort by IFC and SECO to improve the overall context in which SMEs are launched and operate.

During the four years since its launch the project has benefi ted from close interaction with many public and private institutions operating in Tajikistan, as well as a number of international organizations. The project would like to thank the Govern- ment of Tajikistan, with whom the project signed a Memorandum of Understanding in November 2006. The project would also like to extend gratitude to the Executive Unit under the Offi ce of the President of the Republic of Tajikistan, with which it developed a longstanding relationship, to the new State Investment Committee and, in particular, to the Department of Entrepreneurship Support, which has been a vital partner during the last several months of the project’s work. Addition- ally, the project would like to acknowledge the commitment of the Ministries and Agencies that became project pilots in Inspections Law implementation: the Fire Authority under the Ministry of Internal Affairs, the Sanitary and Epidemiological Service under the Ministry of Health, and the Tax Committee under the Government of the Republic of Tajikistan. Finally, the project would like to express gratitude to the Ministry of Justice, the Ministry of Economical Development and Trade, the State Statistical Committee, the House of Representatives of the Republic of Tajikistan, the Chamber of Commerce and Industry of the Republic of Tajikistan, the National Association of Small and Medium Businesses, the Association of Dehkans (Farmers), the Center for Support of Entrepreneurship of the City of Dushanbe, and the Center for Statistical Re- search «Zerkalo» for their active support and a fruitful collaboration.

Numerous individuals and organizations contributed generously to the preliminary review of this report, including: the World Bank Resident Mission in Tajikistan, the IFC Country Coordinator for investment activities and other IFC staff, the IMF Resident Representative, and the SECO National Program Offi cer.

This survey is based on and refl ects entrepreneurs’ views of the business environment in Tajikistan, and as such the data presented do not necessarily refl ect the views of IFC or SECO. At the same time, this report does not intend to provide an exhaustive account of all the issues faced by small businesses; rather, it offers an opportunity to examine the most critical administrative barriers hindering the development of the SME sector in Tajikistan.

Electronic versions of this Report can be downloaded at http://www.ifc.org/tajikistan/sme while printed copies can be obtained at our offi ces in:

International Finance Corporation International Finance Corporation Tajikistan Business Enabling Environment - SME Policy Project Private Enterprise Partnership 7 Abdullo Komandir Str. 36, Bolshaya Molchanovka, bld. # 1 Dushanbe 734001, Tajikistan Moscow 121069, Russia Tel: +992 48 701 1440 Tel: + 7 495 411 7555 Fax: + 992 48 701 1448 Fax: + 7 495 411 7556

Dushanbe, April 2007

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ix x Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY executive summary

content of the report: analyZed procedures

This report is a follow-up to the fi rst survey of the business environment in Tajikistan conducted by IFC in 2003.1 It collects and analyzes the views of a representative sample of 2,500 Tajik entrepreneurs on a number of administrative procedures which they encounter either in establishing or running their businesses in 2005. The survey also includes the views of entrepreneurs on access to fi nance, which, although not an administrative procedure per se, represents a critical step in the SME lifecycle.

In each of the covered areas, the report analyzes the legislative basis and subsequently provides an overall picture of the key issues emerging from both the survey data (coverage, length of the process, offi cial and unoffi cial payments related to the procedure), and from the expert analysis of the legal framework. In order to provide the most updated overview of the issues in each of the areas, the report also provides legal and expert analysis of the post 2005 developments not covered by the survey data.

Areas covered by this report are: • Registration; • Licensing; • Permits; • Access to fi nance; • Inspections; • Taxation; • Foreign trade and technical regulation.

A set of recommendations to overcome the identifi ed problems in these areas is developed at the end of each chapter. A table at the end of this section summarizes the critical issues, key recommendations and their expected impact.

Business environment in 2005 vs. 2002: overall improvement

In the years between the two surveys, the government of Tajikistan has undertaken a set of reforms whose impact on the business environment is evident from the collected data. Reforms in the areas of registration and licensing have reduced the time and cost of starting a business. Clear steps have also been undertaken in the area of access to fi nance, where positive changes are evident despite the still critical overall situation. In particular, thanks to the micro lending

1 IFC (2004b)

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xi EXECUTIVE SUMMARY

of MFO’s, smaller sized borrowers can now have access to external funding.

In addition to these positive results, a number of legislative acts have entered into force in 2006. Their effects were not captured by the present survey data, but the Law on Inspections and the reduction in the number of licensed activities are additional positive steps in the direction of an improved business environment. Their impact will be captured only when implementation is complete and the next survey will take into account these results.

Despite these efforts, it is important to note that the abovementioned improvements need to be further strengthened and made permanent.

On the one hand, it is essential to extend reforms into other areas. Permits are directly linked to inspections and licensing, and if not reformed, could undermine the already achieved results in these areas. Trade procedures and technical standards need to be reformed in conjunction to further simplify trade. Taxation system needs to be simplifi ed in order to facilitate compliance and administrative control, as well as promote business growth.

On the other hand, in order to consolidate the benefi ts of the reforms toward improved investment climate and business environment, it is crucial to monitor the implementation of the newly introduced legal framework. Survey data show that actual practices often differ drastically from the legislative provisions, and that strong regional differences exist.

rankinG of reGulatory procedures: a Qualitative assessment

In order to identify the most pressing issues for SMEs, the survey report identifi es 2 main drivers for prioritization:

• perceived complexity, the percentage of SMEs2 that claim a procedure is diffi cult/very diffi cult. In using this indicator, itis important to remain aware of entrepreneurs’ adjustment to the institutional context, i.e., over time people tend to consider even a very complicated situation to be normal and adjust their behavior. However, in terms of a relative ranking, the impact of these adjustments should be evenly distributed across procedures;

• coverage, the percentage of SMEs affected by the procedure. This indicator shows the relative importance of the procedure for

2 Among those going through each procedure. xii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

the SME sector as a whole. Coverage is a correct indicator of the relevance for compulsory procedures, that is, procedures that are mandatory in order to start or conduct a business activity. Nevertheless, this indicator may be biased by a self- selection process for procedures that are not mandatory (for example external trade). As some of the procedures are very complicated, they implicitly discourage SMEs from the activity which requires them.3

These two drivers are used to prioritize the regulatory procedures Chart I. REGULATORY BARRIERS FOR INDIVIDUAL ENTREPRENEURS mentioned above. Complexity is taken as the most relevant barrier to business development, while coverage is secondary. Moderate Problematic Critical In order to account for differences between types of surveyed coverage SMEs, and their relative weight in the overall economy, a separate registration ranking is developed for individual entrepreneurs, small and Above inspections 80% medium companies and dehkan farmers, which represent the taxation three typologies of businesses surveyed.

permits Access to ﬁ nance Overall, it is interesting to note that the qualitative evaluation of 20%-80% technical regulation administrative procedures, based on SME perception, largely confi rms expert analysis of the survey data. Indeed procedures which SMEs ranked as most critical were the same ones that Below licensing export/import showed the highest administrative burden from a quantitative 20% standpoint.

Difﬁ culty Moderate Complicated Very individual entrepreneurs (below 40%) (40% to 60%) complicated (above 60%)

Individual entrepreneurs face a business environment characterized by two critical administrative barriers: inspections and lack of access to ﬁ nance, which are both very pervasive and complex. Chart II. REGULATORY BARRIERS FOR SMALL AND MEDIUM COMPANIES

Secondary diffi culties include import/export, which is considered Moderate Problematic Critical extremely complicated, and partially explains the limited coverage participation of individual entrepreneurs in foreign trade. registration and taxation are placed next in order of priority, chiefl y Above taxation inspections 80% due to extensive coverage rather than to relative complexity. small and medium companies permits technical 20%-80% Access to fi nance regulation licensing Small and medium companies face the most complex business environment, with a total of 4 procedures which rate as critically diffi cult. Below registration export/import 20% In addition to access to fi nance and inspections, small and medium companies face additional barriers in obtaining permits Diffi culty Moderate Complicated Very and licenses. (below 40%) (40% to 60%) complicated (above 60%)

3 For those cases we used as an indicator of coverage the percentage of SMEs “willing to” instead of the ones accessing the procedure.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xiii EXECUTIVE SUMMARY

taxation and export/import, due to coverage in the fi rst case and complexity in the second, once again pose ‘secondary’ diffi culties Chart III. REGULATORY BARRIERS FOR DEHKAN FARMERS on a relative scale.

Moderate Problematic Critical dehkan farmers

coverage Although the agricultural sector in Tajikistan is characterized by many issues,4 from an administrative viewpoint, dehkan farmers inspections Above face a relatively simpler business environment than individual 80% taxation entrepreneurs and small and medium companies.

Two areas appear as the most critical: access to fi nance, given 20%-80% permits registration Access to fi nance an extremely limited supply of affordable agricultural lending, and registration, given lengthy land allocation procedures averaging licensing 5 months. Below export/import 20% technical inspections and taxation rank as complex, but not critical, regulation procedures for dekhan farmers. Diffi culty Moderate Complicated Very (below 40%) (40% to 60%) complicated (above 60%) overarchinG oBservations

Three clear tendencies emerge from the survey, based on the qualitative assessment of the different administrative procedures and on the analysis presented in the following chapters.

starting versus running a business

First, although starting a business in tajikistan is not easy, the really complex effort is to run it over time. Lack of access to fi nance is the single procedure perceived as critical for all types of businesses, and signifi cantly complicates business operations. Additional barriers are created through processes such as obtaining permits and licenses – typically barriers to entry, but coverage in Tajikistan is spread equally between start-ups and existing businesses. Further, survey results show that these procedures, performed by SMEs on an annual basis, are actually more diffi cult for existing businesses than for start-ups. An existing company is affected more signifi cantly by lack of renewal of a license or permit than a start-up, given that it has already incurred a relevant amount of unrecoverable costs in case its activity is stopped. This raises the stakes for unoffi cial payments in a situation where procedures are complex, not standardized and non-transparent, while issuance time is not stipulated. Indeed the time and cost of obtaining a license or a permit is higher for existing businesses than for start- ups. For example, to obtain necessary permits, 27% of start-up and 36% of existing small and medium companies used unoffi cial payments.

4 For a thorough description of agricultural issues, see FAO/EBRD (2006).

xiv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY making a company grow

Second, survey results show that the business environment gets progressively more difﬁ cult as a company grows. Survey results show that complex administrative procedures block business growth and development. Procedures including taxation, inspections, and access to fi nance serve as barriers to entrepreneurs wishing to expand their business, hire additional workers and pay more taxes, as their profi ts and revenues increase. In particular, the frequency of administrative procedures creates a “regulatory uncertainty” which naturally deters long-term investments. Typical examples of these procedures are the yearly renewals of licenses and permits.

Given a lack of incentives for growth, small and medium companies make up less than 6% of all businesses in the country. Although small and medium companies should represent the backbone of the SME sector, the annual growth rate of small and medium companies was half that of individual entrepreneurs in 2002-2005. Indeed, as a small and medium company is, on average, nearly twice as likely to invest in its operations, hires 7 times as many employees and pays 14 times more in taxes than an individual entrepreneur, the business environment should facilitate its development.

Dealing with ofﬁ cials

Third, survey data shows that unofﬁ cial methods for solving issues Chart IV. IN MOST CASES ENTREPRENEURS SOLVE ISSUES WITH remain common for all procedures. The report distinguishes ADMINISTRATIVE PROCEDURES UNOFFICIALLY between unoffi cial payments and ‘other’ broader informal % OF RESPONDENTS methods of thanking offi cials – such as gifts, meals, and other forms of non-cash payments. These relations undeniably distort Unoffi cially 75 each step of the regulatory process. Unoffi cial methods are used chiefl y to speed up document processing time and to reduce Offi cially 18 the scope of regulation. For example, given that entrepreneurs receive an average of one inspection per month, which is high No need 6 even for the CIS region, about 30% of those inspections lasted less No answer 1 than 30 minutes.

Interestingly, data from focus groups shows that entrepreneurs are used to the “convenience” of unoffi cial means for getting results, and are somewhat wary of the effect of new legislation or practices aimed at reducing the scope of corruption. This strengthens the assumption that unoffi cial solutions are also used as a substitute for offi cial sanctions. Indeed, an unoffi cial solution for lack of a fi re extinguisher, paid out once a year, is less costly for a business than purchasing the extinguisher.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xv EXECUTIVE SUMMARY

Unoffi cial payments, as well as other forms of corruption, are present in 75% of regulatory processes, according to entrepreneurs surveyed for this report. The experiences of other countries show that corruption can only be reduced through comprehensive public sector reforms which set explicit goals and specifi c targets for reducing corruption.

report summary

1. overview of the sme sector

1.1 From 2003 to 2006, the Tajik economy has enjoyed consistent growth and macroeconomic stability, which allowed it to partially recover from the effects of the collapse of the Soviet Union and resulting civil war. The SME sector benefi ted and contributed to this growth, with an increase in the number of active companies, growth in its contribution to GDP and share in overall employment.

1.2. Nevertheless, the sector is still characterized by some structural weaknesses: while its overall growth has been signifi cant, the backbone of the sector continues to be comprised of individual entrepreneurs, i.e., sole proprietors operating micro-businesses, and dehkan farmers, i.e., owners of small scale private farms. While these two categories of enterprises enjoyed sustained growth, small and medium companies are still limited in number and face a more diffi cult business environment.

1.3. Overall business confi dence remains good, although a few worrisome signals should not be underestimated: while most entrepreneurs expect the current economic situation to be sustainable, the share of respondents who say they would not restart their business, if given the choice again, has grown signifi cantly with respect to the previous survey. This number is particularly high among small and medium companies, which further emphasizes barriers to their ability to grow and be successful in the current business environment.

1.4 Investment in fi xed assets is declining: only one out of four entrepreneurs made investments in 2005. This is a sign of decreasing business confi dence and a result of the diffi culties Tajik SMEs face in getting access to funds. Most of the investments that did take place were funded by internal/informal sources rather than by the fi nancial sector.

2. starting a business: registration

2.1 Registering a new business in Tajikistan has become easier, particularly for small businesses. The registration procedure was reformed in 2003 and now individual entrepreneurs can register in

xvi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY less than a week, with limited costs. This result is particularly signifi cant, given that de-facto all individual entrepreneurs are required to register on annual basis (while this should be de-jure, needed only for entrepreneurs operating under the simplifi ed “patent-based” system).

2.2 Registration of legal entities5, on the other hand, has shown no improvement with respect to the previous report6: on average, the process takes over a month, is complex and time-consuming, and involves more than 5 government agencies. As a result, unoffi cial payments are a common solution and expenditure can be quite signifi cant.

2.3 Registration for dehkan farmers is in essence quite similar to that of individual entrepreneurs, but with an additional pre-registration procedure: allocation of the land plot for the farm. This crucial step is extremely time-consuming and results in a total registration procedure that lasts about 5 months. As the land allocation procedure is not fully defi ned by legislation, it lacks uniformity and transparency, and thus also opens the door to unoffi cial payments as a tool to speed up the process.

3. licensing

3.1 Following the new licensing law, obtaining a license has become easier. Fewer businesses are now required to obtain a license, while the costs have remained stable. In particular, licenses have been almost completely eliminated for dehkan farmers.

3.2 The duration of licenses remains a critical issue: although the legislation establishes a minimum duration of 3 years, de-facto the average duration of a license in Tajikistan is less than one year, increasing both the costs of running a business and rent-seeking opportunities for offi cials. Such short-term validity periods present a critical issue in terms of providing incentives for investment and long- term growth. Survey results show that the process of license renewal is even more complicated and more prone to corruption than initial issuance.

3.3 small and medium companies bear the largest chunk of the licensing burden: more than half of all small and medium companies are required to obtain a license, and spend about a month doing so. As a result, they incur the highest costs and, in every fourth case, pay unoffi cially to complete the procedure.

5 Small and medium companies. 6 IFC (2004b).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xvii EXECUTIVE SUMMARY

4. permits

4.1 more than half of smes need to obtain permits prior to launching business activities. The permit system in Tajikistan is the result of two complementary forces: Soviet-era technical regulations, which provide the basis for the majority of permits, and new, market- oriented regulations that have led to somewhat chaotically added permits over the course of the past 15 years. The overall system has never gone through a proper rationalization, and as such represents a heavy and sometimes unnecessary burden for SMEs.

4.2 As to permit coverage, the opportunity cost of such a large number of permits (on average more than 3 per year per business) is questionable, in particular for businesses that have already been licensed. In addition, some permits also contradict the requirements of a market economy (i.e., permit to use energy).

4.3 At the same time, the permit issuance process is not properly regulated. The necessary paperwork, costs and the time it takes to issue a permit all show signifi cant variance throughout different regions. In addition, unclear process requirements once again present an environment conducive to rent-seeking.

4.4 As mentioned in the case of licenses, duration is a critical issue. Survey data shows that existing businesses need to receive permits almost as frequently as do start-ups. Not only are existing businesses required to re-apply for permits, but time and processing costs are higher in cases of renewal. The most likely explanation for these differences is recourse to unoffi cial payments.

4.5 small and medium companies appear to be most affected by permits: coverage, costs and time needed to comply with permit regulations are signifi cantly higher than for other SMEs and create a burden both for start-ups and existing businesses.

5. Access to ﬁ nance

5.1 Tajikistan’s ﬁ nancial sector is still in a development stage, both on the lending as well as on the deposit side. The number of intermediaries is signifi cant, but the sector is highly concentrated and mainly dominated by local players.

5.2 The relationship between fi nancial intermediaries and SMEs is still extremely limited: only one out of six businesses has a bank account, which does not necessarily imply a full-fl edged banking relationship. Not only do individual entrepreneurs and dehkan farmers typically lack bank accounts, but small and medium companies often do not have bank accounts either. SMEs do not perceive banks as service providers: most interviewed entrepreneurs do not feel the need for

xviii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY banking services. This partly refl ects the limited trust in the fi nancial sector, but also points to a lack of effort on the supply side to develop products and services to attract new customers.

5.3 Shallow relationships between banks and SMEs, in conjunction with the diffi culty banks have attracting fi nancing at competitive rates, implicitly limit the size of the lending market. In fact, as a result of the limited number of customers, banks do not possess the necessary information to evaluate the creditworthiness of their clients, while interest rates make bank lending extremely expensive. As a result, almost 75% of SMEs in need of external funding do not apply for loans.

5.4 Despite this, the lending process is quite efﬁ cient (lasting about 16 days) and acceptance rates of applicants are quite high (87%). This is a signifi cant change with respect to 2002, testifying to changes in the way that banks operate, but is also partly a result of a self-selection process among the applicants themselves. The majority of potential applicants self-assess their likelihood of obtaining a loan, and if they feel they do not meet the requirements, do not apply.

5.5 lending conditions, including rates (on average between 35- 40%, given an average infl ation rate of below 10%), loan duration (less than 1 year) and collateral requirements (on average 70% of the principal amount), combine to hinder the development of an effi cient lending market.

5.6 Although the presence of a well developed microﬁ nance sector partially addresses the needs of smaller sized borrowers, the overall situation is particularly critical for small and medium companies, which, in order to fi nance growth, require a well-functioning fi nancial sector to support them in the medium-to-long term by providing funds at reasonable rates.

6. inspections

6.1 Once established, a Tajik business is likely to face government representatives in the form of inspections at least once a month. In 2005, inspections remained a pervasive phenomenon: although the average number of inspections declined with respect to 2002 (from 16 to 13), nearly all SMEs continue to receive at least one inspection per month.

6.2 Only 1 in 5 inspections results in an ofﬁ cial sanction. On the one hand this testifi es to limited use of risk management principles in selecting inspection targets, highlighting ineffi ciency. On the other hand, this points to a high likelihood of unoffi cial payments to resolve inspections-related issues.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xix EXECUTIVE SUMMARY

6.3 The limited effectiveness of the inspections system is also refl ected in the short duration of site visits: individual entrepreneurs in particular report that about one-third of them last less than 30 minutes.

6.4 The overall impact of inspections is considerable. Direct and indirect costs of inspections can be estimated in the range of 7-8% of annual proﬁ ts for individual entrepreneurs and small and medium companies. For dekhan farmers, however, the situation is better, as their total burden is just over 1% of annual profi ts.

6.5 The situation is likely to improve with full implementation of the new inspections law. The introduction of compliance-enhancing mechanisms and the clear defi nition of rights and responsibilities of entrepreneurs as well as of inspectors, should introduce transparency into the inspections process, improve compliance with regulations, and reduce the cost of doing business.

6.6 Inspection reform per se is nevertheless not suffi cient to solve all of the issues. Broader public sector reform is required to revise the structure of the public sector, including a revision of offi cials’ salaries combined with downsizing, review of the criteria for hiring public employees, and introduction of performance management systems.

7. taxation

7.1 SME taxation, although not particularly heavy in terms of tax rates, represents a serious obstacle for the sector’s development in terms of compliance costs, imposing on businesses due to complicated tax administration procedures.

7.2 The simplifi ed taxation systems, foreseen by the legislation for all typologies of SMEs, present serious drawbacks, which need to be addressed: • The patent system for individual entrepreneurs does not reduce administrative burden and eliminate unnecessary inspections; • The simpliﬁ ed system for legal entities is not a drastic simplifi cation of the reporting requirements from the standard system, and imposes a very similar taxation burden; • The uniﬁ ed tax for dehkan farmers does not allow businesses to reduce their tax burden in case of negative or limited results;

7.3 tax administration is cumbersome, requiring multiple reports and payments over the year. Taking into account the low level of tax and accounting literacy of most SMEs, the burden is particularly heavy. In addition, tax offi cials do not provide entrepreneurs with customer oriented support on tax issues, but rather make use of the frequent interactions with SMEs for rent seeking behavior.

xx Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

7.4 Tax compliance is mostly pursued through repeated tax audits. This is ineffi cient from the tax administration viewpoint, as it is mostly focused on small size companies rather than “big tickets,” and corruption prone, leaving a high degree of discretion to the tax inspectors.

8. foreign trade and technical regulation

8.1 Trade is an essential component of the Tajik economy. Due to its size and level of economic development, Tajikistan relies on import to provide the economy with essential goods. export needs to complement imports in order to avoid macro-economic imbalances.

8.2 Complicated foreign trade procedures as well as high transportation costs represent two critical constraints for import/ export activities, resulting in lower competitiveness of exports as well as in price increases for imports.

8.3 As a result, sme participation in trade, already limited, is declining further. SMEs are almost excluded from exports (down to 0.4% versus 4% of 2002). Their contribution to import is somewhat higher, although declining signifi cantly (from 19% in 2002 to 11% in 2005).

8.4 Standardization and certiﬁ cation requirements represent a major barrier to trade for the Tajik economy. Goods imported into Tajikistan need to be tested against and meet separate local quality requirements, as set by TajikStandart (unless certifi ed by CIS countries). Export products meanwhile lack internationally recognized certifi cates required for introduction into key markets.

8.5 Certiﬁ cation procedures are widespread among individual entrepreneurs as well as small and medium companies (with 20% and 36% of respondents subject to the procedures, respectively). Overall coverage is signifi cant, especially given the sectors of the economy affected (to a large extent trade and public catering).

8.6 Cost and time of certiﬁ cation procedures are quite burdensome, while their duration should refl ect more closely the nature of the goods involved (e.g., permanent certifi cates for non-perishable goods). structure of the survey report

The chapters analyze the following administrative procedures in detail: registration: the establishment of a business in legal terms. Analysis of the registration procedure includes all requirements to engage in a business activity, formally recognized by the state.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxi EXECUTIVE SUMMARY

licensing: certain types of businesses cannot be started directly after registration, but require a license from the government, i.e., an authorization to carry out a particular type of business activity.

permits: a government authorization for a specifi c activity in a particular location (i.e., fi re permit to use a building for trade purposes). In this permits differ from licenses, which typically cover an activity repeated over time by the bearer, without particular regard to premises (practicing medicine, selling insurance).

Access to ﬁ nance: the relationship between SMEs and fi nancial institutions is crucial for start-up and growth of companies, and, consequently, for the development of the private sector.

inspections: when properly implemented, inspections represent a useful tool for regulating private sector compliance with standardized rules and procedures, to ensure the health and safety of company employees, the public, and the environment. Among other objectives, inspections aim to create a level playing fi eld for competition, and ensure fair business practices. An inspections system has to balance the need for oversight with the burden placed on businesses on the one hand, and effi cient use of public resources on the other.

taxation: the overall tax burden is a critical issue for SMEs. In addition to tax rates, the cost of compliance with the tax regulations is equally important. The effi ciency of tax administration and simplicity and transparency of tax rules are the key drivers used to limit the administrative burden and to ensure compliance.

foreign trade and technical regulation: international trade is critical for a small country with limited resources like Tajikistan. This report analyzes import-export procedures together with a related issue: standards and the certifi cation process, i.e., the process of compliance of products and services with specifi c quality requirements.

The end of each chapter presents recommendations for improvement, based on international practices to date. IFC, with SECO support, has been implementing a business enabling environment improvement project in Tajikistan since 2002. This project will continue to work together with the Government of Tajikistan as well as with other key stakeholders, including NGOs, international and donor organizations in order to provide assistance in elaboration and implementation of part of the recommendations found in this report.

xxii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

registration issue recommendations expected impact long duration of • Introduce time limits for registration, which could apply to • Time limits for registration introduce a re- registration pro- single bodies as well as to the overall process. This could be sponsibility principle for public bodies, which cedures of legal achieved by: should increase effi ciency by: entities due to - imposing a fi xed consideration time for each step of the - Reduced registration time; high number of registration process by law, for example such as 1 working - Reduced unoffi cial payments. bodies involved day wherever a simple approval is needed (i.e. to obtain • Fewer steps are expected to reduce barrier and wide scope Statistical Code), and 5 working days where a thorough to entry for new companies. of intervention analysis is needed (i.e. State Registration); • Less intervention from state bodies would of each body - requiring the public bodies to substantiate delays, as well reduce the time and cost of registration for as to provide a detailed explanation for refusal of applica- legal entities. tions in order to allow the applicant to improve upon it; - introducing a maximum registration time, differentiated per typology of companies, in case a “one-stop-shop” principle were to be introduced. • Reduce the number of steps needed to register a legal entity. This could be achieved by: - ensuring the implementation of the current legislation foreseeing an ex change of records between registering bodies which would allow the companies to obtain a Statistical Code and a Tax payer’s Identifi cation Number without the need to further apply to each of the bodies; - considering the possibility to consolidate the different identifi cation codes legal entities need to obtain (State Regis- tration Number, Statistical Code and a Tax payer’s Identifi - cation Number); • Introducing a full fl edged “one-stop-shop” mechanism including all the State bodies involved in legal entities registration. The registering entity could fi ll in a single application and provide at once all the necessary documents, which would be processed internally by the involved bodies; • Limit the breadth of arbitrary authority of each body in the decision making process, in particular by the bodies of justice, foreseeing simplifi ed consideration process and specifying a limited set of cases of registration refusal (e.g., incomplete documentation, unlawful activity). unclear cost Introduce offi cial processing costs for each step of registration Introducing and communicating to the pub- of registration by the different bodies. These costs, differentiated for each ty- lic the offi cial costs related to each stage of procedures pology of business, should be offi cially disclosed in the public the registration would increase transparency information boards by each government body. of the process, decreasing unoffi cial solutions, and in turn reducing overall registration costs. non-transpar- Introduce a transparent mechanism for land allocation for de- Simplifi ed and transparent land allocation ent and time hkan farms, which at the very least includes: mechanism would make registering dehkan consuming pro- • Uniform set of application documents; farms easier, reducing cost and time spent. cedure of land • Fixed terms for decision making by the different bodies in- plot allocation volved; for dehkan • Clear application fees. farmers annual reg- Implement a life-time registration for individual entrepreneurs By waiving a duration limit for certifi cates, in- istration for operating under certifi cates, which would reduce a recurrent dividual entrepreneurs opting for this type of individual cost for doing business. As the legislation does not foresee ex- registration would immediately benefi t in terms entrepreneurs piration for certifi cates, this result could be simply achieved by of avoiding a recurrent burden, reducing time working under monitoring that the Tax Bodies do not include an expiration date and cost of re-registration. certiﬁ cate in the certifi cate which they issue.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxiii EXECUTIVE SUMMARY

licensing issue recommendations expected impact short dura- Extend the duration of licenses and introduce permanent By extending the validity period of licenses, tion of issued licenses. This can be achieved by: the government will further reduce the market licenses as • Introducing by law a minimum 5-year validity entry barrier, which in turn would increase the disincentive period for all licenses (as in most countries); number of active companies and the size of to long-term • Identifying licenses that can be issued once, long-term investments. Additionally, it would investments i.e., permanent licenses that are revoked only if reduce the immediate costs of doing busi- infringements are identifi ed; ness, as well as time spent dealing with license • Enforce provisions of the law on duration of is- renewals. This time could be translated into sued licenses to avoid the current discrepancy greater profi ts, more taxes paid, and more in- between legal terms and practical ones. vestments. High ﬁ nancial Introduce the possibility, in particular for individual entrepre- • Payments by instalments would reduce the burden of neurs, to obtain long term licenses while at the same time pay- immediate burden for individuals lacking licensing proc- ing in yearly instalments. This would secure their rights for a longer access to funding, resulting in easier entry for ess, especially timeframe and reduce the fi nancial burden, particularly heavy start-up businesses, leading to more compa- for smaller for cash-constrained individuals. nies active in the economy generating prof- scale busi- its and state tax revenues; nesses. • For the state budget: it would secure a more stable revenue fl ow over time, while reducing the time needed to process new applications. long period Reduce the duration of the license issuing process by enforcing The implemented measures would reduce the of application the existing 30-day limit and introducing transparency into the time spent by entrepreneurs dealing with the consideration decision process. This can be achieved by: procedure, leading to higher profi ts and high- increasing the • Introducing a “silence is consent” principle for all licensing er state tax revenues. A more transparent de- cost for busi- agencies, which would automatically grant a license in case cision-making process is expected to reduce nesses and no explicit refusal decision is made within a 30 day period; unoffi cial payments. unofﬁ cial solu- • Requiring licensing bodies to substantiate their refusal or delay tions of the application; • Introducing a monitoring system that allows ex-post verifi cation of the average length of the licensing process; • Introducing a simplifi ed process (with shorter timeframe, e.g., 15 days) for renewals and repeated applications after a refusal. unclear ra- Evaluate the need for a further reduction in licensed activities to Reduced number of activities subject to licens- tionale behind include only those activities which: ing will reduce expenses for entrepreneurs some licenses • Require strict governmental oversight to protect the health dealing with the procedure. Additionally, fur- and safety of citizens; ther entry into relevant sectors would have a • Deal with the allocation of scarce resources or with natural positive effect on private sector profi ts and tax monopolies; revenues. • Do not foresee specifi c permit requirements. unclear scope Reduce the scope for licensing suspension. In particular by: Reducing the scope for license suspension for license • Clearly defi ning for each licensing bodies a “closed list” of situ- would secure entrepreneurs’ rights. As a re- suspension al- ations in which a license should be suspended; sult, entry costs would be reduced, leading to lowing broader • Evaluating the option to subject license suspension to court more active companies being active in the interpretation or approval. economy. Additionally, unoffi cial payments leading to rent- to licensing bodies would be reduced. seeking

xxiv Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

permits issue recommendations expected impact widespread Reduce permits coverage. This in turn can be achieved by: Reduced coverage of permits will decrease coverage of • Reviewing the number of permits currently issued in order to the entry cost for new businesses and cost of permits rationalize the existing legal basis according to the risk man- doing business for existing ones, with possible agement principles. The necessary steps in this process are: impact on the number of active companies - cancellation of outdated and anti-market permits; and positive contribution to the budget. - consolidation/elimination of redundant permits, i.e., overlapping permits issued by different levels of the same agency, or by different agencies; - elimination of permits covering areas already regulated by licensing; - elimination of permits for areas already covered by other administrative procedures (i.e., compulsory or voluntary certifi cation). • Identifying by law the agencies allowed to issue permits. long applica- Streamline the application process. This can be achieved by: • Clear procedures would reduce the overall tion review • Introducing the “silence-is-consent” principle. Once an appli- burden of entrepreneurs in terms of time and process, cant for a permit submits the required paperwork, the failure money; leading to of an issuing agency to respond with a decision within a given • Transfer of responsibility from applicant to rent-seeking timeframe counts as an application approval; offi cial would force the latter to examine opportunities • Introducing an administrative principle of application review documents in a timely manner, reducing the process, which limits the range of state intervention and clear- overall time of consideration; ly defi nes the required steps in case of refusal; • Clearly substantiated cases of refusal would • Specifying a uniform permits application procedure. improve the overall process and reduce entrepreneurs’ dependence on unfair decisions of offi cials. cumbersome Reduce the burden of permit renewals. This can be achieved Simplifi ed and less frequent renewal proce- and frequent by: dure would reduce the cost of doing business, permits renewal • Extending the validity period of issued permits, thus reducing while at the same time streamline the work of procedure for the need for repetitive renewals; public bodies. existing busi- • Designing a dedicated process with limited steps in case of no nesses changes in business activity. certain ac- Introduce the “one-stop-shop” principle of issuance of some The possibility to apply at a “one-stop-shop” tivities requiring permits (e.g. building permits), which will help to decrease the would reduce the overall burden for entrepre- multiple permits length of the process and increase the effectiveness of the pro- neurs in terms of time and cost spent and have from differ- cedure, both for entrepreneurs and for the state agencies. In a positive impact on transparency and reduc- ent agencies, particular, it would be advisable to adopt the one-stop-proce- tion of unoffi cial solutions between entrepre- resulting in dure for sectors requiring multiple permits. neurs and offi cials. delay of start of activity low legal Launch an information campaign to increase the legal aware- Introduction of standard rules and require- awareness ness of entrepreneurs and government offi cials, including semi- ments will bring clarity and will regulate the among entre- nars, publications and distribution of explanatory materials. procedure of obtaining permits, improve ac- preneurs and cessibility to information, decrease the oppor- government tunities for unoffi cial payments and increase ofﬁ cials the legal protection of entrepreneurs.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxv EXECUTIVE SUMMARY

Entrepreneurs and ﬁ nance issue recommendations expected impact Banks’ limited Provide incentive systems for banks to reduce credit rationing to By reducing the credit risk faced by fi nancial information to SMEs, by reducing their credit risk. This in turn can be achieved: institutions, three results are expected, which assess the • From the government side by: would reduce credit rationing and make clients’ risks - Implementing and developing improved pledge legislation fi nancial resources more easily available to constraining the measures and collateral enforcement regimes through: SMEs: lending market • introducing alternative dispute resolution mechanisms; • Increased amount of lending available and resulting • unifi ed verifi cation of collateral contracts in notary to SMEs (i.e., for the same credit risk, more in higher rates, offi ces to speed up and facilitate the lending process; lending available); high collateral • introducing the possibility of using land user certifi cates • Reduced interest rates, as a result of higher requirements, as collateral for loans. level of guarantees; or short-term - Establishing a national credit registry which would provide • Reduced collateral requirements, as a result lending banks with additional borrower information, facilitating of higher level of guarantees. bank verifi cation of credit requirements and credit history of borrowers. • From the banking side by: - Enhancing internal credit risk analysis capabilities by training credit offi cials and introducing advanced credit analysis methodologies (e.g., credit rating tools); - Promoting alternative fi nancing mechanisms which imply reduced credit risk such as leasing; • From the private sector side by: - Introducing credit insurance provided by business associations (i.e. the Italian CONFIDI), that, in exchange for a fee, could ensure part (up to 50%) of the principal amount provided to a specifi c SME. limited trust of Put in place policies to increase the confi dence of the general Increased confi dence in the fi nancial sector population into public in the Tajikistan fi nancial sector. This could be achieved: will foster its development in several ways, banking system • From the government side by: among which, by: of the country - Increasing the awareness of the population of the Fund for • Channeling fi nancial resources to the Deposit Insurance, and strenghten its role for low/middle fi nancial sector, i.e., increasing the share income households by introducing an upper limit to the of deposits, allowing for an increased coverage while increasing the threshold for full coverage; intermediary role between individuals and - Amending the banking legislation to introduce bank the SME sector; secrecy disclosure only on the basis of a court decision; • Narrowing the confi dence gap between • From the commercial banking side by: SMEs and banks, allowing them to revert - Improving their internal controlling and auditing processes more frequently to banks in case of need. to eliminate unoffi cial payments from their branches; - Increasing accountability by introducing the principles of bank corporate governance and, over time require international rating companies to provide independent evaluation of their fi nancial stability; - Promoting the creation of an Inter-banking Association to develop common standards and promote banking interests on different levels as well as promoting banking activities among the population. lack of practi- Support the development of banking services by creating a Allowing banks to develop closer relationships cal beneﬁ ts “need for banks”: with SMEs, which will in turn reduce the infor- for the popu- • From the government/NBT side by: mation asymmetry which creates a limit to the lation from - stimulating the use of “cashless” payment systems (e.g. by lending market. This in its turn would channel using banking introducing the possibility to direct debit charge bank ac- excess cash into the fi nancial system, reducing services counts for the payment of local utilities); the funding constraints for banks. - conducting an awareness campaign addressed to communicate the benefi ts of using banks for the general public; - reducing the 12% withholding tax on deposit interests to attract more deposits from individuals. This measure could be applied to deposits denominated in somoni only to provide incentives to invest in local currency. • From the commercial banking side by: - developing and disseminating informational materials on available banking products, including deposits, credit cards, payment systems and fi nancing (including guidelines on loan application procedures as well as samples of relevant forms and applications);

xxvi Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

inspections issue recommendations expected impact low awareness Disseminate among the wide public the provisions of the Inspec- Higher level of awareness of the Inspections of the entre- tions Law and in particular the detailed inspection process as Law and a standardized and transparent in- preneurs about envisaged by the new law. This in turn can be achieved by: spection process will empower entrepreneurs’ introduced • Developing information campaigns via media addressed to vis-à-vis inspectors by providing them with legislative a wide audience; some direct tools to reduce the burden of in- norms regulat- • Targeting specifi c audiences, i.e., business associations, busi- spections and at the same time warrant com- ing the process ness incubators, NGOs with specifi c training programs aimed pliance. of inspections, at raising their knowledge and making them able to support in particular the SMEs; newly introduced law on inspections low compli- Provide entrepreneurs with clear, up-to-date and easily avail- The elaboration of checklists at the agency ance of entre- able regulations/ instructions. This in turn can be achieved by level, based on up-to-date regulations, and preneurs with implementing the provisions of the Inspections Law: their dissemination, should increase aware- regulations to • Developing sector-specifi c checklists at each inspectorate ness and bring transparency to the inspection a great extent level, which incorporate all technical regulations; process. due to the lack • Making checklists and regulations available to entrepreneurs of available in advance in large-scale information campaigns and before information for inspections, so that entrepreneurs can be better prepared; entrepreneurs • Reviewing the regulations underlying inspections to align them with international best practices as well as with the Tajikistan institutional context; widespread Implement a risk-based system for selecting inspections targets. The defi nition of risk categories should drasti- coverage due Risk criteria need to be defi ned for each inspections agency in cally reduce the coverage of inspections and to the ab- accordance with specifi c risk parameters of the activities the change their very nature. Indeed, inspections sence of risk agency controls. This in turn can be achieved by: should not represent the norm, but rather, an management • Implementing the provisions of the Inspections Law requiring exception, unless specifi c reasons exist. A busi- approach dur- differentiation of inspected entities based on their potential ness should be inspected more frequently only ing planning, risks, and in particular the high risk category requiring higher if it belongs to a high risk category or if com- conducting and frequency inspections; pany-specifi c conditions exist. assessment of • Defi ning the risk-management principles within each category inspections of business (individual entrepreneurs, small and medium companies, and dehkan farmers), which would allow identifi cation of businesses with higher likelihood of infringements – i.e., selection based on past infringement records, random selection mechanisms. poor profes- Revise the organizational structure, the professional qualifi ca- An improved organization of the key inspec- sional organi- tions, the incentive systems and the salary scale of inspector- torates should complement the introduction zation of the ates. This in turn can be achieved by: of risk-based principles of inspections. A lower inspectorates, • Rationalizing the number of inspectors to be allocated to number of highly skilled, professionally trained low qualiﬁ ca- each agency and their geographical distribution, according and better rewarded inspectors should war- tion of inspec- to the number of entities to be inspected and the risk associ- rant improved outcomes of inspections, de- tors, insufﬁ cient ated to the inspected entities; spite the reduction in the number of inspec- remuneration • Submitting inspectors to regular training programs and profes- tions and reduction in unoffi cial payments, as sional tests to ensure professional skills and improve the effi - a result of an incentive system linking salaries ciency of the inspections process; with performances. • Reviewing the salaries of inspectors and introducing incentive systems linking salaries to performance

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxvii EXECUTIVE SUMMARY

taxation issue recommendations expected impact complex Further simplify the taxation system for individual entrepreneurs By consolidating all taxes to be paid by indi- requirements working under patents, by introducing a comprehensive lump- vidual entrepreneurs into a patent, the ben- for social and sum system: efi ts would be two-fold: retail trade • Consolidating into the patent costs both the retail tax and so- • On entrepreneurs’ side, would eliminate the tax payments cial tax payments; costs of unneeded inspections and unoffi - for individual • Revising the patent payments on a regular basis by consulta- cial payments. entrepreneurs tions with others stakeholders, for example within a framework • On the government side, it would drastically undermining of an annual workshop. reduce the number of inspectors. In addi- the simplicity of tion, lump sum patent payments would fa- patent system cilitate forecasting tax revenues. unclear and Introduce systematic and simplifi ed tax accounting for: The introduced measures will increase the at- non-transparent • Individual entrepreneurs working under certifi cate; tractiveness of these systems, increasing the tax accounting • Small and medium companies taxable under simplifi ed sys- number of tax payers and consequently infor: tem. crease tax revenues of the state budget. • individual This could be achieved by: entrepreneurs • Introducing unifi ed tax accounting and reporting, which under certiﬁ - would allow submission of one single tax return; cate • Book-keeping for purposes of taxation based on simplifi ed uni- • small and fi ed Book of Revenues; medium • Clearly defi ning the tax accounting procedures in Tax Code. companies no clear Strengthen the advantages of the simplifi ed taxation for legal Further strengthening the advantages of simpli- advantages entities, by either streamlining tax administration procedures fi ed taxation would lead to small and medium of simpliﬁ ed (e.g., quarterly payments and unifi ed reporting for all taxes) or companies choosing this system. Increased taxation system consider reducing the tax rate. Indeed, as it is now, the simplifi ed share of enterprises working under simplifi ed for small and tax is neither really simple, nor economically convenient. system would reduce the overall tax adminis- medium com- tration for tax bodies, resulting in a decrease panies of administrative costs. some of the Consider the possibility to eliminate taxes which represent an ob- Abolishing these kinds of taxes would create taxes hinder- stacle to business growth. A typical example of these taxes is the additional incentives for companies to invest ing the growth newly reformed road users’ tax, which is calculated based on in business development and reduce the drive and investment costs, implicitly representing a disincentive for companies which towards “shadowing” of revenues and ex- opportunities of invest and generate long-term growth. penses. companies taxation of Further improve the taxation regime for dehkan farmers by in- Introduction of this measure would reduce the dehkan farm- troducing the option to reduce the tax burden for smaller sized tax and debt burden of the dehkan farms. ers not taking farms in cases of low profi tability, which should be proved by Elimination of unnecessary pressure would mo- into account the farmer and subject to a tax audit. The decision to reduce tivate farmers to improve their performance. achieved pro- the tax burden should be made by a special commission of rep- ductivity resentatives from tax authorities, local governments, and local self-governments, in order to prevent unfair decision-making and corruption. high rate of Evaluate the opportunity to reduce social tax payments which Reduced social tax rate would reduce the la- social tax represent a disincentive to hire employees and push labor into bor cost and increase the level of employment the shadow market. by creating additional jobs. complex tax Streamline the tax administration. This can be achieved by: Effective tax administration system would re- administration, • Simplifying tax payments by consolidating them (providing the duce the corruption level, free government especially for option to pay more frequently on voluntary basis) and wher- resources from unnecessary tax procedures legal entities ever possible reduce the number of tax forms; and redirect them more effi ciently. In addition under standard • Simplifying the taxation forms, reducing the number of pages it would reduce the costs for businesses due to taxation system and redundant information; consolidated number of necessary payments • Introducing risk based principles in planning and conducting and cost and time of interaction with tax bod- inspections, focusing the verifi cations on the businesses where ies. higher returns are expected; • Reducing the scope for tax inspections and clearly limit the arbitrary powers of tax inspectors.

xxviii Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 EXECUTIVE SUMMARY

illegal pay- Abolish the practice of charging additional payments not fore- Abolishing illegal payments would increase ments from seen by the legislation. This can be achieved by: the profi tability of entrepreneurs, resulting in businesses • Providing an opportunity to report illegal payments issues to increased tax revenues for the state. It would charged by higher authorities; also reduce corruption, resulting in an im- local govern- • Declaring “land improvement payments” illegal and sanc- proved business environment. ments (“land tioning offi cials that require them. improvement payments”) limited ac- Provide tax consultation within business associations to allow Access to tax and accounting consultations counting access to tax consultations for member-businesses. would facilitate tax fi ling and accounting of literacy smaller scaled businesses. smes limited Increase the legal awareness of entrepreneurs through state The benefi ts of increasing entrepreneurs’ le- awareness of and non-governmental structures to improve entrepreneurs’ gal awareness would be reduction of unof- tax regulations access to information on taxation. fi cial payments and of time required to deal with tax payment and inspections procedures, positively affecting entrepreneurs’ profi ts and state tax revenues.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 xxix EXECUTIVE SUMMARY

foreign trade and technical regulation issue recommendations expected impact complicated Simplify the export trade procedure by: Simplifi ed procedures would increase the procedures • Eliminating 100% advance payment requirement for export; number of SMEs involved in foreign operations hindering • Reducing the number state bodies involved in processing of contributing to additional income generation involvement of documents to avoid unnecessary duplication. For instance: of national economy and increase in foreign smes in export - National Bank of Tajikistan confi rms the presence of the trade turnover. operations necessary documents for export, even though the procedure has already been completed by the seller’s bank; - custom procedures are repeated by directorate for custom supervision and regional customs offi ce. • Eliminating mandatory requirements for certain categories of export goods at Tajik Universal Commodity Exchange (TUCE). At very least, enforce that products not on the list in government resolution should not be subject to TUCE review. complicated Facilitate processing of imported goods by: Introduced measures would increase the trans- procedures • Creating Valuation Dispute Resolution Administrative Tribunal parency of the import procedures and reduce hindering to handle disputes on valuation methods during import; the time and cost burden for businesses. involvement of • Introducing acceptance of faxed import documents (e.g., smes in import letters of credit) in accordance with international practices. operations complicated Facilitate transportation of goods. This could be achieved by: Improved transportation would reduce the transporta- • Improving the domestic transport and customs regulations to- overall expenses of trade operations. tion regula- wards more transparency and simplifi cation; tions hindering • Continuing dialogue with neighboring countries to simplify the growth of and to increase the transit volumes of the goods. foreign trade operations low awareness Develop and disseminate by customs services a binding sum- Availability of uniform requirements for foreign of the entre- mary descriptions on export/import procedures, necessary doc- trade procedures reduce the overall burden preneurs about uments to be submitted, costs, and timeframe for each step. for entrepreneurs in terms of time and cost major trade spent. procedures due to the lack of uniform information widespread Apply the risk-based approach by determining which goods Reduction of the coverage of certifi cation certiﬁ cation and services need to be certifi ed to exclude non-risky catego- would result in additional cost savings for en- of goods and ries from mandatory certifi cation as well as by abolishing the trepreneurs. services being mandatory certifi cation requirement for services. burdensome for smes outdated tech- Update the standard system by: Possibility for entrepreneurs to market their nical standard • Reviewing the list of standards and abolish the ones not nec- products in the conformity with international system with lim- essary on the grounds of health and safety in a market econ- standards. At the same time “maintenance ited integration omy; cost” for the bodies responsible for elaboration with worldwide • Considering the possibility to adopt international standards to of standards will be reduced. standards avoid “maintenance cost” of the system. Burdensome Reduce the need for double certifi cation of import/export by: On the one hand, avoidance of double certifi - system of man- • Accepting the certifi cates of conformity from EU countries, cation during import would reduce the overall datory certiﬁ ca- U.S.A., Japan to avoid double certifi cation of imported burden for importers. On the other hand pos- tion hindering goods; sibility to certify Tajik commodities with inter- the develop- • Creating internationally required laboratory facilities to cer- nationally accepted standards would allow ment of foreign tify Tajik commodities according to internationally adopted Tajik exporters easier access to international trade standards to facilitate their export. markets. unequal posi- Accelerate WTO accession of Tajikistan by bringing the legisla- WTO accession would have a positive impact tion of tajik tion in line with requirements and institutionalization of business on the development of foreign trade in the exporters in participation in WTO accession process. country. foreign trade

xxx Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 1. SME in Tajikistan: Overview of the sector, main trends and business expectations SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1. sme in tajikistan: overview of the sector, main trends and Business expectations

Economy of Tajikistan has seen stable growth in the last three main findinGs years, with an expanding SME sector that has contributed to a higher GDP and overall employment rates in the country.

• The SME sector constituted 33% of employment in 2005 and contributed to the over- This development, however, conceals a multi-faceted situation. whelming majority of the private sector. Individual entrepreneurs and dehkan farmers still represent the majority of the SME sector, both in terms of number of enterprises

• The SME sector is developing unevenly. and employment. As the least structured typologies of business- While the number of individual entrepre- es, their rapid growth refl ects an underlying weakness of the SME neurs and dehkan farms are growing rap- sector: while the number of individual entrepreneurs and dehkan idly, small and medium companies are still farmers increased signifi cantly in 2005, their turnover slowed in very few and expanding at a moderate comparison to the previous year both in nominal and real terms. pace. In contrast, small and medium companies (i.e., legal entities) grew more slowly in number, showing the diffi culties that entrepreneurs

• 27% of SMEs made investments - mostly face in expanding and become more structured in the Tajik con- from internal funds. text. Nevertheless, existing companies experienced more stable growth and were able to sustain their turnover level in real terms,

• Only 19% of entrepreneurs profess having a showing a higher resilience to the economic environment than good knowledge of the legislation regulat- their smaller counterparts. ing their activities. Investments into fi xed assets have further decreased with respect

• Very few entrepreneurs settle fi nancial to 2002: only about one in every four SMEs invested, mostly fi nanced confl icts through court. Those who de- by internal/family funds. Low level of investments could be in part cided to use the courts (less than 1%) had explained by lack of funding (see chapter “Entrepreneurs and Fi- a 50% chance of succeeding, but every nance”), but is also a signal of low business confi dence. In fact, third plaintiff used unoffi cial payments to IFC survey of the business environment and business confi dence achieve that result. has revealed that while entrepreneurs remain confi dent that the business environment in Tajikistan will improve, a growing share,

• Entrepreneurs have positive expectations seen in particular among small and medium companies, would about the business environment within the be reluctant to restart their businesses given the existing climate. next 12 months – 70% of them think that it will improve. A low legal awareness among businesses and limited use of the court system for economic disputes remain key obstacles to in-

• Almost one in every four respondents would creased growth in the sector. Although the government has made not restart his or her activity in the current substantial steps toward improving legislation regulating the SME business climate. sector, the effectiveness of these reforms is limited by the lack of awareness of most SMEs of these reforms. As a result, SMEs cannot make the best use of the improvements in the legislation or protect their rights adequately in case of confl icts. In addition, entrepreneurs are still reluctant to make use of courts when disputes arise due to a non-transparent and time-consuming legal process; in most cases, issues are solved unoffi cially. These constraints need to be addressed quickly for the policy reforms to have their full intended effect.

2 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1.1 the sme sector within the tajik economy BOX 1.1. GOVERNMENT DEVELOPS REFORM 1.1.1 MACROECONOMIC OVERVIEW PROCESS 1

The GDP of Tajikistan has seen stable growth from 2002-2005 (av- In 2005, the President of Tajikistan initiated the erage annualized growth rate of 9.2% in real terms), reaching long-term, 10-year National Development 7.2 billion somoni ($2.3 billion) at the end of this period. Control Strategy of the Republic of Tajikistan (NDS) to of infl ation (from 14.5% in 2002 to 7.1% in 2005) and a stable ex- improve living standards in the country. Based change rate both contributed to Tajikistan’s overall macroeco- on the NDS, the government developed a mid- nomic stability,1 which in turn supported the steady growth. The term Poverty Reduction Strategy of the Republic main factors driving this growth were the recovery of the industrial of Tajikistan for 2007-2009 (PRS). production sector,2 development of the service sector,3 favorable prices for major exports (cotton and aluminum), and a substan- High unemployment rates, the limited size of the tial increase of remittances from migrant workers (the majority of domestic market and lack of foreign investment whom go to Russia).4 Nevertheless, the growing dependency of in the country increase the role that individual, the Tajik economy from remittances makes it vulnerable to politi- micro and small business entrepreneurs play in cal trends in the region.5 Tajikistan. Therefore, the main goals of the NDS/ PRS highlight the importance of developing this

Table 1.1. MACROECONOMIC INDICATORS sector and attracting investment: • Elaboration of a new investment policy to indicator 2002 2005 ensure coordinated and consistent imple- Nominal GDP in billion somoni 3 7 mentation of effective measures, aimed at Nominal GDP per capita in somoni 517 1,041 attracting, supporting and promoting for- CPI infl ation in % 15 7 eign direct investment;

Real GDP growth in % 10 7 • Strengthening the legislative and legal

Population, million 7 7 base for SME establishment, operations and liquidation; Trade balance, million somoni -124 -323 • Review of current norms with the goal of Export, million somoni 699 1,108 strengthening property rights; Import, million somoni 823 1,431 • Creating conditions for improving the qual- Exchange rate, 1 USD to somoni, end of period 3.00 3.19 ity of services rendered for SMEs; Source: NBT (2006) • Reduction of excessive administrative barriers; With population growth (2% a year on average) lagging behind • Provision of a state support system for micro the real GDP growth, GDP per capita enjoyed a substantial in- and small businesses. crease as well in this period.

However, this favorable growth rate can also be explained by the Chart 1.1. REAL GDP IN 2005 DID NOT REACH THE LEVEL OF 1990S fact that the economy is still recovering from the effects of the collapse of the Soviet Union and the civil war. The GDP in 2005 was 100% only 62.1% of the 1991 level in real terms (see Chart 1.1). 62%

33% 1 More details on the macroeconomic development of Tajikistan can be found in IMF (2006). 2 Industrial production increased during 2002-2005 by 137%.

3 Such services like communications (especially mobile services), Internet, and 1991 1993 1995 1997 1999 2001 2003 2005 banking are growing very rapidly in Tajikistan. Source: State Statistical Committee of RT 4 Latest estimates indicate the number of migrants to have reached 800,000 (on estimate of IOM) and corresponding remittances to have reached $1 billion. 5 New Russian legislation imposed a quota for migrant workers, which allocated 600,000 working permits to Tajikistan (Asia-Plus, January 11, 2007).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 3 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

BOX 1.2. REGIONAL OVERVIEW OF THE TAJIK ECONOMY The Districts of Republican Subordination host 22% of the population and boast a diverse economy. DRS is home to about 20% IFC survey makes use of the following regional division: of the country’s agricultural production, but also some large in- i) Dushanbe city (the Capital). dustries like TadAz (Tajik Aluminum Plant), and porcelain ceram- ii) Districts of the Republican Subordination (DRS) in the mid- ic works that make up more than 50% of the industrial output of dle of the country6; the country. Small and medium businesses are mostly concen- iii) Gorno-Badakhshan Autonomous Province (GBAO) in the trated in larger cities and districts (Tursunzade, Hissar valley). East of the country; iv) Khatlon province with two districts - Kurgan-tube and Kuly- Due to its very mountainous terrain (highest altitude is 7,495m ab in the South; at Ismoil Somoni Peak), GBAO is diffi cult to access and has a v) Sughd province in the North of the country. very low population density (3% of the total Tajik population). It is, therefore, the least developed region of the country with an Dushanbe - the capital of the country - is the most dynamically underdeveloped SME sector. developing region in terms of business activities and entrepreneurship, accounting for more than 22% of the total number of Khatlon province accounts for about 35% of the country’s pop- SMEs active in Tajikistan. ulation. About 576 enterprises are situated in this province, including agricultural farms, textile factories, meat-packing plants Number of citizens, in thousands and 11 industry giants like Joint Venture “Tajikazot” (plant for nitrogenous fertilizer), and OJSC ”Transformator“ (production of transformers). The lion’s share of the country’s cotton is produced in Khatlon, as well as most of its non-cotton agricultural products like vegetable-growing, livestock-breeding, and poul- try farming (the province contributes 39% of Tajikistan’s agricul- Sughd 2,060 DRS 1,531 tural product).

646 Dushanbe Sughd province is one of the most developed and industrialized GBAO 218 regions of the country contributing to 17% of industrial output of Khatlon 2,463 the economy. The least affected by the civil war, the province attracts a signifi cant share of foreign direct investments (25% of all companies with foreign investments are situated in Sughd). Sughd hosts 30% of the population and has the highest popula- Source: State Statistical Committee (2006) tion density.

Chart 1.2. SME CONTRIBUTION TO EMPLOYMENT INCREASES 1.1.2 THE SME SECTOR IN THE ECONOMY CONSISTENTLY

% 33% The SME sector of Tajikistan is composed of three typologies of 28% 29% businesses: individual entrepreneurs (i.e., sole proprietors of an en- 25% terprise without any juridical status); dehkan farmers (i.e., owners of private agricultural farms); and small and medium companies (i.e., legal entities) which tend to be of a larger scale.

The relevance of SMEs in the economy increased every year in 2002-2005: the share of employment provided by the SME sector 2002 2003 2004 2005 reached about 700,000 employees, 7 or about 33% of the total Source: State Statistical Committee of RT

6 For better assessment of the region in IFC survey we divided it into two parts: a) DRS A (Hissar Valley), which is more developed and b) DRS B (Rasht Valley), which is less developed due to its mountainous terrain. 7 Employment fi gures provided by the State Statistical Committee of RT. However, the data include only the self-employment fi gures of individual entrepreneurs without taking into account possible hired employees.

4 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart 1.3. TAJIK SME8 SECTOR’S CONTRIBUTION TO GDP Chart 1.4. … BUT THERE IS ROOM FOR DEVELOPMENT OF THE SME SECTOR IS RELEVANT … 78 73 1 60% 59 51% 50% 55 49 43% 38% 40 37 33 24 20 20 16% 18 14 10 6 3

9 Uz- Italy Mexico UK Tajikistan Russia Belarus Ukraine Latvia Tajikistan Estonia Russia Italy bekistan UK . SME per 1000 of inhabitants . SME share in Employment in % Source: Factiva (2006) Source: IFC MSMEs Database, State Statistical Committee of RT

Chart 1.5. ALTHOUGH LIMITED IN NUMBER, SMALL AND employment (see Chart1.2). In addition, the SME sector represent- MEDIUM COMPANIES REPRESENT A RELEVANT COMPONENT OF ed the vast majority of the private sector, which made up 43% of THE SME SECTOR the GDP, with an average growth of 2.7% annually. %

21 21 International comparison confi rms the relevant contribution of 6 49 the SME sector to the GDP, which nevertheless can be partially 40 explained by the low overall development level of the Tajik econ- 15 omy (see Chart 1.3). 73

40 36

However, international comparison of the number of businesses per 1,000 inhabitants shows that there is still room for growth for Share Share Share in total number in total revenues in employment the SME sector, with a positive contribution to the GDP as well as of businesses volume to the country’s employment (see Chart 1.4). . Individual entrepreneurs . Small and medium companies The agricultural nature of the Tajik economy is refl ected in the em- . Dehkan farmers ployment structure: almost 50% of employees in the SME sector Source: State Statistical Committee; share in employment work in dehkan farms, one third are employed as individual en- and revenues estimation based on survey data trepreneurs, while the remaining 15% are employed by small and medium companies (see Chart 1.5). Yet dehkan farms represent Chart 1.6. DISTRIBUTION OF SMES IS UNEVEN only about 20% of the SME sector revenues, with individual entrepreneurs and small and medium companies equally sharing the 42 remaining 80%.10 29 25 22 23 Although more entrepreneurs are active in Sughd and Khatlon,

Dushanbe and the Districts of Republican Subordination have a 12 18 higher percentage of small and medium businesses per capita 17 12 2 (see Chart 1.6).

Khatlon Dushanbe DRS GBAO Sughd province Regional distribution in % . Number of businesses per 1,000 inhabitants Source: State Statistical Committee of RT 8 These aggregate data refl ect different defi nitions of SMEs used in different countries and do not always include individual entrepreneurs, as in the case of Tajikistan. 9 For Tajikistan data on private sector contribution are used. 10 Employment structure and revenues estimated on the basis of our survey data.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 5 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1.1.3 INDIVIDUAL ENTREPRENEURS

An individual entrepreneur is an individual (sole proprietor) who is BOX 1.3. DEFINITION OF SME involved in a business activity without forming a legal entity and operates it at his/her own risk. The terms “small enterprise” and “medium-sized

enterprise” are used in this report as defi ned by Individual entrepreneurs can register and run their business on two the State Statistical Committee of RT: i) small different legal bases11: enterprise: a business with an average of fewer • A simplifi ed system (patent), used by the majority of entrepre- than 50 employees in the reporting period; ii) neurs,12 which provides simplifi ed taxation and accounting medium-sized enterprise: a business with an av- systems, but poses constraints in terms of types of activities, erage of 51 to 200 employees in the reporting location (only outdoors), and employment structure. It also period. requires repeated registration renewals; • A more structured legal form (certifi cate), providing additional fl exibility at the expense of stricter fi scal and accounting requirements.

Chart 1.7. NUMBER OF BUSINESSES RUN BY INDIVIDUAL ENTRE- The number of individual entrepreneurs has grown signifi cantly PRENEURS from 2002 to 2005 (average annual growth - CAGR13 of 8%), and # OF ENTREPRENEURS, ‘000S CAGR 8% at the beginning of 2006 accounted for about 90,000 entities (see 89 Chart 1.7). As such, they represent the largest category of SMEs in 71 Tajikistan both in terms of numbers as well as share of revenues. Table 1.2 illustrates “typical” Tajik individual entrepreneur.

Table 1.2. THE “TYPICAL” TAJIK INDIVIDUAL ENTREPRENEUR

2002 2005 Average annual turnover 17,000 somoni $5,340 Source: State Statistical Committee of RT Average annual profi t 4,000 somoni $1,250 Number of employees 2 Average monthly salary paid 122 somoni $38

Chart 1.8. INDIVIDUAL ENTREPRENEURS ARE MAINLY PRESENT Individual entrepreneurs are mostly present in Sughd province IN DUSHANBE AND SUGHD and Dushanbe (see Chart 1.8). Since imported goods and serv- 37 ices are usually delivered fi rst to Khodjend (capital of Sughd prov- 31 ince) and Dushanbe and then distributed to other regions, trade is 27 very dynamic in these two regions. As a result, there is a high con- 21 18 centration of individual entrepreneurs involved in trade in Sughd 10 and Dushanbe. 13 11 8 3 According to the survey, individual entrepreneurs achieved lower

Khatlon volumes of turnover in 2005 by 4.1%, as compared to the previous Dushanbe DRS GBAO Sughd province year. The rapid increase in the number of individual entrepreneurs Regional distribution in % could push the competition among them and pose a limit for fur- . Number of businesses per 1,000 inhabitants ther growth of individual activities. Source: State Statistical Committee of RT

11 More detailed explanations of the different legal bases for patent and certifi cate entrepreneurs will be provided in the Chapters 2 and 7. 12 About 90% of surveyed individual entrepreneurs use patents (see Chapter 2). 13 Compound Annual Growth Rate (CAGR) - represents the average annual growth over a period (for more details see Chapter 9).

6 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Revenues vary greatly across regions, with Dushanbe and Sughd province seeing the highest revenues: an individual entrepreneur in Dushanbe has a turnover that is 10 times larger than one in DRS (see Chart 1.9). These fi gures refl ect the fact that Dushanbe 1 and Sughd province are the most industrial and developed regions of the country, with higher purchasing power than the rest of Tajikistan. In particular, individual entrepreneurs are mostly involved in trade and therefore more affected by the local purchasing power.

Chart 1.9. STRONGER PERFORMANCE OF INDIVIDUAL ENTREPRENEURS IN DUSHANBE AND SUGHD

39 37 34,500

30 29 26

24 21,200 23

12,800 10,800 9,400 6,900

3,200 ince) GBAO Sughd province Districts of province) Districts of Dushanbe Republican Republican Kurgan-Tube Kulyab district (Khatlon prov- district (Khatlon Subordination A Subordination B

Annual turnover in somoni . Annual profi tability in %

Although Dushanbe and Sughd have higher revenues and profi t Chart 1.10. TRADE IS THE PREVAILING SECTOR FOR ACTIV- in absolute terms,14 individual entrepreneurs in DRS and GBAO ex- ITY OF INDIVIDUAL ENTREPRENEURS perience higher profi tability.15 The high profi tability could be due 2% Other to: 2% Production 6% Transport • Lower competition in these regions, allowing businesses to

achieve better performances; 6% Consumer services • Reduced pressure from state agencies (especially fi scal bodies) in these regions, which results in a lower taxation burden 11% Public catering for businesses.

In terms of economic sectors, individual entrepreneurs are involved predominantly in activities that require minimum investment and 73% Trade bring very fast returns and in particular in trade (see Chart 1.10). Only a small number of individual entrepreneurs are involved in a manufacturing activity, which implies a larger initial investment

14 For more details see Statistical Appendix. 15 Profi tability – is a company’s ability to generate revenues in excess of the costs. Profi tability is expressed as a percentage of revenues, while profi ts are expressed in money (absolute) terms.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 7 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

and longer-term returns, but might also lead to a future expansion of the business activity.

Individual entrepreneurs employ, on average, 2 employees on a permanent basis, providing them with an average monthly salary of 122 somoni ($38).

1.1.4 DEHKAN FARMERS

A dehkan farm is an enterprise involved in the production and sale of agricultural products. Dehkan farmers operate as individual en- trepreneurs16 according to the State Registration Certifi cate.17

Dehkan farms are the most dynamically growing typology of business, both in terms of number of businesses and employment levels (see Chart 1.11). From 2002 to 2005, dehkan farmers saw an annual growth rate (CAGR) of about 19% in both number of entities and employment. This dynamic growth is, to a great extent, due to government reforms in the agricultural sector aimed at transforming former large-scale, state-owned farms into smaller, privately owned enterprises.

According to offi cial statistics, the highest concentration of dehkan farmers is in the Khatlon province, with 7 dehkan farms per 1,000 inhabitants (see Chart 1.12). This can be explained by the fact that Khatlon province is the major region of agricultural production of the country (see Box 1.2).

Chart 1.11. DEHKAN FARMERS ARE GROWING FAST BOTH IN TERMS OF NUMBER OF BUSINESSES AND EMPLOYMENT

# OF BUSINESSES, ‘000S # OF EMPLOYEES, ‘000S CAGR 18.7% CAGR 18.8% 26 545

15 325

2002 2005 2002 2005

Source: State Statistical Committee of RT

16 For more details on the registration procedures, see the Chapter 2. 17 A farm can also be organized in the form of a business partnership or a production co-operative, but these categories of business are not granted a simplifi ed registration process and as such do not fall into the dehkan farm defi nition. For information on the registration of business partnerships and production co-operatives, see the section on registering legal entities in the Chapter 2.

8 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Dehkan farms represent 21% of total SME sector businesses. Data Chart 1.12. DEHKAN FARMERS ARE MAINLY PRESENT IN from our survey allows us to draw a picture of the typical dehkan KHATLON AND DRS farmer operating in Tajikistan as shown in Table 1.3. 40 39 1

Table 1.3. THE “TYPICAL” TAJIK DEHKAN FARMER 7

Average turnover per year 30,900 somoni $9,660 4 20 Average annual profi t 5,790 somoni $1,809 Number of employees: Permanent basis 13 Number of employees: Seasonal basis 13 3 Average monthly salary paid 48 somoni $15 1 1

Khatlon Sughd Dehkan farmers were not able to increase their turnover volumes DRS GBAO province province with respect to the previous year.18 This could be due to: Regional distribution in % • High indebtedness of the agricultural sector (especially debts Number of businesses per 1,000 inhabitants of cotton seeding farms)19; . Source: State Statistical Committee of RT • Low and unstable yield (especially of cotton)20; • Low price of cotton.

On average, turnover of dehkan farmers reached 30,900 somoni Chart 1.13. BEST PERFORMANCE OF DEHKAN FARMS SEEN ($9,660) in 2005. The highest turnover volumes were reached by IN SUGHD AND KHATLON21 the dehkan farms in Sughd and Khatlon regions, which are char- 40.4 48,962 acterized by larger land plots. While the ones in the DRS region 33.7 see the highest profi tability ratio in monetary terms, their revenues lag behind more agriculturally developed regions like Khatlon and Sughd provinces (see Chart 1.13).22 23.7 26.0 27,579 Due to the high labor intensity in the agricultural sector, the aver- 25,688 age dehkan farm employed 13 employees on a permanent basis. In addition to the permanent workforce, dehkan farmers employed about 13 employees on seasonal basis. Employees were 8,688 remunerated with 48 somoni ($15) per month, 25% higher than the offi cial average salary in the total agriculture sector, which amounted to 38 somoni per month in 2005.23 district of

1.1.5 SMALL AND MEDIUM COMPANIES Republican Kurgan-Tube Districts of the Subordination Sughd province Kulyab district of Khatlon province Khatlon province A small and medium company is a privately owned legal entity Annual turnover in somoni with employment levels between 1 and 200 employees.24 . Annual profi tability in % Only about 7,000 small and medium companies were registered in Tajikistan at the beginning of 2006, corresponding to 5.7% of

18 They reported to have achieved only about 97% of 2004 level’s. 19 For more details, see World Bank (2006a). 20 The yield of cotton, which represents the highest share of agricultural revenues, decreased in 2005 by 24% with respect to 2004. 21 GBAO is not taken into consideration given the low number of answers. 22 For more details see Statistical Appendix. 23 see State Statistical Committee (2006). 24 Our defi nition refers to the defi nition provided by the State Statistical Committee, which does not consider any limit in terms of annual turnover.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 9 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart 1.14. THE GROWTH OF SMALL AND MEDIUM COMPANIES REMAINS MODERATE IN TERMS OF NUMBER OF BUSINESSES AND EMPLOYMENT

# OF BUSINESSES, ‘000S CAGR 4.0% # OF EMPLOYEES, ‘000S CAGR 5.2% 7 71 6 61

2002 2005 2002 2005 Source: State Statistical Committee of RT the entire SME sector. Furthermore, their annual growth (4%) is the Chart 1.15. SMALL AND MEDIUM COMPANIES ARE MAINLY least dynamic among the three typologies of private businesses PRESENT IN DUSHANBE AND SUGHD (see Chart 1.14). This illustrates the low number of entrepreneurs

39 who feel the need to give their business a more structured form by incorporating it. 4 Regionally, the highest concentration of small and medium com- 20 18 panies per 1,000 inhabitants is in Dushanbe, followed by Sughd province (see Chart 1.15). 12

0.3 Table 1.4. THE “TYPICAL” TAJIK SMALL AND MEDIUM COMPANY 1 0.8 0.3 1 Average turnover per year 216,000 somoni $67,500 Average annual profi t 16,690 somoni $5,216 DRS

anbe Number of employees: Permanent basis 15 Dush- GBAO Sughd Khatlon

province province Number of employees: Seasonal basis 6

Regional distribution in % Average monthly salary paid 120 somoni $37 . Number of businesses per 1,000 inhabitants Source: State Statistical Committee of RT Table 1.4 illustrates a “typical” small and medium company. It can be noted that the data on employment provided in our sample Chart 1.16. SMALL AND MEDIUM COMPANIES ARE MAINLY (15 employees) is signifi cantly higher than the one provided by of- ENGAGED IN TRADE AND COMMERCE fi cial statistics (10 employees), which can be explained by the ex-

39% 4% Other istence of a “black” labor market unreported by offi cial data. On General 6% Services commercial activity average, small and medium companies employed 15 employees 7% Agriculture on a permanent basis and 6 on seasonal terms. The average salary provided by companies amounted to 120 somoni ($37) – 40% more than the average monthly salary in the country. 13% Industry

Partially refl ecting the situation of individual entrepreneurs, small and medium companies in Tajikistan are mainly active in tertiary25 sectors of the economy, i.e. general commercial activity26 and trade (more than 55% - see Chart 1.16). Industry represents 13% of 13% Construction the overall sector, construction (particularly active sector of the

18% Trade

25 The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale trade, transportation and distribution, enter- tainment, restaurants, tourism, insurance, banking, health care, etc. 26 General commercial activity include: i) intermediary services by sale of goods, securities, currency; ii) intermediary services in the fi eld of transportation, housing and communal services; iii) advertising, marketing research and audit.

10 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

economy in the recent years) and agriculture account for about Chart 1.17. BEST PERFORMANCE OF SMALL AND MEDIUM 27 20%. In order to secure stable growth for the economy, a further COMPANIES IN DUSHANBE AND SUGHD diversifi cation into other sectors would be advisable. 294,765 1 In 2005, the turnover of small and medium companies reached 221,284 216,000 somoni ($67,500), 8% higher than the previous year and 20 practically the same in real terms. As for individual entrepreneurs, the strongest performance of companies is seen in the Dushanbe 119,623 16 and Sughd provinces (see Chart 1.17). 13

Although companies state the lowest profi tability (15%), their profits (19,690 somoni - $5,216) are the highest among the three typologies of business thanks to the larger size: the turnover of small Other regions Sughd Dushanbe and medium companies is about 10 times larger than that of an province individual entrepreneur. Annual turnover in somoni . Annual profi tability in % 1.1.6 INVESTMENTS: MOSTLY INTERNAL FUNDS

Entrepreneurs very seldom make investments into fi xed assets. Ac- Chart 1.18. INVESTMENTS MADE IN 2005, cording to the survey, only 27% of the respondents made some BY TYPOLOGIES OF BUSINESS investment in 2005 (see Chart 1.18). This fi gure has worsened in % OF RESPONDENTS comparison to 2002, when about 40% of entrepreneurs made investments into fi xed assets. 72 53 83

The majority of entrepreneurs still use personal savings to conduct any investment. Only a small amount of entrepreneurs use banking/MFO loans to fi nance their investments into fi xed capital. This situation is linked to the complicated access to external funding 28 47 17

Individual Small and medium for SMEs. Dehkan farmers entrepreneurs companies

It is especially crucial for small and medium companies, since . Invested . Not invested every second company (47.2%) made investment in 2005. Among those every third invested in building a new facility or production Chart 1.19. INVESTMENTS MAINLY FUNDED BY PERSONAL SAVINGS28 unit. But still personal savings represent their major source of fund- % OF RESPONDENTS ing for the investment (see Chart 1.19). Broader access to external funding could stimulate faster growth of the companies contribut- Personal savings 87 ing additionally to the economical development of the country Non-banking loan 11 (for more details see Chapter 5). (friends, relatives)

Banking loan 5

Loans from MFO 3

Other 3

Futures companies 2

Direct investment (local or foreign 1 27 The category “Other regions” include – GBAO, Khatlon province and DRS. Only investor) 30% of small and medium companies are present in these regions. Due to this State funds 0.1 fact, a very small amount of companies from these regions were included in our sample. 28 Respondents could have chosen several answers.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 11 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1.1.7 ENERGY SUPPLY: INSUFFICIENT BOX 1.4. ENERGY DEFICITS ARE IN WINTER In order to ensure effi cient development of the economy, a reli- “Due to seasonal specifi cs, Tajikistan’s energy able and continuous energy supply is essential. For the time being, system produces less energy in the winter than the Tajik economy lacks a suffi cient energy supply and, especially in the summer. The daily energy consumption during the winter, supply is rationed throughout most of the coun- in the wintertime amounts to 60-68 million KWh try (see Box 1.4). The energy gap is caused on the one hand by -- meaning that in the period of cold weather increasing energy consumption and, on the other hand, by in- (October-March), the overall need for energy tensive energy usage due to low energy tariffs and energy losses amounts to 10.8 billion KWh. As the overall ener- (see Box 1.5). gy production of hydro power plants in Tajikistan is about 6.8 billion KWh, this implies an energy The Tajik economy is indeed among the most energy intensive defi cit of 4 billion KWh. While a small portion of ones (see Chart 1.20), mainly due to the lack of modernization of this defi cit is covered by energy import to the its technical infrastructure. Without proper measures to address northern part of the country from Uzbekistan energy effi ciency, the risk is that the energy gap will increase fur- (about 600 million KWh), insuffi cient volumes of ther (see Chart 1.21), despite the efforts undertaken by the gov- available energy create the need for introduc- ernment to increase energy supply through the construction of ing rationing measures of energy supply effect- new hydro-power plants. ing consumers and industries.” The impact of lack of reliable energy supply is extremely relevant: Asia-plus, dd. January 25, 2007. economic activities are often interrupted and disrupted, generating substantial losses for businesses.

BOX 1.5. COMPARISON OF ENERGY USAGE IN DIFFERENT COUNTRIES

Two main drivers characterize energy consumption in Tajikistan: on the one hand technology is outdated and requires higher level of power, on the other hand tariffs for electricity, main energy source, are very low and cover only about 30-40% of the cost. As a result energy usage is excessive: in order to produces $1 of GDP Tajikistan needs almost 3 times more energy than Armenia (see Chart 1.20).

A gradual increase of energy tariffs is essential to maintain and upgrade the generation and transmission facilities, while steps need to be taken in order to improve energy consumption by both stakeholders and enterprises. At the same time, the government must address the social implications of a price increase in energy.

Steps for increasing energy effi ciency are also important taking into account the expectation that energy consumption will grow with development of the economy. It is estimated that with the current level of energy consumption, to reach the GDP level of Kyrgyzstan, Tajikistan will need to generate about 3,500 kWh per capita which is 2.5 times higher than current consumption in Kyrgyzstan (see Chart 1.21).

Chart 1.20. ENERGY INTENSITY OF TAJIK ECONOMY IS HIGH29 Chart 1.21. ENERGY CONSUMPTION IS LIKELY TO INCREASE REQUIRING MEASURES IN ENERGY EFFICIENCY KWH/$ 0,53 0,47 0,49 0,43 0,3 KWH/PER CAPITA 0.21 5,642 0.19 3,418 3,144 3,626 1,428 1,421 2,240 Kyr- Kyr- Kaza- Kaza- Russia Russia khstan khstan Poland Belarus Belarus Poland gyzstan gyzstan Armenia Armenia Tajikistan Tajikistan

Source: IEA (2006) Source: IEA (2006)

29 Energy intensity measured by division of Total Primary Energy Supply to GDP at purchasing power parity.

12 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1.2 leGal environment and sme confidence

1.2.1 LEGAL AWARENESS 1

During 2002-2005, the Republic of Tajikistan adopted many new Chart 1.22. SMES’ AWARENESS OF NEW LEGISLATION laws, regulations and normative acts, many of which regulated IS QUITE LIMITED the activity of small and medium business. The IFC survey focused % OF RESPONDENTS on the knowledge of the general public regarding four relevant legislative changes (see Box 1.6). 49 84 81 86

As the survey reveals, the share of entrepreneurs aware of the 51 19 adoption of certain norms remains extremely low. In particular, 16 14 only about half of SMEs were aware of the introduction of the 2005 2004 new Tax Code, which impacted 100% of business. Less than 20% of businesses are aware of the remaining legislation, which by its January 1, Tax Code dd. March 1, 2005 Law “ On Col- lateral of Mov- January 1, 2005 Law “On Licens- nature is more specifi c and affects fewer businesses (see Chart ing” dd. May 17, Custom Code dd. Code Custom able Property” dd. 1.22). . Aware . Not aware

The perceived infl uence of these norms on the activities ofen- Chart 1.23. LEGISLATION CHANGES HAVE DIFFERENT trepreneurs is very different. Taxation and licensing, the most fre- IMPACT ON SMES quent procedures that entrepreneurs face in their day-to-day % OF RESPONDENTS AWARE OF THOSE LEGISLATIVE ACTS activities, have an overall positive perceived impact (see Chart

1.23). On the other hand, the new Custom Code as well the Law Tax Code, 60 10 30 dd. January 1, 2005 “On Collateral of Movable Property” are perceived to have less impact on businesses, possibly as a result of the low number of en- Law “On Licensing” 55 5 40 trepreneurs engaging in external trade30 or seeking external fund- dd. May 17, 2004 ing from banks or microfi nance organizations.31 Custom Code, dd. January 1, 2005 44 8 48 The introduction of numerous new laws and regulations, despite their attempts to improve the business environment, cannot be Law “ On Collateral of Movable Property”, 44 10 46 effective unless entrepreneurs are aware of them and can use dd. March 1, 2005 the regulations in their daily activity. . Positive infl uence . Negative . No infl uence

BOX 1.6. MAJOR LEGISLATIVE ACTS RELATED TO BUSINESS ENABLING ENVIRONMENT INTRODUCED DURING 2004-2005 tax code dd. custom code dd. law “on licensing of certain kinds law “on collateral of movable january 1, 2005 january 1, 2005 of activities” dd. may 17, 2004 properties” dd. march 1, 2005

Regulation on conducting Bringing legislation in line Unifi ed regulation of licensing Creation of a legislative basis for tax inspections; with international custom procedures; pledging movable property; Reduction of the rates of standards; Reducing the number of activi- Establishment of a unifi ed state reg- some taxes; Bringing legislation in line ties that are subject to licensing; istry of the pledged movable prop- Creation of a unifi ed tax for with intergovernmental Determination on validity of li- erty. agricultural producers; agreements among CIS censes, the duration of consid- Benefi ts for import of goods countries for simplifi cation eration of the application. and equipment on account of the custom regulation; of nominal capital. Exclusion of the double customs levy.

30 For more details, see the Chapter 8. 31 For more details, see the Chapter 5.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 13 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart 1.24. SMES’ AWARENESS OF LEGISLATION REMAINS MODERATE, BUT IS INCREASING

% OF RESPONDENTS % OF ENTREPRENEURS HAVING FAIRLY GOOD KNOWLEDGE OF LEGISLATION

. 12 1 6 3 30 Do not know 13 26 . 21 Know poorly 59 18 59 15 . 12 51 Know in genera

34 . 26 Know fairly well 15

Individual Small and medium Dehkan farmers Individual Small and medium Dehkan farmers entrepreneurs companies entrepreneurs companies . 2002 . 2005

The survey attempted to study the awareness of entrepreneurs “… I came across situations in which changes in the legislation were not effectively transmitted about regulations, legal norms and laws that regulate their activi- to government offi cials in the various regions in ty. Among the typologies of SMEs represented, companies have a which our company operates. Even at the same better knowledge of the legislation. Yet even the majority of these state body, we faced different rules according to each region… “ still have only cursory or poor understanding (see Chart 1.24).

- Entrepreneur, focus group participant However, the share of entrepreneurs who now have a fairly good knowledge of the legislation increased in 2005. This could be evidence of increasing efforts by entrepreneurs to become more aware of the legislation, as well as efforts by the government and international organizations to distribute information and promote awareness.

It needs to be noted, however, that limited knowledge of the leg-

Chart 1.25. MASS MEDIA ARE MAIN SOURCE islation is common not only to entrepreneurs, but to government OF INFORMATION ON CHANGES OF LEGISLATION offi cials as well. Entrepreneurs involved in focus groups pointed % OF RESPONDENTS out this fact quite clearly. Frequently changing legislation and lim- Mass 41 ited availability of training and legal materials are the most com- media 40 mon causes for this lack of awareness from the offi cials’ side. Friends and 40 colleagues 39

State 10 As in 2002, mass media (41%) and friends/colleagues (40%) remain bodies 11 the major sources of information for entrepreneurs in responding Lawyers/Law 3 fi rms 4 to changes in legislation (see Chart 1.25). Only a small share of entrepreneurs (10%) use the information provided by state bodies, Professional 2 association 4 and even fewer seek outside sources like law fi rms and profes-

Other 1 sional/business associations. State bodies should use mass media 2 more actively to inform the population/business on changes hap- 0% 20% 40% 60% pening in the regulatory environment. Mass media could also be better used as a public platform for broader discussions. . 2002 . 2005

14 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

1.2.2 ROLE OF THE STATE IN THE SUPPORT OF ENTREPRENEURSHIP

The existence of a central state body that advocates the interests of entrepreneurship which supports policy changes might be BOX 1.7. SUPPORT OF THE SME SECTOR BY THE 1 signifi cant in developing and strengthening the business environ- GOVERNMENT ment. The role of the interest representative for the support of entrepreneurs in Tajikistan has been the State Agency for Antimo- The government attaches importance to the nopoly Policy and Support of Entrepreneurship (see Box 1.7). development of entrepreneurship in the country and undertakes active efforts to improve This Agency has followed the guidelines based on the objectives the business environment for entrepreneurs. of the State Program for Support of Entrepreneurship for 2002- Therefore, the government adopted a Law “On 200532: Licensing” in May 2004, the Strategy of the De- • To improve legislation related to SME development; velopment of Entrepreneurship in RT until 2015 • To create a well-developed SME fi nancing, lending, and in- in December 2004, the Law “On Inspections of surance system; Business Entities” in July 2006, as well as others • To develop business support infrastructure. (see more details in chapters “Licensing” and “Inspections”). As this report was being prepared, the government had recently abolished the Antimonopoly Agency and assigned its role of sup- The State Agency for Antimonopoly Policy and porting entrepreneurship to a specifi c department within the State Support of Entrepreneurship has played an im- Committee on Investment and Management of the State Prop- portant role in this process. Following the gov- erty of RT.33 It is expected that the new Committee will take over ernment reorganization in November 2006, the the role of the previous agency supporting the development of Agency was abolished and its functions of sup- entrepreneurship in general and the SME sector specifi cally by: porting entrepreneurship were transfered to the • Continuing the development policy of entrepreneurship; State Committee on Investment and Manage- • Promoting improvement of the investment climate in general ment of the State Property of RT (see more de- and entrepreneurship in particular; tails further in text). • Analyzing the existing regulatory problems hindering the development of the entrepreneurship and elaborating concrete measure for their elimination; • Coordinates the dialogue among all stakeholders to strengthen the role of the private sector in economy.

1.2.3 LEGAL DISPUTES

Less than 1 in every 100 entrepreneurs have ever used courts to settle economic disputes. This low number is likely related to the limited trust of people towards courts in general. The widespread corruption in the courts is also confi rmed by the survey conducted by the Strategic Research Center under the President of the Re- public of Tajikistan. According to that survey, courts, along with the administration of local authorities and law-enforcement bod-

32 In particular, the Agency was closely involved in the development and adoption of the Law “On Inspection.” Furthermore, the Agency was involved in the working group that developed the new Tax and Custom Codes. 33 Decree of President “On Enhancement of the Structure of Central Bodies of Execu- tive Authorities of the Republic of Tajikistan” No.9, dated November 30, 2006.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 15 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart 1.26. EXPECTATIONS FOR CHANGE OF THE BUSINESS ies, are considered to be the most corrupt bodies in the coun- ENVIRONMENT OVER THE NEXT 12 MONTHS try.34

% OF RESPONDENTS The main reasons for disputes were: In the country • Nonfeasance of payments; • Nonfeasance of terms of delivery; 56 Will improve • “Imposition” of unjustifi ed obligations.35 70

The low level of court applications can be due to several factors:

Will remain 34 the same 14 • Infl uential businessmen/offi cials can receive decisions in their favor, irrespective of the merits of their case; Will 16 10 worsen • The procedures are very non-transparent, allowing for unof-

2002 2005 fi cial payments during the process; • The process can become very lengthy, and therefore unac- ceptable for dynamic entrepreneurship; In the region of entrepreneur’s activity • The process can become very costly, so entrepreneurs risk going through the entire process and losing more money in the long run. 52 Will improve 62 1.2.4 EXPECTATIONS OF ENTREPRENEURS

Will remain 37 18 Most entrepreneurs are optimistic that the business environment in the same Tajikistan will improve in the next 12 months (see Chart 1.26). These Will 20 11 worsen expectations could be due to:

2002 2005 • General economical growth and macroeconomic stability in Tajikistan;

Chart 1.27. EXPECTATION FOR CHANGE OF THE BUSINESS • Expected increase of consumption among the population ENVIRONMENT OVER THE 12 MONTHS, BY REGIONS due to the rise in incomes and a higher demand for goods % OF RESPONDENTS WHO THINK THE SITUATION WILL IMPROVE and services; • Expectation of further reform of administrative procedures, Districts of Republican 74 Subordination 58 meaning a lower regulatory burden for entrepreneurs.

Kulyab district 66 (Khatlon province) 54 The best expectations by region are seen in DRS and Kulyab (see

Gorno-Badakhshan Au- 57 Chart 1.27). This could be explained by the planning of some tonomous Province 34 large-scale investments in these two regions, as well as specifi c

Sughd province 56 investments in the Kulyab region in concurrence with the 2700th 46 anniversary of the city.36 48 Dushanbe 52

Kurgan-Tube district (Khat- 48 lon province) 59

0% 20% 40% 60% 80% 34 For more details see Strategic Research Center (2006). 35 2002 2005 Though more than a half of entrepreneurs succeeded with their lawsuits, every . . third successful plaintiff used unoffi cial payments to rule the decision of the court favorably. 36 In particular huge investments in the TadAz aluminium plant (DRS) and building of a new aluminium plant in the south of the Khantlon province (Kulyab district) were planned by Russian Aluminium Consortium “RUSAL.” Additionally there are some investment projects in building/completing Hydro Power Plants in these regions.

16 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Although the overall expectations of entrepreneurs are positive, our survey did reveal a rise in the number of entrepreneurs who “… It is true that there are a lot of positive trends remain dissatisfi ed with the situation (seeChart 1.28). and changes introduced by the government. But still, it is nerve-wracking, takes so much effort 1 and so many sleepless nights to deal with offi - In particular, every fourth entrepreneur (25%) would not start his/ cials that sometimes I think of quitting…” her business again based on his/her experiences. This fi gure rep- - Owner of a small company, focus group resents an increase from 2002 (15%), and may be due to grow- participant ing pressure from state bodies and the “price” that entrepreneurs have to pay for achieving good performance.

The increase is particularly signifi cant for small and medium companies and dehkan farmers. The main reasons behind this sharp decline in confi dence could be:

• For small and medium companies - the increased regulatory burden (which will be further analyzed in the next chapters of the report);

• For dehkan farmers, the relative “immaturity” of the sector– most farms are newly established in their fi rst stage of development as private businesses and lacking a well-developed infrastructure system that can support them in delivering products to the market.

In subsequent chapters we analyze the administrative procedures faced by SMEs during their business activities in more detail in order to fi nd possible explanations to the trends observed in the SME sector.

Chart 1.28. NUMBER OF ENTREPRENEURS WHO WOULD START THEIR BUSINESS AGAIN BASED ON THEIR EXPERIENCE IS DECREASING

% OF RESPONDENTS

Individual entrepreneurs Small and medium companies Dehkan farmers

4 2 4 10 13 10 10 10 23 26 25 24

88 86 73 65 63 66

2002 2005 2002 2005 2002 2005 . Yes . No . Do not know . Yes . No . Do not know . Yes . No . Do not know

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 17 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

18 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 2. REGISTRATION REGISTRATION

2. reGistration

In recent years, the registration process in Tajikistan has under- main findinGs gone a number of reforms that impacted the SME sector in different ways. As a result, the current situation differs for each of the • Registration for individual entrepreneurs three typologies of business included in the SME sector. has drastically improved with respect to 2002. As a result it is easier and requires: Registration is now a simple 2-step procedure for individual entre- a. A duration of 5 business days (versus preneurs, which can be completed within a week with a limited 13 in 2002); amount of fi nancial resources. This is particularly important, given b. A cost of 117 somoni ($37), including that de facto individual entrepreneurs renew their registration both offi cial and unoffi cial payments every year. (a decrease from 178 somoni, or $64, in 2002); legal entities, on the other hand, face a more complicated and c. A total impact estimated at about 4% not always transparent procedure that involves multiple steps at of their annual profi ts. various agencies. This necessarily extends the time needed to start up their business activities, resulting in additional costs in both • Registration for legal entities is still an ex- offi cial and unoffi cial payments as well as lost business opportuni- pensive and time-consuming process, ties. which requires, on average: a. A duration of 25 business days, as in dehkan farmers register as individual entrepreneurs,1 with the ad- 2002; ditional requirement of obtaining the right to use the land as a b. A cost of 745 somoni ($233) including prospective farm. This is a largely non-transparent step represent- both offi cial and unoffi cial payments ing a signifi cant barrier to entry for a potential farmer by increas- (versus 487 somoni, or $176, in 2002); ing the amount of time and cost (unoffi cial) for farmers wishing to c. A total impact estimated at more start up a new activity. In fact the current situation is signifi cantly than 10% of their annual profi ts. worse than in 2002 in terms of the duration process.

• Registration for dehkan farmers is improv- The complexity and opaqueness of the registration procedure ing, but is still somewhat complicated and appears to be the main drivers of unofﬁ cial payments: in fact, the time consuming, requiring: entrepreneurs resorting most frequently to unoffi cial payments are a. A duration of 78 business days, as in legal entities, who not only face a very complicated procedure, 2002; but also offer the most interesting rent-seeking opportunities for b. A cost of 269 somoni ($84) (versus 419 offi cials. somoni, or $151, in 2002); c. A total impact estimated at almost 30% of their annual profi ts.

• The registration procedure for dehkan farmers and legal entities is not fully defi ned or standardized by the government. This leads to large regional differences, both in terms of duration and costs.

• Unoffi cial payments are still very frequent, reported by about 25% of respondents: the highest frequency is among legal entities (44%) versus dehkan farmers (27%). 1 Unless they decide to operate as legal entities, in which case they are considered companies in the fi eld of agriculture.

20 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

2.1 reGistration: the leGal framework

Registration with the relevant state bodies is the fi rst step that all entrepreneurs must take to legalize their status as a business. Al- though it is a common requirement for all SMEs, it is not a common procedure for each typology of business. Currently, there is a different registration system for individual entrepreneurs, dehkan farmers, and legal entities. 2 Registration is governed in Tajikistan by a set of legal acts, most of which have been recently introduced to unify the legislation of state registration of business entities: • Registration of individual entrepreneurs is mainly regulated by the Procedure for “Issuing a Patent and an Individual Entrepreneur Certifi cate to Individuals, Operating without Forming a Legal Entity”; • Registration of dehkan farms is regulated mainly by the Law “On a Dehkan Farm”; • Registration of legal entities is regulated mainly by the Law “On the State Registration of a Legal Entity”. Some additional aspects are also regulated by other legislative acts (see Box 2.1.).

This survey covers the registration procedure in its various stages. The fi rst step, state registration, legalizes the start of the entrepreneur’s operations with the authorized state body. To be legalized businesses then must follow post-registration procedures to fi le records with the relevant agencies, for the purposes of taxation, statistics, and fi ling.2 In addition, dehkan farmers must also obtain a land user’s right certifi cate (pre-registration) they can register with the state.

BOX 2.1. MAIN NORMATIVE ACTS REGULATING THE REGISTRATION PROCESS IN TAJIKISTAN

Codes: 1. The Civil Code – came into force January 1, 2000; 2. The Tax Code – came into force January 1, 2005.

Laws and Decrees: 1. Law No.46 “On the State Protection and Support to Entrepreneurship in RT,” May 10, 2002; 2. Law No.48 “On a Dehkan Farm,” May 10, 2002; 3. Law No.5 “On the State Registration of a Legal Entity,” April 22, 2003; 4. The Procedure No.140 for “Issuing a Patent and an Individual Entrepreneur Certifi cate to Individuals, Operating without Forming a Legal Entity,” approved by the Government of RT March 31, 2004.

2 E.g., in order to issue a seal or stamp, to open a bank account, etc.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 21 REGISTRATION

2.2 reGistration of individual entrepreneurs

Chart 2.1. REGISTRATION OF AN INDIVIDUAL ENTREPRENEUR Registration of an individual entrepreneur is the simplest process among the various systems in Tajikistan and is regulated by the State Post-Registration Procedure for “Issuing a Patent and an Individual Entrepreneur registration Certifi cate to Individuals, Operating without Forming a Legal En- tity,” and by the Civil and Tax Codes. The process consists of two steps (see Chart 2.1). TAX BODIES SOCIAL SECURITY FUND State registration 1. Application; 1. Application; 2. Passport; 2. Passport; Entrepreneur needs to obtain a patent or certifi cate from the tax 3. Document certifying the Certifi ed copies of: authorities (i.e., state registration). This is done by appearing per- payment of the cost of 3. Certifi cate of state regis- patent or certifi cate of tration or patent; sonally at the place of registration3 with necessary documents state registration; 4. Permit to conduct com- 4. 2 photos. mercial activity; listed in Chart 2.1. 5. Employment contract of individuals (only for certifi cate holders). Post-registration After state registration, the individual entrepreneurs must get registered at the Social Security Fund4 as a taxpayer of social taxes.5

As mentioned in the chapter 1, individual entrepreneurs can register their business with the state by fi ling for either a patent or certifi cate. The registration process is the same for both documents. However there are certain differences in rights provided to a certifi cate holder versus a patent holder (see Table 2.1.): • A patent holder can conduct only 49 activities set by legislation, while a certifi cate holder can conduct any type of activity not prohibited by the legislation6; • An individual entrepreneur can not usually hire employees if he or she is patent holder, but can cooperate in activities with another individual entrepreneur who also possesses a patent; • A patent holder is only allowed to conduct business activity outside (e.g., bazaar), while a certifi cate holder is allowed to conduct business anywhere (i.e., indoors and outdoors).

While registration for patent holders is granted up to one year, certifi cate holders should be granted permanent registration. In practice, as confi rmed by survey data, also certifi cate holders register every year.

According to the survey data, all respondents operating on the patent basis stated that they hired on average 1 employee. This

3 Article 24 of the Civil Code of RT. 4 At the time of preparation of the report Social Security Fund was renamed into State Agency for Social Security and Pension. 5 “The Guidelines for Accepting, Accounting and Spending the Resources of the Social Security Fund of RT,” approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 6 Decree of the Government of the Republic of Tajikistan No. 140 dd. March 31, 2004.

22 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

Table 2.1. Patent and Certifi cate - Main differences

patent Certiﬁ cate

According to the Civil Code (Article 24), a According to the Tax Code of RT (Article 137), an patent issued by the tax body is an offi cial individual entrepreneur (who has not formed a legal document certifying the State Registration entity) can register with the state based on a cer- of an individual as an individual entre- tiﬁ cate to engage in any business activity that is not preneur giving him the right to engage in prohibited by the legislation. A certifi cate is a docu- Legal basis7 specifi c business activity, as long as it is not ment certifying the state registration of a citizen as 2 carried out indoors. Additionally patent is an individual entrepreneur. a confi rmation of the payment of the income tax (see chapter 7). The activities which can be conducted under a patent were reduced from 110 to 49.

Type of activity Only the activity indicated in the patent Any activity not prohibited by the legislation

Form of activity Individual only Both individual and hiring of manpower

Region of operation Only in the region indicated in the patent On all territories of the republic without limitations

Hired staff No Yes

Foreign-economic activity No Yes

Although the legislation does not provide any provi- Duration from 15 days up to 1 year sion on duration, in practice certifi cate is issued for 1 year

Location Outdoors (i.e., bazaars, streets, etc.) Anywhere could be explained by the fact mentioned above: these individual entrepreneurs were cooperating with other individual entrepre- Chart 2.2. REGISTRATION OF INDIVIDUAL ENTREPRENEURS IS neurs who were patent holders, too. Another explanation for this RELATIVELY SIMPLE could be that individual entrepreneurs may have counted their % OF INDIVIDUAL ENTREPRENEURS UNDERGOING REGISTRATION family members supporting them as employees, or fi nally they hired employees without processing the required documents (unoffi cial employment). 11 64 32 4

2.2.1 DIFFICULTY OF REGISTERING AS INDIVIDUAL ENTREPRENEUR 75% 50% 25% 0% 25% 50%

Survey data confi rm that the new legislation has simplifi edthe Very Rather Very Rather easy easy complicated complicated registration process: only a third of the individual entrepreneurs fi nds the registration process either complicated or very complicated. This result is quite remarkable when taking into account

7 As set out in the Procedure “Issuing a Patent and Certifi cate of an Individual Entre- preneur to Natural Persons Operating Without Forming a Legal Entity,” approved by Decree No.104 of the Government of RT on March 31, 2004.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 23 REGISTRATION

Chart 2.3. DURATION OF THE REGISTRATION PROCESS FOR the limited legal awareness and limited legal literacy of individual INDIVIDUAL ENTREPRENEURS DECREASED CONSIDERABLY entrepreneurs (see Chart 2.2).

BUSINESS DAYS

13 2.2.2 TIME SPENT ON REGISTRATION AS AN INDIVIDUAL ENTREPRE- NEUR

5 The law defi nes a time frame of 13 days from the application date to complete the registration process as an individual entrepreneur. In particular:

• registration with the tax bodies should be completed within 2002 2005 3 days8; • fi ling as an individual entrepreneur at the Social Security Fund should take a maximum of 10 days.9

Chart 2.4. COST OF REGISTRATION OF INDIVIDUAL Chart 2.3 shows that the entire registration procedure for an indi- ENTREPRENEURS IS DECREASING.10 vidual entrepreneur lasts on average 5 business days (including

SOMONI the time to collect the documentation needed to support the ap- 728 178 plication). This is a dramatic improvement with respect to 2002. 117 85 2.2.3 COST OF REGISTRATION OF INDIVIDUAL ENTREPRENEURS

The law offi cially defi nes the cost of registration for individual en- 2002 2005 Maximum Minimum offi cial offi cial cost for cost for patent patent in 2005 in 2005 trepreneurs operating under patents or certifi cates (see Box 2.2). (per year) (per year) For patent holders the cost can vary depending on the activity

BOX 2.2. THE OFFICIAL PRICE OF AN INDIVIDUAL ENTREPRENEURS REGISTRATION

1. For entrepreneurs operating on the basis of a patent: cost is determined by the duration of a patent (from 15 days to 1 year) and a regional coeffi cient.11 For example, if an individual decides to sell newspapers, magazines, books and educational articles for 1 month in Dushanbe, the patent will cost 8.1 somoni ($2.53) per month. This amount consists of:

i) patent cost - 8 somoni ($2.5) per month and ii) the regional coeffi cient of 1.15% of the patent cost equivalent to 0.1 somoni ($0.03).12

2. For entrepreneurs operating on the basis of a certifi cate: registration is equal to the minimum monthly wage (MMW) or 20 somoni ($5.88) starting from 2006.13 The registration fee increased remarkably in comparison to 2002, where it amounted to 6% of MMW or 0.42 somoni ($0.14).14 The legislation does not specify whether fi ling a record at the Social Security Fund should be subject to payment, nor defi ne its cost.

8 Aricle 9 of the Law of RT “On the State Protection and Support to the Side of Entre- preneurship in RT.” 9 “The Guidelines for Accepting, Accounting and Spending the Resources of the Social Security Fund of RT,” approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 10 Maximum offi cial cost for a patent is for transportation activity (taxi), minimum cost for dry cleaning. 11 Regional coeffi cient varies from 0.8% to 1.15%. 12 Decree of the Government of the Republic of Tajikistan No. 216 dd. May, 10 2000. 13 Law of RT No. 115 dd. 26 December 2005. 14 Point 14 of the state fee rates set by Decree of the Government No. 587 dd. No- vember 29, 1993.

24 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

and region,15 while the cost of certifi cate is linked to the minimum Chart 2.5. REGIONAL DIFFERENCE OF REGISTRATION COSTS monthly wage (MMW).16 It should be noted that the two costs FOR RETAIL TRADE IS MAINLY DUE TO UNOFFICIAL PAYMENTS should not be compared, as registration cost for certifi cates is a 43% pure registration cost, while patent cost also includes the income 36% tax. 27% 21% 21% 18% According to the data (see Chart 2.4), on average, individual entrepreneurs spent 117 somoni ($37) on the whole registration 160 125 107 98 77 53 process, including all offi cial and unoffi cial payments. This indica- 82 2 tor shows a sharp decline with respect to 2002. 10%

The cost of the registration of individual entrepreneurs varies great- tion B Province province) ly from region to region, even for the same type of activity. As Dushanbe Kurgan-Tube Autonomous

Chart 2.5 shows, the cost of registration in the fi eld of retail trade Kulyab district district (Khatlon Sughd province lican Subordina- Districts of Repub- (Khatlon province) shows sharp differences between Dushanbe and the Districts of Districts of Republi- Gorno-Badakhshan can Subordination A Republican Subordination. The difference in unoffi cial payments Cost of registration in somoni is the main reason behind such a gap. . Unoffi cial payments in %

2.2.4 UNOFFICIAL PAYMENTS

As the survey reveals (see Chart 2.6), unoffi cial payments still play a role in the registration process: 25% of respondents admitted “... Frankly speaking, it is more convenient for having made unoffi cial payments during registration procedures. me to pay 5 or 10 somoni to speed up issuing the certifi cate and save time...” One of the most common reasons for unoffi cial payments mentioned by entrepreneurs is to speed up the processing of docu- - Entrepreneur, focus-group participant ments.

2.3 reGistration of dehkan farms

Legislation dedicates a special status to dehkan farms and pro- Chart 2.6. UNOFFICIAL PAYMENTS ARE DECREASING BUT vides them with the same rights of any other business entities in- STILL COMMON. volved in entrepreneurship (see Box 2.3). % OF INDIVIDUAL ENTREPRENEURS WHO MADE UNOFFICIAL PAYMENTS

33 24% of dehkan farmers in the survey sample registered their activ- 25 ity in 2005.

Registration of dehkan farms is regulated by the Law of RT “On a 2002 2005 Dehkan Farm.” Dehkan farms operate as individual entrepreneur registered on a certifi cate basis,17 with an additional requirement of pre-registering their land. However, registration of dehkan farms is not completely aligned with individual entrepreneurs and post-

14 For more details see Chapter 7. 16 1 MMW – from January 1, 2004: 7 somoni ($2.2); from January 1, 2005: 12 somoni ($3.8); from January 1, 2006: 20 somoni ($6.3). 17 Dehkan farmers can also choose to be organized in the form of a business partnership or a production co-operative, but are then classifi ed as legal entities and lose the rights of the simplifi ed registration process. For information on registering business partnerships and production co-operatives, see section on registering of the legal entities.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 25 REGISTRATION

registration procedures for dehkan farmers must be performed at BOX 2.3. EXTRACT FROM THE LAW OF RT “ON A 3 different bodies: bodies of statistics, Social Security Fund, and DEHKAN FARM” local self-government (Jamoat) (see Chart 2.7).

Article 5. Dehkan farm as a form of business Pre-Registration activity Dehkan farms are established on a piece of land. Acquiring this Dehkan farm is a unit of the economical system land for use as a farm is referred to as the pre-registration stage, possessing equal rights along with commercial and involves 2 steps: organizations and individual entrepreneurs. • The fi rst is for the head of the rayon (city) to grant a piece of land for organizing a dehkan farm; • The second step involves obtaining a land user’s right certifi - cate from the Raykomzem, the state body in charge of land use.

State registration State registration of a dehkan farm is done by application from the dehkan farm. After the registration with the tax bodies, the dehkan farm is given the State Registration Certifi cate.

Chart 2.7. REGISTRATION OF A DEHKAN FARM

STATE PRE-REGISTRATION REGISTRA- POST-REGISTRATION PROCEDURES TION

Head of Regional land rayon committee OPTION 1: AS AN INDIVIDUAL ENTREPRENEUR (IE) (city) (Raykomzem)

Application 1. Application; Bodies Social Security for decision 2. Confi rmation of land Tax bodies Jamoat of land plot plot allocation; of Statistics* Fund allocation 3. Project of land-utili- zation by land plot allocation; 4. Land tenure bound- 1. Application; 1. Application; 1. Application; 1. Confi rmation of ary plan; 2. Passport; Copies of: 2. Passport; land plot alloca- 5. Certifi cate for land Copies of: 2. Confi rmation of Certifi ed copies of: tion; plot. 3. Certifi cate of State land plot alloca- 3. Certifi cate of state 2. Certifi cate of land registration; tion; registration; use right; 4. Land user’s right 3. Decision on 4. OKPO code; 3. Certifi cate of state certifi cate; creation of Dehkan 5. Licenses, if neces- registration. 5. Certifi cate of land farm. sary; use right; 6. Employment con- 6. Information about * If dehkan farm tract of individuals. number of staff, is created on a chairman and partnership basis, a chief accountant. copy of agreement of partnership is also required.

OPTION 2: AS A LEGAL ENTITY (See Chart 2.13)

26 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

Post-Registration Post-registration consists of 3 steps: ”...It is not only me who faces diffi culties obtaining the decision of the local executive authority • At the bodies of statistics: after obtaining the Registration Cer- (Khukumat) and getting the certifi cate for land tifi cate at the tax bodies, a dehkan farm must also register at use. It is this entire procedure that takes much time and efforts...” the statistics bodies at the location of the farm to get the statistical code for the general classifi cation of enterprises and - Entrepreneur, a focus-group participant organizations (“OKPO” code)18; • At the Social Security Fund: after obtaining the OKPO code, dehkan farms must apply to the Social Security Fund to be 2 registered as a taxpayer19 and receive an Individual Taxpay- er’s Code; • At the Jamoat: dehkan farms must also register in the fi nan- Chart 2.8. REGISTRATION PROCEDURE FOR DEHKAN FARM- cial records of the local administration. ERS IS COMPLICATED

% OF DEHKAN FARMERS UNDERGOING REGISTRATION 2.3.1 DIFFICULTY OF REGISTERING A DEHKAN FARM

5 53 35 8 As the survey shows, registration of a dehkan farm still remains problematic: 43% of dehkan farmers think that the procedure is 75% 50% 25% 0% 25% 50% either complicated or very complicated (see Chart 2.8). The dif- Very Rather Very Rather fi culty of the registration procedure can be explained by ambigu- easy easy complicated complicated ous legislation and non-transparent and time consuming process, including the paperwork to be fi lled at different bodies described in Chart 2.7. Table 2.2. Offi cial time frames for registration of a dehkan farm 2.3.2 TIME FRAMES FOR THE REGISTRATION OF DEHKAN FARMS

time frames, process Bodies The legislation does not regulate the time frames for every stage days of the registration process for dehkan farmers (see Table 2.2). Time Head of Rayon (city) 30 limits are set only for the Head of the Rayon to grant the land Pre-registration Regional land 20 not specifi ed21 (within one month) and for registering at the Social Security Fund committee (within 10 days after submission of the application). State registra- Tax Bodies not specifi ed22 tion

According to the survey, registration of a dehkan farm in Tajikistan Bodies of Statistics not specifi ed23 Post-registration takes, on average, 78 business days. This situation has worsened procedures with respect to 2002 (see Chart 2.9). Social Security Fund 10

Survey respondents cite the pre-registration process as the main Chart 2.9. PRE-REGISTRATION INCREASES THE TOTAL TIME cause of the long duration in registering a dehkan farm. The pro- SPENT FOR REGISTRATION OF DEHKAN FARM cedure of obtaining land can at times take several months, and BUSINESS DAYS 78 is due to the diffi culty in gaining approvals and preparing all nec-

18 Article 16 of the Law of RT “On a Dehkan Farm.” 36 19 The Guidelines for “Accepting, Accounting and Spending the Resources of the Social Security Fund of RT,” approved by the Chairman of the Fund as per the agreement with the Ministry of Finance and the Chairman of the National Bank dd. June 24, 1997. 2002 2005 20 Law of RT No.48 dd. May 10, 2002. 21 There is no offi cial information. 22 A dehkan farm must apply for state registration at the tax bodies within 30 calendar days after receiving the land use certifi cate (Article 45 of the Tax Code). But there is no information on the time frame for the government bodies to complete registration after receiving the application. 23 Legislation does not specify the time frames for completion of the registration.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 27 REGISTRATION

essary documents. It is also caused by the absence of a legally established time frame for obtaining the Land User’s Right Certifi - cate and the low legal awareness of farmers (for example, when preparing the required documents).

2.3.3 COST OF REGISTRATION OF A DEHKAN FARM

Chart 2.10. COST OF REGISTRATION OF A DEHKAN FARM IS The survey results show that the average cost of registering a de- DECLINING hkan farm in 2005 is 269 somoni ($84), including offi cial and unof-

SOMONI fi cial payments (see Chart 2.10). This indicator decreased greatly 419 as compared to 2002,24 most likely due to government reforms that reduced the examination requirement by a notary offi ce. Previously, a farmer had to prepare and present the documents required for registration at the Ministry of Justice, as well as register 269 the farm at a notary offi ce.

The legislation does stipulate some costs of the procedure: 1. State registration of a dehkan farm at the tax bodies is free of charge25; 2002 2005 2. Issuance of the registration OKPO card costs 3 times the minimum monthly wage (60 somoni or $19)26; 3. Processing the Land Use Certifi cate is subject to the following payments27: • for dehkan farms organized on the lands of reformed agricultural institutions and companies – 37.24 somoni ($12); • for dehkan farms organized on other pieces of land – 75.14 somoni ($23).

Chart 2.11. REGISTRATION COSTS OF A DEHKAN FARM Nevertheless, despite these improvements, the legislation does 28 DIFFER HIGHLY ACCORDING TO THE REGION not defi ne the offi cial cost of every step of the registration proc-

SOMONI ess for dehkan farmers. The cost to apply for a decision from the rayon is not specifi ed, for example. Kurgan-Tube 240 district (Khatlon province) The unclear and ambiguous legislation regarding registration Sughd province 218 costs for dehkan farms is refl ected on the regional level. Costs to register a farm varied widely among the provinces of Tajikistan. Others 415 According to the survey results, farmers paid most to register in the Kurgan-Tube district of Khatlon province and in Sughd province (see Chart 2.11).

24 See “Registration” in IFC (2004b). 25 Article 26 of the Law of RT “On a Dehkan Farm.” 26 Regulation “On the State Register of Enterprises, Institutions and Organizations of RT,” approved by Decree of the Cabinet of Ministers of RT No. 387 dd. December 30, 1991. 27 Regulation “On the Procedure for Processing and Issuing the Certifi cates of the Right to the Use of Land, Certifi cate for a Piece of Land and Their Cost,” approved by Decree of the Government of RT No. 478 dd. December 3, 2004. 28 Category “Others” include Kulyab district and Districts of Republican Subordina- tion.

28 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

2.3.4 UNOFFICIAL PAYMENTS

The number of dehkan farmers who reported making unoffi cial Chart 2.12. THE PRACTICE OF UNOFFICIAL PAYMENTS FOR payments is remarkably low in 2005 (see Chart 2.12). About 27% DEHKAN FARMERS IS DECREASING of the entrepreneurs who registered their farms in 2005 turned to % OF DEHKAN FARMERS WHO MADE UNOFFICIAL PAYMENTS unoffi cial payments versus 57% in 2002. Although this fi gure rep- 57 resents a clear improvement with respect to the previous survey, it should be mentioned that this result can be in part due to the 27 unclear defi nitions of the offi cial cost of certain steps of registra- 2 tion for dehkan farmers: as a result entrepreneurs cannot always distinguish between offi cial and unoffi cial payments.

2.4 reGistration of leGal entities 2002 2005

Legal entities face the most complicated registration procedure among the business types surveyed. This procedure is regulated BOX 2.4. LEGAL FORMS OF LEGAL ENTITIES by the Law “On the State Registration of a Legal Entity,” which was adopted in 2003. The following legal organizational forms exist in the country: Chart 2.13 presents the process as pictured by the Law (i.e., “de 1. a business partnership (full partnership and jure”) as well as it is applied in practice (i.e., “de facto”). a partnership in commendam); 2. a company (limited liability company Two major highlights of the new Law “On the State Registration of – LLC, joint-stock company – OJSC, CJSC, a Legal Entity” that have signifi cantly infl uenced the registration additional responsibility company, affi li- procedure should be mentioned here: ated and depending company); • On the positive side, the new law reduced the number of 3. agriculture and manufacturing coopera- bodies involved in the registration procedure: in particular tives. prior to the adoption of the law, examination of constitutive The results of the survey are based on the an- documents and state registration was conducted in separate swers provided by: LLC, OJSC, CJSC, affi liated bodies – bodies of justice and notary respectively, while after companies, agriculture and manufacturing adoption of this law, these two procedures are conducted in cooperatives. bodies of justice only; • On the negative side, the new law increased the term of the state registration, which is the fi rst step of the overall registration process described in Chart 2.13: the time limit for state registration was increased from 5 to 10 days.

State Registration

Legal entities must obtain their State Registration Certifi cate at the local state justice bodies,29 with the exception of legal entities with foreign investments and fi nancial institutions which must carry out their state registration in the central offi ce for the Ministry of Jus- tice located in Dushanbe.

29 Registration of other legal entities is carried out in justice bodies located in the centre of oblasts.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 29 REGISTRATION

Chart 2.13. REGISTRATION OF A LEGAL ENTITY: DE-JURE VS. DE-FACTO30 State registration Post-Registration

2a Automatic process via notifi cation Bodies of Social 1 statistics security Fund Require presence in person

Bodies of Jamoat LE Bank Justice (only for

de-jure agribusiness) Department of Tax bodies 3 Internal Affairs 4 2b

1 2 3 4a

Bodies of Bodies of Social Tax bodies 5 6 Justice statistics security Fund

de-facto Jamoat Bank (only for 4b Department of agribusiness) Internal Affairs

a. de-jure:

1. Legal entity (LE) applies to body of justice to obtain the Certifi cate on State registration. Body of justice registers the LE and issues the Certifi cate on State registration. Body of justice informs bodies of statistics and tax bodies on state registration of LE. Body of statistics gives LE the OKPO code of the general classifi cation of enterprises and organizations. Tax body issues the Individual Taxpayer’s Code. Body of statistics and Tax body notify the LE about assignment of OKPO code and Individual Taxpayer‘s code. 2. After that LE can apply simultaneously to Social Security Fund and Department of Internal Affairs. Social Security Fund registers LE as the payer of social taxes and issues an informational letter. Department of Internal Affairs gives a permit to obtain of a stamp and seal. 3. Next step is opening a bank account. After that LE (with exception of a business partnership or a production co-operative) can start its activity. 4. Business partnership or production co-operative after opening a bank account should be additionally registered in the Jamoat.

B. de-facto:

1. LE applies to body of justice to obtain the Certifi cate on State registration. Body of justice registers the LE and issues the Certifi cate on State registration. 2. After this LE applies itself to body of statistics to obtain the OKPO code of the general classifi cation of enterprises and organizations. Body of statistics issues the OKPO code for LE. 3. LE applies to Social Security Fund and gets registered as a payer of social taxes. LE is given an information letter. 4. After this, LE can apply to Tax body and/or Department of Internal Affairs. Tax body issues the Individual Taxpayer‘s code. Department of Internal Affairs gives a permit for obtaining of a stamp and seal. 5. Next step is opening a bank account. After that LE (with exception of a business partnership or a production co-operative) can start its activity. 6. Business partnership or production co-operative after opening a bank account should be additionally registered in the Jamoat (local self-government).

Post-Registration

Legal entities must then register at some or all of 6 state bodies indicated in Chart 2.13, depending on the legal form of the legal entity (see Box 2.4):

1. At the bodies of statistics: legal entities must obtain the OKPO code of the general classifi cation of enterprises and organizations; 2. At the Social Security Fund: after obtaining the OKPO code, the legal entity must register with the Social Security Fund as a taxpayer;

30 For list of documents necessary to register a legal entity see Attachment 2.1.

30 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

3. At the tax bodies: registration at the tax bodies is done if the OKPO code and confi rmation letter from the Social Security Fund are available. Every legal entity must get registered at the tax bodies as a taxpayer in the place of its location, at the location of the immovable property and vehicles belonging to it, and in the location of each of its separated divisions to obtain the Individual Taxpayer’s Code; 4. At the Department of Internal Affairs: registration can be done at any stage after the state registration and before registering 2 at a bank, to obtain an offi cial seal and stamp31; 5. At the bank: the legal entity applies for opening a bank account to deposit its capital; 6. At the Jamoat (agribusiness only): agricultural goods producers organized in the form of business partnerships or production co-operatives must also register at the Jamoat, or local governing body.

2.4.1 DIFFICULTY OF REGISTRATION FOR LEGAL ENTITY BOX 2.5. NON-OBSERVANCE OF “ONE-STOP- The registration process for legal entities in Tajikistan is very compli- SHOP” ELEMENTS IN TAJIKISTAN cated, hindering the start-up of business activities. The bodies of justice regularly forward informa- In fact, although Tajik legislation currently stipulates some aspects tion on the registration of a legal entity to the of “one-stop-shop” registration (e.g., the bodies of statistics and bodies of statistics and tax bodies in its district. tax should provide an OKPO and Individual Taxpayer’s Number32 respectively, based on the information provided by the bodies of The bodies of statistics must, based on the infor- justice), in practice, however, this is not done, and entrepreneurs mation provided by the bodies of justice, give must apply separately to the tax and statistics bodies with the rel- the legal entity the statistical code (OKPO) and evant information (see Box 2.5 and Chart 2.13). send a written notifi cation to the entrepreneur. However, entrepreneurs have one month to reg- The complexity of the registration process for legal entities is fur- ister at the tax bodies after receiving the State ther proved by our survey results (see Chart 2.14). Of the 22% of Registration Certifi cate. Without the OKPO code, legal entities that established their business in 2005, almost 60% they cannot get registered at the tax bodies or view registration as either complicated or very complicated. In- open a bank account. Therefore, they must go terviews with entrepreneurs showed that at the very beginning to the statistics bodies to “speed up” receipt of of the registration process, they encountered the most diffi culties. the statistical code. These included limited access to information on the registration

Chart 2.14. REGISTRATION PROCESS OF LEGAL ENTITIES IS COMPLICATED

% OF SMALL AND MEDIUM COMPANIES UNDERGOING REGISTRATION

7 37 53 3

50% 25% 0% 25% 50% 75%

Very Rather Very Rather easy easy complicated complicated

31 Seal used for fi nancial documents of the entity; stamp used for correspondence. 32 Articles 9 and 15 of the Law “On the State Registration of a Legal Entity, Articles 45 and 47 of the Tax Code of RT.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 31 REGISTRATION

process, the large number of the documents required, and am- BOX 2.6. STATE REGISTRATION IS AN INEFFICIENT biguous requirements for each step in the process. AND COMPLEX PROCESS The registration of small and medium companies remains a com- • Departments of Bodies of Justice conducting plicated administrative barrier. The absence of clear and specifi c state registration are situated only in: concepts of cost and duration of certain procedures (e.g., reg- - Dushanbe, where legal entities from Dush- istration at the Social Security Fund) makes the procedure even anbe and DRS are registered; more diffi cult. - Central cities of provinces (Khorog, Kur- gan-Tube, Khudjent), where legal entities One of the possible ways to simplify the procedure could be the from GBAO, Khatlon and Sughd province introduction of a “one-stop shop” principle,33 which will consoli- are registered. date the various state agencies into one registering body. This will That implies entrepreneurs from remote areas allow businesses to get registered faster with fewer expenses, and needs to go to respective central cities cov- reduces opportunities for graft and bribery (see Attachment 2.3 ering up to 300 km, with obvious related time in the Annex). and fi nancial expenses. • Necessity to have several identifi cation codes 2.4.2 TIME FRAMES FOR REGISTRATION OF LEGAL ENTITIES: (Number of state registration, Individual Iden- A LONG PROCESS tifi cation Number of Taxpayer and Statistical Code). The legislation does not fully defi ne the time frame to register a legal entity (see Table 2.3) and as such, the process can be extremely complex and time consuming.

According to survey data, it took the same time to register a legal entity in 2005 as in 2002: more than one month (see Chart 2.15).

Such a long time frame does not encourage development and formation of small and medium business representing a serious barrier to entry and has direct consequences on the economy.

Chart 2.15. DURATION OF REGISTRATION OF LEGAL ENTITIES Table 2.3. Offi cial time frames for registration of legal entities DID NOT BECOME FASTER

BUSINESS DAYS procedure Bodies time frames, days State Registration Bodies of Justice 10 25 25 Bodies of Statistics not specifi ed34

Tax Bodies 1035 Post-Registration Proce- Social Security Fund 10 dures Bodies of Internal Affairs not specifi ed

Banks not specifi ed

2002 2005 33 A one-stop shop is any institution that unifi es government offi cials from different departments in one location to provide information and/or services to its citizens (see Attachment 2.3). 34 The bodies of statistics must fi le information about the registration of the legal entity into the state register of enterprises and organizations, and is also obliged to give the legal entity the statistical code (OKPO) and notify the entity in writing. The legislation, however, does not envisage the time frame to complete the procedure of creating a record for a legal entity. 35 A legal entity must apply for registration at the tax bodies within 30 calendar days after registering at the bodies of justice (Article 45 of the Tax Code). But there is no corresponding time limit for the tax bodies to register the entity after receiving the application.

32 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

The absence of a uniform, legally established time frame explains Chart 2.16. DURATION OF THE REGISTRATION PROCESS FOR 36 the high regional differences in the duration of the registration A SMALL AND MEDIUM COMPANY: REGIONAL DIFFERENCES procedure: the fastest time to register a legal entity was in Sughd business days province (20 days), while the longest one was in the Districts of the District of Repub- Republican Subordination А (40 days). This long duration is due to lican Subordina- 40 tion A the fact that according to current legislation all legal entities from Dushanbe 21 DRS get registered in Dushanbe that adds up to time and fi nancial cost of entrepreneurs, especially from remote areas (see Box Sughd province 20 2.6 and Chart 2.16.). Additionally the differences of duration of on average 2 Other regions 16 25 business days registration characterize the status of the business environment in the region, in particular, the relations between entrepreneurs and certain offi cials and bodies involved in registration.

BOX 2.7. EXAMPLE OF DECLARATIVE PRINCIPLE IN THE REGISTRATION PROCESS37

The declarative principle of registration introduced in Uzbekistan is a process of state registration based on the consideration of provided documents. This process does not foresee a comprehensive examination of documents for compliance with current legislation. Registering bodies only consider the sections of documents relevant to their control. Preparation of the necessary documents for state registration can be done either by founder himself or by hired consulting company, Chamber of Commerce and Industry, other persons. Founder bears full responsibility for the authenticity of provided documents and their compliance with current legislation.

Refusal of state registration can be due to:

for all legal entities: • application to an irrelevant registering authority; • presentation of an incomplete set of documents; • the fi rm name in constituent documents or stamp design do not correspond to the name specifi ed in the certifi cate confi rming its uniqueness; • the legal form of business declared in the constituent documents or the stamp design do not correspond to the legal forms provided by the legislation; • constituent documents include types of activity prohibited by the legislation; • the authorized capital specifi ed in the constituent documents does not match the authorized capital size established by the legislation for that type of business entity. additionally for entities with foreign investments: • the share of foreign investments does not correspond to the share size established by the legislation for entities with foreign investments; • the list of founders does not include a foreign legal entity. additionally for bazaars: • failure to pay at least 30% of the authorized capital amount specifi ed in the constituent documents; • the list of founders of the market does not include the local government holding at least 51 percent of the shares.

Provided documents are studied only to check their inconsistency with cases of refusal. Refusal of state registration except above mentioned cases is not allowed.

36 Due to the small number of registered companies in GBAO, Kulyab district, Kur- gan-Tube district and DRS B, these regions are grouped under “Other regions” for statistical purposes. 37 See IFC (2006b).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 33 REGISTRATION

Furthermore the long registration period is due to thorough examination of documents by the bodies of justice during very thorough examination of provided documents. Entrepreneurs think that offi cials drag out the process and can even refuse the state registration on any pretext, opening opportunities for rent-seeking. It is recommended therefore to introduce the declarative principle of registration to streamline the process and reduce the authority of offi cials to refuse the state registration (seeBox 2.7).

2.4.3 COST OF REGISTRATION FOR LEGAL ENTITIES

Chart 2.17. COST OF REGISTRATION FOR A SMALL AND From March 2004, the fees for several stages of registration of a MEDIUM COMPANY IN 2005 VS. 2002 legal entity are defi ned by the Law38 and are linked to the mini-

SOMONI mum monthly wage (MMW). This means that every increase of the 745 MMW also increases the cost of registration (see Attachment 2.4

In 2005 the offi cial in Annex). For the time being the following fees are set by legisla- 487 cost of registration tion: of a legal entity at the bodies of 1. Fee for state registration by the bodies of justice amounts to justice and statistics only equaled 33 30 MMW; times the minimum 2. Obtaining the statistical code (OKPO) by the bodies of statis- wage, or 396 39 somoni ($124) tics and issuing a registration card costs 3 times the MMW.

2002 2005 However, the costs for registering at other bodies are not set forth in the legislation, and as such, are open to higher unoffi cial payments. Accordingly, registration as a legal entity is the most expensive for entrepreneurs.

Legal entities spent 745 somoni ($233) to register in 2005, including “... When I wanted to register my enterprise, my offi cial and unoffi cial payments (see Chart 2.17). This indicator is friends advised me to turn to a law company providing assistance with the registration. As a 83% higher than that in 2002, and supports the assumption that result, the registration might have been a little registering bodies increase the pressure on legal entities. expensive for me, but I did not have to go from one door to another...” The registration cost also varies depending on the region. Entre- - Entrepreneur, focus-group participant preneurs who registered their business in Dushanbe pay more. This may be due to the greater number of entrepreneurs in the country’s capital who hire legal fi rms to take care of their registration procedures.

2.4.4 UNOFFICIAL PAYMENTS FOR LEGAL ENTITIES: STILL AN ISSUE

The data on unoffi cial payments also prove that registration of legal entities is a diffi cult procedure with a large amount of inter-

38 Law of RT No. 19 “On the State Due” dd. February 28, 2004. Prior to the law, the costs to register with the state were approved by the Government of the Republic of Tajikistan. For example, Decree No. 587 of the government of RT on November 29, 1993. 39 Regulation “On the State Register of Enterprises, Institutions and Organizations of RT,” approved by Decree of the Cabinet of Ministers of RT No. 387 dd. December 30, 1991.

34 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

vention from state bodies’ side. According to the survey, almost Chart 2.18. UNOFFICIAL PAYMENTS DURING REGISTRATION 44% of the entrepreneurs who tried to register their businesses in ARE COMMON FOR LEGAL ENTITIES

2005 had to turn to unoffi cial payments. Remarkable is the fact % OF SMALL AND MEDIUM COMPANIES WHO MADE UNOFFICIAL PAYMENTS that this fi gure did not change in comparison to 2002 (see Chart 2.18) proving that legislative changes do not always work in prac- 44 44 tice.

In general, legal entities begin their operation after obtaining the State Registration Certifi cate, except for activities that require a 2 license or a permit.

chapter 3 and chapter 4 provide a more detailed description of 2002 2005 the procedures linked to the start of business activity.

2.5 economic impact estimate

According to the approach described in Box 2.8, SMEs lose between 4% and 27% of their annual profi t to undergo the registra- BOX 2.8. ESTIMATE OF THE OPPORTUNITY COST tion process (see Chart 2.19). LOST DURING THE REGISTRATION PROCEDURE

Though losses for individual entrepreneurs are relatively modest, Registration process creates direct costs for new- their repetitive nature (due to the fact that individual entrepre- ly established businesses in the form of expenses neurs need to register every year anew) represent a signifi cant (offi cial and unoffi cial payments) they need to burden for them. It is also remarkable that dehkan farmers lose a bear. At the same time, due to the long regis- signifi cant share of their annual profi ts due to the very long reg- tration process businesses lose the opportunity istration process. In money terms small and medium companies to gain additional profi ts. These losses are calcu- bear the highest burden.40 lated as additional “opportunity costs.” Overall economic impact is equal to: Chart 2.19. ECONOMIC IMPACT OF THE REGISTRATION BURDEN RANGES BETWEEN 4% AND 27% OF ANNUAL PROFITS

C = E + (PA*d/dt), SOMONI

where: 4% 11% 27% of annual of annual of annual profi ts profi ts profi ts • C- economic impact in money terms;

• E - offi cial and unoffi cial expenses for registration;

• PA - annual profi ts, net of profi t tax; 2,200 • d - business days per year;

• dt - business days spent for registration. 1,550

175

Individual Small and medium Dehkan farmers entrepreneurs companies

40 Attachment 2.2 provides a detailed calculation for a specifi c sector.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 35 REGISTRATION

recommendations

1. Introduce time limits for registration, which could apply to single bodies as well as to the overall process. This could be achieved by:

1.1 Imposing by law a fi xed consideration time for each step of the registration process: within 1 working day wherever a simple approval is needed (i.e., to obtain Statistical Code), while within 5 working days where a thorough analysis is needed (i.e., State Registration); 1.2 Requiring the public bodies to substantiate delays, as well as to provide a detailed explanations for refusal of applications in order to allow the applicant to improve upon it; 1.3 Introducing a maximum registration time, differentiated per typology of companies, in case a “one-stop-shop” principle was to be introduced.

Expected impact

Time limits for registration introduce a responsibility principle for public bodies, which should increase effi ciency by: • Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profi ts, employment and tax revenues; • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies.

2. Introduce offi cial processing costs for each step of registration by the different bodies. These costs should be differentiated for each typology of business and offi cially disclosed in the informational boards in each bodies.

Expected impact

Introducing and communicating to the public the offi cial costs involved in each stage of the registration process would increase transparency of the process and in turn decrease unoffi cial solutions, overall reducing registration costs. This would in turn result in: • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies, with positive impact on profi ts, employment and tax revenues; • Higher number of registered businesses, reducing the size of the informal sector in the economy.

3. Further streamline the registration process for individual entrepreneurs, by creating a “one-stop-shop” which would integrate Tax Bodies and Social Security. This could be obtained by providing the Tax Authority with the responsibility to collect the information needed by the Social Security Fund the start-up of an individual entrepreneur’s activity.

Expected impact

A further consolidation of the stages needed to register an individual entrepreneur would be particularly benefi cial given the repetitiveness of the process (on a yearly basis for patent holders). This would in turn result in: • Higher number of registered businesses, reducing the size of the informal sector in the economy; • Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profi ts, employment and tax revenues; • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies.

4. Implement a life-time registration for individual entrepreneurs operating under certifi cates, which would reduce a recurrent cost for doing business. As the legislation does not foresees expiration for certifi cates, this result could

36 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

recommendations be simply achieved by monitoring that the Tax Bodies do not include an expiration date in the certifi cate which they issue. 1. Introduce time limits for registration, which could apply to single bodies as well as to the overall process. This could be achieved by: Expected impact

1.1 Imposing by law a fi xed consideration time for each step of the registration process: within 1 working day wher- By waiving a duration limit for certifi cates, individual entrepreneurs opting out for this typology of registration would ever a simple approval is needed (i.e., to obtain Statistical Code), while within 5 working days where a thorough obtain an immediate benefi t by avoiding a recurrent burden. This in turn would imply: analysis is needed (i.e., State Registration); • Reduced time and cost on a yearly basis for certifi cate holders, with positive impact on profi ts, employment 2 1.2 Requiring the public bodies to substantiate delays, as well as to provide a detailed explanations for refusal of and tax revenues; applications in order to allow the applicant to improve upon it; • Provision of an incentive to individual entrepreneurs to operate under a certifi cate status, benefi cial for the 1.3 Introducing a maximum registration time, differentiated per typology of companies, in case a “one-stop-shop” public budget in terms of higher revenues and transparency of the accounting. principle was to be introduced. 5. Reduce the number of steps needed to register a legal entity (e.g., applying the so-called “one-stop-shop” princi- Expected impact ple) and limit the discretionality of each body in the decision making process. This could be achieved by:

Time limits for registration introduce a responsibility principle for public bodies, which should increase effi ciency by: 5.1 Ensuring the implementation of the current legislation foreseeing an exchange of records between registering • Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on bodies which would allow the companies to obtain a Statistical Code and a Taxpayer’s Identifi cation Number profi ts, employment and tax revenues; without the need to further apply to each of the bodies; • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies. 5.2 Introducing a full fl edged “one-stop-shop” mechanism including all the State bodies involved in legal entities registration. The registering entity could fi ll in a single application and provide at once all the necessary docu- 2. Introduce offi cial processing costs for each step of registration by the different bodies. These costs should be differ- ments, which would be processed internally by the involved bodies; entiated for each typology of business and offi cially disclosed in the informational boards in each bodies. 5.3 Introducing the declarative principle in the registration process by the bodies of justice, foreseeing simplifi ed consideration process and specifying a limited set of cases for refusing registration (e.g., incomplete documen- Expected impact tation, unlawful activity).

Introducing and communicating to the public the offi cial costs involved in each stage of the registration process Expected impact would increase transparency of the process and in turn decrease unoffi cial solutions, overall reducing registration costs. This would in turn result in: A lower number of steps is expected to reduce a barrier to entry for new companies, resulting in: • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies, with positive impact • Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on on profi ts, employment and tax revenues; profi ts, employment and tax revenues; • Higher number of registered businesses, reducing the size of the informal sector in the economy. • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies.

3. Further streamline the registration process for individual entrepreneurs, by creating a “one-stop-shop” which would 6. Introduce a single identifi cation number forlegal entities, to be used at the bodies of justice as well as statistical and integrate Tax Bodies and Social Security. This could be obtained by providing the Tax Authority with the responsibility tax bodies. The single identifi cation number could be assigned by the fi rst body processing the registration docu- to collect the information needed by the Social Security Fund the start-up of an individual entrepreneur’s activity. ments and communicated to the other ones along the process.

Expected impact Expected impact

A further consolidation of the stages needed to register an individual entrepreneur would be particularly benefi cial Introducing a single identifi cation number would simplify the registration process, by reducing the need to apply given the repetitiveness of the process (on a yearly basis for patent holders). This would in turn result in: to different bodies (see Recommendation 5), while at the same time it would also facilitate the identifi cation of • Higher number of registered businesses, reducing the size of the informal sector in the economy; the companies for State purposes, including tax and social security payments administration. • Reduced registration time, which in turn would result in faster entry of new companies, with positive impact on profi ts, employment and tax revenues; 7. Introduction of a transparent mechanism for land allocation for the creation of dehkan farms, which foresees, • Reduced costs, in particular unoffi cial ones, resulting in cheaper entry of new companies. at the minimum:

4. Implement a life-time registration for individual entrepreneurs operating under certifi cates, which would reduce • Fixed terms for decision making; a recurrent cost for doing business. As the legislation does not foresees expiration for certifi cates, this result could • Clear application fees.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 37 REGISTRATION

Expected impact

Simplifi ed land allocation mechanism would make registering dehkan farms easier, which would allow dehkan farmers to dedicate more time for tillage resulting in increased possibilities for good yield.

8. Increasing the legal awareness of entrepreneurs through the related state and non-governmental structures, and improving entrepreneurs’ access to information on the registration procedure. To increase awareness campaign entrepreneurs it is recommended to introduce a uniform set of documents required for the registration (preferably not more than one or two forms).

Expected impact

Improved access to information, especially outside the Dushanbe region, could improve registration procedures, allowing for growth in the number of local companies. This in turn would have an immediate impact on the local economy, supporting development of local entrepreneurship.

38 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION annex attachment 2.1. list of documents for the legal entities registration procedure.

1. In bodies of justice: • Application; • Statute; • Decision, which encompasses: creation of legal entity; confi rmation of constituent documents; assignment of the head of executive organ of legal entity; 2 • Documents confi rming legal address and location; • Receipt or copy of warrant for payment of state due. 2. In bodies of statistics: • Certifi cate of state registration (copy); • Statute (copy). 3. In Social Security Fund: • Certifi cate of state registration (copy); • OKPO code (copy); • Statute (copy). 4. In Tax bodies: • Certifi ed statute (copy); • Certifi ed Certifi cate of state registration (copy); • OKPO code (copy); • Reference from Social Security Fund Information about number of staff, chairman and chief accountant (copy). 5. In Department of Internal Affairs: • Statute (copy); • Certifi cate of state registration (copy). 6. In bank: • Application; • Certifi ed statute (copy); • Certifi cate of state registration (copy); • Two cards with signature samples and imprint of the seal (copy). 7. In Jamoat (only for agribusiness) • Certifi cate for the right to use the land.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 39 REGISTRATION

attachment 2.2. example of the opportunity cost calculation for small and medium company

We took the example of one sector of the economy: retail trade.

1. The amount paid during the registration

An enterprise operating in retail trade on average spent 785 somoni ($245) for the entire registration process (76% of GDP per capita), including all offi cial and unoffi cial payments.

2. Loss of profi ts

Time spent on the registration process is lost opportunity for a newly established enterprise to gain income. According to survey results, entrepreneurs operating in retail trade gained income of 20,420 somoni ($6,381) in one year. If a fi rm operated a complete month instead of going through the long registration process, it could earn 1,700 somoni ($531) (20,420/12*1=1,700). The total amount lost by the enterprise during the registration process is thus 2,485 somoni ($777).

3. Taxes to the country budget

VAT (the rate is 20% of the turnover) In 2005 the sale turnover in retail trade made 290,600 somoni ($90,812) (or 24,215 somoni/$7,567 per month). Based on that fi gure, the state budget does not receive 4,840 somoni ($1,512) in VAT from those enterprises that spent a whole month to register their activity (24,215*0.25=4,840).

Tax for motorways use (the rate is 0.5% of the turnover of a retail enterprise) The budget loss in this case amounts to 120 somoni ($38), the calculation is similar to the calculation for the VAT.

Profi t tax (the rate is 20% of the profi ts) Going by the calculation of the monthly profi ts, the loss of the state budget from the profi t tax will amount to 340 somoni ($106) (or 20% of 1,700 somoni).

The total loss for the budget is, therefore, 5,300 somoni ($1,656), i.e: 4,840 + 120 + 340. This fi gure is 5 times as large as the GDP per capita.

4. Creating jobs On average, a trade enterprise employs 8 people at the average salary of 115 somoni ($36). The total amount of the unpaid salary is 920 somoni ($288), accordingly.

40 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

Attachment 2.3. Simpliﬁ cation of the registration Process by introducing a “one-stop-shop” principle

In 2002, a “one-stop-shop” principle was introduced in the Ukrainian city of Ivano-Frankovsk to simplify the registration process. This meant that all of the 8 state bodies involved in registering a business were moved to one offi ce (the Registration Chamber). There is an information center that addresses questions that entrepreneurs have about the registration process, as well as other government services for the private sector.

So, a person who wants to register his business comes to this offi ce, submits all necessary documents, and after a cer- 2 tain time, gets his business (entity) registered. Rather than visiting each of the 8 agencies three times (for a minimum of 24 visits), the entrepreneur now only needs to come to the Registration Chamber three times (to fi nd out what documentation is required, to submit that documentation, and to receive the registration).

Thanks to this one-stop-shop principle: • The number of local businesses registered in Ivano-Frankovsk increased by 113%; • The duration of the registration process decreased from 28 days to only 10 days; • The cost of registration fell by 65%; • There was increased transparency, due to much clearer and publicly available information, which reduced the opportunities for graft and bribery; • An additional factor to contribute the increased transparency was the presence of local business associations in the Registration Chamber.

Chart 2.20. SCHEME OF HOW THE “ONE-STOP-SHOP” PRINCIPLE WORKS

1. Registration 3. Statistics 2. Tax police Department Department Registration Chamber Information 4. Permit Service Center under the Ministry of Internal Affairs

5. Unemployment 9. Tax registration Social inspection in 10 days Insurance Fund

7. Temporary 8. Pension 6. Casualty Social Disability Social Fund Insurance Fund Insurance Fund

Registration Chamber Representatives Service Center of public organization • Bank • Notary • Copying • Other

Source: Buryy V./Morford Z./Snider P. (2002)

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 41 REGISTRATION

attachment 2.4. cost of registration of legal entities Chart 2.21. COST OF STATE REGISTRATION OF LEGAL ENTITIES

Registration without foreign investments 700 Legislation distinguishes the registra-

tion fees for legal entities with and 100 without foreign investments. The amount to be paid is linked to the minimum monthly wage (MMW). This in turn has some negative impact, increasing the amount to be paid in real terms. For instance a company regis- 360

tering without foreign investments has 300 to pay 15 MMW in 2005 and 2006. The 210 MMW in 2005 was set to 12 somoni, so

the registering entitity would pay 180 30 30 somoni ($56). In 2006 the MMW was 180

increased to 20 somoni, so the reg- 15 15 istering entity would pay 300 somoni ($94) a remarkable increase of 66%

with respect to 2005. Decree of PRT Law of RT Decree of PRT Law of RT Decree of PRT #1173 #19 #1403 #115 #1716 dd November 4, dd February 28, dd November 4, dd December 26, dd March 20, 2003 2004 2004 2005 2006

Minimum Monthly Wages . Registration fee, in somoni

Registration with foreign investments

3500

500

1200

700 1000

600

100 100 50 50

Decree of PRT Law of RT Decree of PRT Law of RT Decree of PRT #1173 #19 #1403 #115 #1716 dd November 4, dd February 28, dd November 4, dd December 26, dd March 20, 2003 2004 2004 2005 2006

Minimum Monthly Wages . Registration fee, in somoni

42 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 3. LICENSING LICENSING

3. licensinG

Licensing procedures in Tajikistan have undergone numerous main findinGs revisions in recent years, including a signifi cant reduction in the number of activities requiring a license. The Law on Licensing “de • The number of businesses that needed to jure” came into force in January 2005, but “de facto” only in Sep- obtain a license has declined signifi cantly tember 2005 after the adoption of the specifi c regulation, which (from 27% in 2002 to 16% in 2005), refl ect- defi ned the various elements needed to implement the changes ing the reduction in the number of activities outlined by the law.2 Further amendments to the licensing law subject to licensing (from 1000 to 66). were introduced in July 2006.

• About half of the respondents (45.5%) fi nd While the survey is based on 2005 data and cannot capture all obtaining licenses a very diffi cult process. the effects of the reforms so far, the data does show an overall improvement in the licensing environment. However, some prob- • Duration of the application process and the lematic areas were identifi ed that might need further actions from cost of licenses are highly variable: the legislative as well as the procedural viewpoint.

- Individual entrepreneurs spend on av- The duration of licenses appears to be the most pressing issue: erage 289 somoni ($90) and 9 working licenses are issued for too short a time to allow for any reasonable days to apply for a license, for a total long-term investment. This has the most implication for medium- impact estimated at about 11% of their sized businesses, which, by their nature require more long-term in- annual profi ts1; vestments than individual entrepreneurs. The duration of licenses has also been addressed with the new amendments to the law, - Small and medium companies spend but in this case the limits were further reduced rather than extend- on average 717 somoni ($224) and 25 ed. Overall the issue needs further consideration. In addition, sur- working days, for a total impact estimat- vey data show an average duration incompatible even with the ed at about 13% of their annual profi ts legislation in force at the time of the survey. (28% wait longer than the 30-day limit defi ned by the legislation); The list of licensed activities might still be streamlined. A careful analysis shows that activities presenting limited or no risks to health - Dehkan farmers spend on average 82 and safety are still subject to licensing (e.g., evaluation and assess- somoni ($26) and 9 working days, for a ment activity). In addition, specifi c sectors of the economy such as total impact estimated at about 4% of tourism, which might be critical to foster the country’s economic their annual profi ts. development, are burdened by licensing requirements which are diffi cult to motivate according to market economy principles. • Duration of licenses: on average a license is valid for only 10 months. However this con- Finally, the overall situation seems to be the most complicated tradicts to the legislation. for legal entities, which need to obtain the most licenses, face the longest wait times and pay the highest offi cial and unoffi cial • Unoffi cial ways of solving the issues play a payments. This shows that government offi cials use the licensing signifi cant role in obtaining a license. About process as a means of rent-seeking, which is especially signifi cant 40% of entrepreneurs used unoffi cial ways given the constant need to renew short-term licenses. This situa- to obtain a license. tion needs to be specifi cally addressed in order to facilitate the development of larger-scale enterprises that would fuel the economic growth of the country.

1 This profi t equivalent also includes “additional” opportunity costs (see more details further in the chapter). 2 e.g., the licensing bodies responsible for each type of licensed activity.

44 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

3.1 licensinG: the leGal framework

A license is a special permit issued by a state body authorizing a business to carry out a certain activity under specifi c terms and BOX 3.1. EXTRACT FROM THE LAW ON LICENSING conditions. As such, when a business is subject to licensing require- OF CERTAIN KINDS OF ACTIVITIES6 ments, it must obtain the specifi c license before starting its activities. Article 1. Basic Defi nitions

The basic normative-legal acts regulating the licensing proce- A license is a special permit to carry out a spe- dure in the Republic of Tajikistan are the Law “On Licensing of cifi c activity with obligatory observation of the Certain Kinds of Activities3” (hereafter “the Law”) and Regulation license terms and conditions, issued by a licens- “On Specifi cs of Licensing of Certain Kinds of Activities4” (hereaf- ing body to a legal entity or an individual entre- ter “the Regulation”), which covers detailed provisions outlined preneur; by the Law. 3 The activity subject to license is an activity that This unifi ed legal framework represents a great improvement from requires obtaining a license before conducting 2002, when licensing was regulated by more than 43 sectoral laws the activity in accordance with the Law on Li- and more than 40 by-laws.5 In particular the new legislative basis censing; also defi nes some basic procedural steps required to obtain a license, steps that were not clearly specifi ed under the previous Licensing is the series of actions related to issuing norms (e.g., which application documents are needed, the cost and renewing licenses, suspension and resump- of obtaining a license). tion of license validity, cancellation of a license and control by the licensing bodies over the ob- the law regulates the relations arising from licensing of certain servation of the license terms and conditions by activities and ensures observation of the standards and require- license holders in their operation. ments to protect the interests and safety of the citizens, the community and the state. The Law contains: Article 4: Criteria for Defi ning the Activities Sub- ject to Licensing • General provisions for the licensing of certain activities; • List of the activities subject to licensing; The activities subject to licensing are referred to • Time frames for considering the application for a license; as those activities which, when carried out, can • Validity period of a license and its extension; potentially harm the rights, legal interests and • Licensing fees; health of the citizens, defense and security of • Procedure for suspension and cancellation of a license. the state, or cultural heritage of the peoples of the Republic of Tajikistan. These activities can be the regulation defi nes: regulated only through licensing.

• Licensing bodies for each activity subject to licensing; • Detailed procedure for obtaining licenses; • Authorities of the licensing bodies; • Procedure for overseeing the terms and conditions of a license; • Provisions on inspections procedures, including rights and du-

3 Law adopted on May 17, 2004 and further amended in July 28, 2006 by the Law No. 195 “On Introducing Amendments to the Law on Licensing of Certain Kinds of Activities.” 4 No. 337 approved by the Decree of the Government of RT September 1, 2005. 5 See IFC (2004b). 6 The Regulation also describes some inspection requirements (i.e., grounds to conduct an inspection, frequency and duration of inspections).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 45 LICENSING

ties of a license holder during inspection7; • Additional licensing conditions for specifi c activities subject to licensing.

3.2 licensinG coveraGe: improvements overall

Chart 3.1. NUMBER OF ACTIVITIES SUBJECT TO The specifi c economic activities requiring a license as well as the LICENSING DECLINED AFTER ADOPTION OF THE LAW criteria to subject an activity to licensing requirements are defi ned by the Law (see Box 3.1) . In addition the Law distinguishes 1000 between general activities subject to licensing, and special ones that require greater monitoring.

After the adoption of the Law on Licensing and its amendments 114 in 2006, the number of activities subject to licensing has declined 66 to 66 (versus more than 1,000 in 2002). Although the current situation represents a signifi cant improvement, this sharp reduction Before the Law After adoption of After was partly obtained by merging several types of activities into (until May 2004) the Law amending one,8 and its real impact is somehow reduced with respect to the (from May 2004) the Law expected one (see list of the activities subject to licensing in At- (July 2006) tachment 3.4).

The survey data confi rm a signifi cant decline in coverage: 16.4% of respondents needed to obtain a license in 2005, compared to 27% in 2002 (see Chart 3.2). Two comments are nevertheless necessary: • During the transitional period between the adoption of the Law (May 2004) and issuance of dedicated regulations (Sep- tember 2005), entrepreneurs faced diffi culties renewing old

Speciﬁ c General BOX 3.2. COMPARISON OF TWO TYPES OF ACTIVITIES REQUIRING A LICENSE Validity Less than three years Five years Application free 10X minimum wage9 4X minimum wage

License cost 25X minimum wage 10X minimum wage

The Law identifi es 2 General activities subject to licensing (59 types): private medical activity, passengers groups of activities and cargo transporting by motor vehicles, tourism related activities, etc. requiring licenses, distin- Special activities subject to licensing (7 types)10: credit organizations, activities in the guished by the duration fi eld of manufacturing and selling ethyl alcohol, works and services in the fi eld of nu- as well as issuing costs. clear power, mining and geological excavations, etc.

7 Article 1 of the Law of RT ‘’On Licensing of Certain Kinds of Activities,” May 17, 2004. 8 For instance, according to the amendments to the Licensing Law in 2006, geodesic and cartographical activities are incorporated into one kind of licensing activity, while before they were separate (#195, July 28, 2006). Manufacture, storage, and use of industrial explosives are incorporated into one kind of licensing activity, though prior to amendments they represented 3 separate categories of activities (#195, July 28, 2006). 9 In accordance with Article 103 of the Labor Code of RT, May 15, 1997, the minimum wage is the minimum monthly monetary payment to the employee in accordance with the working hours established by the Labor Code and the performance of established duties. The size of the minimum wage is periodically established by a Presidential Decree, and is currently 20 somoni by Decree #1716, March 20, 2006. 10 For more details see Attachment 3.3.

46 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

licenses, and licensing bodies were reluctant to issue new Chart 3.2. SHARE OF SMES THAT UNDERWENT LICENSING: ones. This likely resulted in a reduction of the number of entre- DECREASING preneurs who applied to obtain licenses.11

• Survey data do not take into account the provisions of the % OF RESPONDENTS latest amendments to the licensing law in 2006, which further Individual 17 decreased the number of activities subject to licensing from entrepreneurs 28 114 to 66. Small and 55 medium Legal entities are the types of businesses most affected by licens- companies 64 ing: more than half (55%) of small and medium companies had Dehkan 3 to obtain a license (see Chart 3.2). This high percentage can be farmers 6 explained by the fact that legislation dictates that most of the activities requiring a license can only be carried out by legal enti- SMEs on 16 12 average 27 ties, not individual entrepreneurs. Only specifi c activities in the 3 agricultural sector (i.e., production of tobacco, private veterinary service) that represent a possible risk for the health and safety of . 2002 . 2005 consumers are subject to licensing. The majority of dehkan farmers do not engage in these types of activities, and therefore only a small percentage of them needed to obtain a license.13

Overall, there is still room for further reduction in the number of activities subject to licensing, as some international benchmarks as well as examples from Tajikistan’s economy show (see Box 3.3 and Box 3.8).14

In fact, the percentage of businesses undergoing a licensing pro- Chart 3.3. TAJIKISTAN RANKS IN THE MIDDLE AMONG SELECTED cedure ranks Tajikistan as average with respect to other CIS coun- CIS COUNTRIES BY LICENSING COVERAGE tries (see Chart 3.3). Nevertheless both Ukraine and Belarus are % OF RESPONDENTS in the process of further reforming their licensing regulation while Uzbekistan and Georgia are more developed in this context. Belarus 36

Ukraine 21 Additionally, analysis of the legislation shows that the list of licensed activities still includes many activities presenting neither Tajikistan 16 risk category nor other justifi cation to be subject to licensing (e.g., activity dealing with evaluation and assessment, pawn-shops, Georgia 6 patent attorneys). However, many of these activities impact a 4 large number of SMEs or have a particular relevance for the coun- Uzbekistan try’s future development. Box 3.3 clearly describes the case for Source: IFC (2004c), IFC (2005a), IFC (2005b), IFC (2007a) Internet cafes, which are requested a license for activity in the area of electrical communication.15

11 Licensing bodies temporarily suspended issuing licenses until the adoption of the Regulation. 12 For instance, pharmaceutical activity can be conducted only by legal entities (the Law “On Drugs and Pharmaceutical Activities” of August 6, 2001, Article 30), as well as trade of narcotics, psychotropic substances and precursors (the Law “On Narcotics, Psychotropic Substances and Precursors” of December 10, 1999, Article 10). 13 In particular, no start-up dehkan farmer obtained a license in 2005. 14 See also Attachment 3.2, describing the licensing legislation in the selected CIS countries. 15 Electrical communication refers to any transmission or reception of signs, signals, written texts, pictures, sounds or any information via wire, radio optical or other electromagnetic systems. (Law “On Electrical Communication,” May 10, 2002).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 47 LICENSING

A clear example of an unnecessary license is tourism: although BOX 3.3. SHOULD INTERNET CAFES tourism is considered a priority development area by the Govern- BE LICENSED? ment,16 in order to start up an activity in this sector it is necessary to obtain a license. This also represents a contradiction with the Relief International has launched a Schools On- principles of market economy. line program funded by the United States Depart- ment of State to facilitate access to the Internet An additional issue needs to be mentioned. In many cases re- at 24 schools in the Republic of Tajikistan. The quirements for licensing overlap with those for permits, creating a project started in December 2003 and includes double barrier regime which poses a serious obstacle to economic a long-term fi nancial sustainability initiative that activities without pursuing a specifi c public goal.17 For this reason foresees transformation of computer classrooms permit reform should be carried out in a complementary manner. into Internet cafes to cover associated electric- A fi rst step in order to address this issue would be to consider on ity and Internet provider services costs. a sectoral basis licensing and permit requirements to identify unnecessary duplications and propose targeted interventions. However, Tajikistan’s State Communications Inspectorate ruled that when the schools will 3.3 licensinG procedure: a two-sided situation launch Internet cafes in their classrooms, they will need a license from the agency “since they The procedure for issuing licenses is commonly defi ned for all li- will run the Internet cafes on a commercial ba- censes. To obtain a license from a licensing body, the applicant sis and thus will have to receive a license – and must present: pay a license fee.” Such a situation contradicts • A set of documents common to all licenses; the very essence of licensing, which should not • Additional documents/requirements specifi cally defi ned for target a commercial business but rather address each activity as set out in the Regulation (see Box 3.4). concerns to human health and safety or the effi cient use of scarce resources. Chart 3.4 shows an example of the license application procedure

Source: FIAS (2006) for opening a drugstore business.

BOX 3.4. EXAMPLE OF GENERAL AND SPECIFIC DOCUMENTS REQUIRED TO ISSUE A LICENSE18 General documents: 1. Application form for issuing a license; 2. Copies of constitutive documents and Certifi cate of the applicant’s registration with the state; 3. Copy of the Certifi cate of the applicant’s registration with the tax bodies; 4. Document certifying payment of the license fee. Speciﬁ c documents Transportation activity: Private insurance activity: 1. Copy of the driver’s license; 1. Technical and economic assessment of the activity of 2. Copy of the certifi cate of quality of a vehicle; the insurance organization; 3. Copy of log book of the vehicle; 2. Conditions and rules of insurance activity; 4. Copy of the rental agreement of the transport carrier 3. Information on insurance fees; and warranty (if transportation is not conducted with 4. List of management staff. own vehicle).

16 “…Due to geographical characteristics and existing possibilities of Tajikistan, special attention is to be paid for development of textile industry, processing of mineral materials, and development of tourism….” (extract from the annual speech of the President of RT to Majlisi Oli, April 20, 2006). 17 For instance legislation foresees both permit and license for pharmaceutical activities (Law “On Medicine and Pharmaceutical Activity” dd. August 6, 2001). Another example of overlapping is the architectural and town-planning activity requiring both permit and license for certain architectural works (Law “On Archi- tecture and Town-planning” dd. May 15, 1997). 18 Regulation No.337 “On Specifi cs of Licensing of Certain Kinds of Activities.”

48 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

Chart 3.4. OBTAINING A LICENSE TO SELL MEDICINES FROM THE STATE SCIENTIFIC CENTRE OF EXAMINATION OF MEDICINES UNDER THE MINISTRY OF HEALTH

Application fee With- 80 somoni in 30 days after the Rejection notifi cation receipt (indicating the reasons for the rejection)

The Application Decision of (with the necessary the licensing set of documents) body Notifi cation of issuing the license Issuing the (indicating the Payment of license (within bank account the license 3 days after Documents to be attached: details fee - the payment • Application for issuing the license, indicating: and deadline 200 somoni of the license • Name and the organizational and legal form, the legal for paying fee) 3 address and the location, the settlement account and the license the bank offi ce; fee) • Activity to be licensed and the term during which this activity will be carried out; • A copy of the Tax Registration Certifi cate; • Document certifying payment of the license fee for considering the application; • Information on the employees’ qualifi cation; • Copies of the documents certifying the right to use the manufacturing premises; • Conclusion of the Sanitary Service and the Fire Surveil- lance Service; • Certifi cate of Conformity of the premises to the requirements to pharmaceutical activity; • A copy of the diploma and the specialist’s employment history; • A copy of the specialist certifi cate, proving that he can About carry out pharmaceutical activity. 15 documents in total

Although licensing procedures should be clearly defi ned by the legislation, almost half (45.5%) of the respondents indicated that the procedures were complicated or very complicated (see Chart 3.5). This could be explained by the relative novelty of the procedures at the time of the survey as well as by the diffi culty to obtain the proper information from each licensing body (see Box 3.10 further in text).

Chart 3.5. ALMOST HALF OF SMES ASSESS LICENSING COMPLEX

% OF RESPONDENTS UNDERGOING LICENSING

Individual entrepreneurs 11 44 37 8

Small and 5 49 37 10 medium companies

Dehkan farmers 7 39 47 7

75% 50% 25% 0% 25% 50% 75% . Very easy . Rather easy . Rather complicated . Very complicated

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 49 LICENSING

Chart 3.6. LICENSING PROCESS FOR SMALL AND MEDIUM COMPA- 3.3.1 DURATION OF LICENSING PROCESS: COMPLIANCE STILL TO NIES IS THE LONGEST BE ACHIEVED

% OF RESPONDENTS OBTAINING LICENSE Individual entrepreneurs According to the Law the licensing body must grant or deny the license and notify the applicant about its decision within 30 calen- 72% 19 9 business days dar days from the receipt of the application. on average

18% The survey data regarding the application procedure do not fully refl ect compliance with the requirements imposed by the Law 7% (e.g., the 30-day requirement). Dehkan farmers and individual en- 3% trepreneurs spent on average 9 business days to obtain a license, while small and medium companies needed on average 25 busi- 1 to 7 8 to 22 23 to 40 above 40 days days days days ness days (see Chart 3.6).

Small and medium companies This can be explained in a few different ways: • Legal entities might encounter more diffi culties in applying for 41% 25 business days on average those licenses specifi cally requiring a legal-entity status; 31% • The requirements for legal entities are often more complex 20% than those for individual entrepreneurs (even when obtaining 8% the same license) and the collection of the documents as well as their analysis might require more time20; 1 to 7 8 to 22 23 to 40 above 40 • Legal entities might be specifi cally targeted for unoffi cial pay- days days days days ments. Thus by delaying the issuance of a license, offi cials can Dehkan farmers increase the pressure on them.

67% 9.3 business days on average This last point can be supported by the fact that start-ups, i.e., entrepreneurs who started their activity in 2005, spent less time 33% than existing businesses to obtain their licenses (see Chart 3.7). This result seems counterintuitive: existing businesses have already obtained at least one license and should be faster in dealing with 1 to 7 8 to 22 23 to 40 above 40 the process thanks to the experience they developed.21 days days days days

However, existing companies are actually more dependent on receiving a certain license than start-ups, and as such might be Chart 3.7. DURATION OF THE LICENSING PROCESS IS LONGER more subject to deliberate delays in their application process to FOR EXISTING BUSINESSES increase rent-seeking opportunities, which result in unoffi cial pay-

BUSINESS DAYS ments. Existing 13 businesses The difference can be better observed in some certain sectors of

Start-ups 11 the economy such as retail trade, which is one of the most representative in the Tajik context (see Chart 3.8).

19 Law “On Licensing of Certain Kinds of Activities,” Article 10, Item 3. 20 For example, for transport services an individual entrepreneur needs to provide only information about his car and himself. In contrast, a legal entity trying to get a license needs to provide more detailed information on the number of drivers, existence of medical and technical personnel, availability of the technical infrastructure for support of the vehicles, etc. Therefore, it takes longer to prepare this information and also for the licensing bodies to examine it. 21 In fact, even taking into account the novelty of the licensing procedure introduced by the Law, it is not clear why start-ups should have an advantage in preparing and processing their documents.

50 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

In order to promote compliance with the 30-day time limit, a Chart 3.8. EXISTING BUSINESS IN RETAIL TRADE SPENT MORE simple mechanism has been introduced and successfully imple- TIME FOR LICENSING PROCESS THAN START-UPS mented in a number of countries, called the “silence is consent” BUSINESS DAYS principle (see Box 3.5). According to this principle: • Once an application has been offi cially fi led, a maximum Existing 13 time limit is defi ned, within which the public administration businesses can formally: Start-ups 9 - Reject the application, motivating the reason for the act; - Request further documentation/clarifi cation; • If the public administration does not perform any of the two “The Law sets specifi c norms for issuing licens- actions defi ned above after the time limit has elapsed (i.e., is es, but the licensing bodies under any pretext drag out the license-issuing procedure...” silent), the application will be considered implicitly approved and can be used as an authorization document (i.e., the - Entrepreneur, focus group participant public administration consent to the action). 3

BOX 3.5. PRINCIPLE “SILENCE IS CONSENT” IN SOME COUNTRIES Italy The principle “silence is consent” (silenzio assenso) was introduced within the Law “On Administrative Procedures” in Italy in 1990 to simplify administrative procedures and reduce the duration and number of direct interactions with state bodies. Ac- cording to this principle, if a state body does not reply negatively to the application it means that the applicant is authorized to conduct the applied action or activity. This rule currently applies to 194 different administrative procedures.

Spain The principle “silence is consent” is set by the Law “On Administrative Procedures” of 1992. According to this rule, the state body has up to 6 months to respond to any request of the applicants (some licenses may require less time). If the state body does not respond, the applicant is vested with all rights to conduct the applied action or activity.

Mexico The principle “silence is consent” was introduced in Mexico in 1995 by the Agreement “On Reduction of the Regulation of Entrepreneurship.” As an example of this principle in action, City committees that oversee water usage and drainage systems have to consider an application within 19 days. If this committee does not reply, the principle “silence is consent” is in place. Applicant can conduct the applied action or activity.

3.3.2 COST OF LICENSING: STILL A RELEVANT BURDEN Chart 3.9. AVERAGE COST OF OBTAINING ALL LICENSES, BY TYPOLOGIES OF BUSINESS

The cost of licensing varies by the typologies of business (see Chart SOMONI 3.9): 717 597 • Individual entrepreneurs spent 289 somoni ($90) for obtaining 322 all necessary licenses (including offi cial and unoffi cial pay- 288 289 ments); 82 • Small and medium companies spent 717 somoni ($224) for obtaining all necessary licenses (including offi cial and unof- Individual Small and Dehkan fi cial payments); entrepreneurs medium farmers • Dehkan farmers spent 82 somoni ($26) obtaining all necessary companies licenses (including offi cial and unoffi cial payments). . 2002 . 2005

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 51 LICENSING

The costs of obtaining all the necessary licenses did not change “The licensing bodies treat legal entities with signifi cantly in comparison to 2002 as far as individual entrepre- special attention. I own a small enterprise that neurs are concerned. Costs increased for small and medium com- provides transportation services. I spend much 22 time and money to obtain the license because panies and declined signifi cantly for dehkan farmers. Licensing the licensing body knows that there is no other fees for certain activities in the agricultural sector have been uni- choice for my fi rm except to obtain the license. fi ed in 2005, and, as a result, the overall cost for obtaining agricul- An acquaintance of mine, an individual entrepreneur who also provides transportation serv- tural licenses has decreased.23 This is indicative of the efforts of the ices, obtained the same license in 3 days, and Government to improve and reform the licensing regime. he spent half as much...”

- Entrepreneur, focus group participant However, legal entities have had to make higher offi cial and unoffi cial payments. This confi rms our conclusion that legal entities become more vulnerable before the licensing bodies in terms of getting/eliciting money.

Chart 3.10. DISTRIBUTION OF THE COSTS INCURRED The cost of obtaining licenses can vary dramatically for SMEs, BY SMES DURING THE LICENSING PROCEDURE much like the time frame required to obtain one. In fact, although

% OF RESPONDENT UNDERGOING LICENSING the average cost of licensing is about 365 somoni ($114) almost 25% of the licenses cost more than 400 somoni (see Chart 3.10). 35

25 The costs of the licensing procedure seem to be very different

17 even considering the same sector and typology of business (see 14 Chart 3.11). To obtain a license to conduct retail trade transac- 9 tions, 33% of individual entrepreneurs spent less than 100 somoni. At the same time, 24% of individual entrepreneurs spent more than 400 somoni for the same procedure. These fi gures confi rm the assumptions that:

below • Licensing procedures are not transparent; 00 to 200 200 to 400 400 to 800 above 800 100 1 somoni somoni somoni somoni somoni • Unoffi cial payments still prevail in the licensing procedure.

Chart 3.11. DISTRIBUTION OF THE COSTS FOR LICENSING It should be noted that licensing costs could be signifi cant in par- PROCEDURE FOR RETAIL TRADE BY INDIVIDUAL ENTREPRENEURS ticular for smaller sized businesses and start-up ones in particular,

% OF RESPONDENT UNDERGOING LICENSING representing a signifi cant barrier to entry. For this reason it would be advisable to introduce the possibility to pay on an installment 33 basis. 33

10 15 9

below 00 to 200 200 to 400 400 to 800 above 800 100 1 somoni somoni somoni somoni somoni

22 Although it did not signifi cantly change in real terms. 23 For instance, the cost of the license to produce and process tobacco was 445 somoni ($150) in 2002 (Decision of the Government of RT No. 131, May 7, 1999). After the introduction of the Law, the unifi ed fee equalled 14 times the minimum wage (in 2005 it would make 168 somoni, or $52.5). This fee applies to all general activities under which all agricultural activities are classifi ed (see more details on specifi c activities in Annex), thus leading to signifi cant decreases in obtaining licenses for products like tobacco.

52 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

3.3.3 UNOFFICIAL PAYMENTS: STILL A COMMON WAY TO RESOLVE Chart 3.12. PRACTICE OF UNOFFICIAL PAYMENTS AMONG ISSUES COMPANIES ARE DECREASING

% OF RESPONDENT UNDERGOING LICENSING WHO MADE UNOFFICIAL PAYMENTS Unoffi cial payments still play a signifi cant role in obtaining ali- cense. There is a strong correlation between the share of unoffi cial 25 Dehkan farmers 17 payments and the total cost of licenses, with 25% of respondents 24 acknowledging having made unoffi cial payments as a solution to Small and medium companies 33 the problem of obtaining a license. This fi gure improves in com- Individual 26 parison to 2002, where 33% of entrepreneurs made unoffi cial pay- entrepreneurs 36 ments (see Chart 3.12). . 2002 . 2005 However, unoffi cial payments are not the only way of solving is- Chart 3.13. UNOFFICIAL WAYS OF SOLVING ISSUES ARE sues. It is very common to use other methods such as presents, COMMON AMONG SMES lunch invitations, involving friends or relatives to solve issues. As the % OF RESPONDENT UNDERGOING LICENSING WHO MADE UNOFFICIAL PAYMENTS 3 results show, these additional unoffi cial ways of solving the issues are also common among small and medium businesses: 40% of 15 40 entrepreneurs made use of them (see Chart 3.13). 25

As the survey shows, the existing (“old”) businesses use unoffi cial ways more frequently than start-ups when obtaining a license, as they are more vulnerable in case the license is denied (see Chart Unoffi cial Other Overall unoffi cial 3.14). According to the fi ndings of the survey, none of the start-up payments unoffi cial ways ways of solving dehkan farmers underwent the licensing procedure in 2005. issues

Remarkably, entrepreneurs pay different amounts for a license in Chart 3.14. EXISTING BUSINESSES RECUR MORE FREQUENTLY TO different state agencies, although legislation foresees a unifi ed UNOFFICIAL WAYS OF SOLVING ISSUES state fee (see Chart 3.15). This again confi rms non-transparent % OF RESPONDENT WHO MADE UNOFFICIAL PAYMENTS procedures and the existence of unoffi cial ways of solving the issues. Individual 26 entrepreneurs 36

Small and medium 49 companies 52

. Start-ups . Existing businesses

Chart 3.15. AMOUNT SPENT FOR OBTAINING A LICENSE DIFFERS BY GOVERNMENTAL AGENCIES

COST OF ONE LICENSE IN SOMONI

543 484

354 350 308 282 185 125

Ministry of Justice Ministry of Agri- Ministry of Industry State Scien- Ministry of Ministry of Health Ministry of Energy Ministry of Trans- culture tifi c Centre of the Economy and portation Medicine Trade Examination (Ministry of Health)

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 53 LICENSING

3.4 economic impact of licensinG

SMEs undergoing the licensing procedure spend not only money BOX 3.6. ADDITIONAL COSTS INCURRED DURING for obtaining all necessary licenses, but a signifi cant amount of ADMINISTRATIVE PROCEDURES time and human resources as well. To better demonstrate this effect, we estimated the total loss of time and work in monetary Entrepreneurs spend not only fi nancial resources terms (see Box 3.6). to deal with administrative procedures. In addition, there is an opportunity cost related to the As a result, the total costs for businesses consist of two elements: time of employees performing administrative • Direct costs for obtaining all necessary licenses (including of- duties, as well as to the lost profi ts when the start fi cial and unoffi cial payments); of an activity is stalled by the need to obtain the • Indirect costs caused by loss of labor resources redirected to necessary licenses. obtaining a license, and loss of potential profi ts for start-ups, which cannot begin operations without the necessary licens- In our economic impact estimates we include: es.24 According to our approach, licensing costs vary between 2% and For existing businesses: 16% of annual profi ts (see Chart 3.16).25

- Direct administrative costs: Eo + Eu; - Labor costs: w*d. In particular, legal entity start-ups appear to bear most of the li- For start-ups: censing costs: 3,100 somoni ($969), which equals 16% of the an-

- Direct administrative costs: Eo + Eu; nual profi ts. - Lost profi ts: (P*s/b). Chart 3.16. ECONOMIC IMPACT OF THE LICENSING BURDEN RANGES BETWEEN 2% where: AND 16% OF ANNUAL PROFITS

• Eo - offi cial expenses SOMONI

• Eu - unoffi cial expenses • d - business days of full-time employee time 8% 10% 4% 16% 2% • dedicated to licensing procedure, of annual of annual of annual of annual of annual • w - daily employee salary profi ts profi ts profi ts profi ts profi ts • P - annual profi t losses, • s - days spent for the procedure • b - number of business days per year in the 3,100 economy

800

395 315 90

Individual Small and medium com- Dehkan entrepreneurs panies farmers26 . Existing businesses . Start-ups

24 Lion’s share of the burden is represented by the “additional” costs in the form of lost profi ts. 25 Calculation is made for SMEs which underwent licensing procedure. 26 Start-up dehkan farmers did not obtain any licenses in 2005.

54 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

3.5 duration of a license: a stronG deterrent to lonG-term investments

The duration of a license -- the time frame in which the licensee can carry out the licensed activity before re-applying -- is a rel- BOX 3.7. DURATION OF A LICENSE BEFORE AND evant aspect of licensing. AFTER AMENDMENTS TO THE LAW ON LICENSING validity law on amendments licensing to As mentioned above, the Law provides two different approaches (2004) the law on to determine the validity period of a license: licensing (2006) • The standard duration of a license is 5 years; General activi- Not less 5 years • For specifi c activities the validity period of a license is not less ties than than 3 years.27 5 years Special activi- Not less Not less than 3 ties than 3 years The legislation also provides an additional provision for individual years 3 entrepreneurs operating without hired employees. The individual For individual Same as From 1 to 5 entrepreneurs29 above years entrepreneur can apply for a license valid from one to fi ve years (see Box 3.7).28

According to the fi ndings, the average duration of a license in Chart 3.17. DURATION OF THE MOST ISSUED LICENSES DOES practice is 10.4 months (see Chart 3.17). This clearly does not re- NOT EXCEED ONE YEAR PERIOD fl ect the provisions of the Law on Licensing. Even before the 2006 % OF RESPONDENTS UNDERGOING LICENSING amendments,29 licenses should have been valid for at least 5 years Individual entrepreneurs for general activities (see Box 3.7).

84% average validity On one hand, this phenomenon could be due to the fact that 10 months the licensing bodies did not completely introduce the provisions of the new legislation into their day-to-day practices. On the other hand, it illustrates that the state bodies do not always comply with 6% 5% 4% 1% provisions of the law. A better assessment of the impact of the new legislation can be done in a follow-up survey. Small and medium companies

81% average validity The duration of licenses does not differ signifi cantly among busi- 12.5 months ness typologies. Nevertheless, a direct correlation exists between the amount paid to obtain a license and the duration of it: in fact small and medium companies obtained the longest-lasting licens- 7% 10% es, while dehkan farmers got the shortest. 1% 1%

Dehkan farmers By comparing licensing costs between start-ups and existing businesses, we notice that the latter faced higher payments, clearly 100% average validity correlated to higher unoffi cial payments (see Chart 3.18). This is 8.3 months to testify that the short-term licenses not only defer long-term investments, but also stimulate rent-seeking opportunities by gov-

27 According to the Law “On Licensing” the specifi c activities include: banking activity, foreign currency exchange transactions, the activity in the fi eld of electric up to 1 year 1-2 years 2-3 years 3-5 years more than 5 communication. years 28 Lawmakers used a fl exible approach to offer individual entrepreneurs the choice to apply for licenses valid between 1 and 5 years. For example, if a person wants to work as a taxi-driver for just one year, he may apply for a 1-year license as an individual entrepreneur and pay a fee equivalent to 2 minimum wages only, while a 5-year license would cost 10 minimum wages. 29 Introduced in July 2006.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 55 LICENSING

Chart 3.18. EXISTING SMALL AND MEDIUM COMPANIES ARE ernment offi cials. In fact, once established, a business is more de- UNDER MORE PRESSURE TO GET A LICENSE pendent on the renewal of the operating license rather than a

SOMONI start-up. 619 A strong regional difference can also be observed, possibly due to the relationships that entrepreneurs and offi cials have built at 382 the local level (see Chart 3.19). SMEs that have better relation- 269 266 ships with local authorities are able to obtain licenses with longer validity periods. Additionally, this could be due to the fact that licensing offi cials are more fl exible at the periphery rather than in Individual Small and central districts like Dushanbe and Khudjand. entrepreneurs medium companies Chart 3.19. DURATION OF A LICENSE DIFFERS REGIONALLY Start-ups Existing businesses . . MONTHS

Kurgan-Tube district 16 (Khatlon province)

Kulyab district 13 (Khatlon province)

Districts of Republican 11 Subordination

Sughd province 10

10.4 months Dushanbe 7 on average

In a market economy, the duration of licenses plays a signifi cant BOX 3.8. LICENSING PROCEDURES IN GEORGIA role for investment consideration. The length of time set by the Tajik legislation does not fully meet the requirements of a market According to the legislation of Georgia, licenses economy, as a long-term license would ensure a potential inves- are permanent for the majority of activities sub- tor an adequate time for return on his investments. In this con- ject to licensing. In case the licensee violates the text, a more fl exible approach is required. The government par- requirements of the license, the regulating body tially addressed this issue for individual entrepreneurs, providing has the right to suspend the license. The licensee entrepreneurs with the choice to determine the duration of their then has 3 months to rectify the problem or risk licenses. This approach could be expanded for all typologies of having the license revoked. business, giving all entrepreneurs the option to apply for: • Medium and long-term licenses; Introduction of transparent and simplifi ed proce- • Permanent licenses. dures allowed the licensing bodies of Georgia to reduce unoffi cial payments drastically. Conse- The businesses could themselves determine what they prefer ac- quently, 90% of the licensees did not make unof- cording to their strategies on the market, and not be deterred by fi cial payments to obtain their licenses. the risk incurred in renewing short-term licenses. In this context, the experience of Georgia is very interesting (see Box 3.8). Source: IFC (2004a) An additional, complementary measure, would be to allow for payments in installments, on a yearly basis (see section 3.3.2) in order to facilitate market entry for those players with limited access to fi nancial resources. So that they do not apply for short-term licenses simply on the basis of fi nancial constraints.

56 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

According to the most recent amendments, the legislation defi nes a set of situations in which a license could be suspended or BOX 3.9. SUSPENSION AND CANCELLATION OF revoked (see Box 3.9). LICENSE

In particular the law foresees that a license should be revoked According to the Law a license can be sus- only by court decision, unless payments for licensing fees are not pended in case of repeated or relevant viola- made. tions of license requirements. The license can be suspended only in extraordinary cases, when Nevertheless, the cases in which the license could be suspended there is a threat to consumers’ health or to the are not precisely defi ned, leaving a certain degree of discretion- environment, and other options are not possible. ary power to licensing bodies. Clearly defi ning the cases of pos- The licensing body should set a time-frame (no sible suspension as well as entitling the court to suspend a license more than 3 months) for a licensee to eliminate would help secure entrepreneurs’ right and facilitate business en- the violations. If the violations are not eliminated try. within a set term, the licensing body is obliged to 3 appeal to court for a license cancellation.30 3.6 access to information Legislation clearly defi nes the situations in which Obtaining information on the licensing process still remains diffi cult a license can be revoked: for entrepreneurs. • By a court decision, if the licensee violates the licensing requirements and if the cir- This is also confi rmed by the survey fi ndings (seeChart 3.20) as well cumstances leading to the suspension of as by a direct experiment conducted by the IFC team (see Box the license have not been eliminated within 3.10), which shows some reluctance from government bodies to the set timeframe (6 months); share complete informations on licensing requirements. • By the decision of the licensing body, if the licensee failed to pay the license fee within the set timeframe (3 days).31

Chart 3.20. PERCEIVED DIFFICULTY OF OBTAINING INFORMATION ON THE LICENSING PROCESS, BY GOVERNMENTAL AGENCIES

% OF RESPONDENTS UNDERGOING LICENSING PROCEDURE

Ministry of 17% 50% 4% 29% Economy and Trade

Ministry of Education 6% 54% 17% 23%

Ministry of Industry 19% 40% 3% 38%

State Construction and 4% 52% 11% 34% Architecture Committee

Ministry for Social Protection 19% 34% 21% 26%

Ministry of Health 9% 44% 13% 35%

State Scientifi c Centre of the 5% 45% 14% 36% Medicine Examination

Ministry of Agriculture 7% 38% 16% 38%

Transport Inspection (Ministry 8% 23% 38% 31% of Transportation)

75% 50% 25% 0% 25% 50% 75% . Very easy . Rather easy . Very complicated . Rather complicated

30 Law on Licensing, Article 6 and 14. 31 Law on Licensing, Article 14.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 57 LICENSING

BOX 3.10. EXPERIMENT ON OBTAINING INFORMATION IN SOME STATE BODIES IN JULY 2006

To evaluate the accessibility of information from the state, volunteers visited different state bodies and asked for details about the licensing procedure. Below are the main fi ndings of this experiment.

Ministry of Agriculture Different departments of the ministry issue certain licenses such as: private veterinary activity, manufacturing of tobacco, production of ethyl spirit, etc.

The central apparatus did not provide any information. It is necessary to apply directly to the relevant department that issues the licenses. Access to information depends on how one introduces himself. The volunteer who introduced himself as an employee of an international organization (in this case, IFC) was denied any access to the information and had to apply in writing. He was also told that the application would take one month.

The volunteer who introduced himself as an entrepreneur obtained only general information (list of documents, offi cial cost, etc.), which was outlined on an announcement board. The entrepreneur was advised to apply during a certain period (for instance, if an offi cial plans his vacation, then before his leave). More detailed information about the procedure is hard to obtain. Other entrepreneurs informed the volunteer that there are faster ways to obtain the license – i.e., use of unoffi cial payments.

Ministry of Health Protection Different departments of the ministry issue certain licenses such as: private medicine activity, technical service of medical equipment, pharmaceutical activity, etc.

The representative of the ministry refused to share any information.

Ministry of Justice The ministry issues licenses for provision of juridical services, with the exception of representing the interests of individuals and legal entities in law-enforcement bodies and courts.

It is very easy to obtain information in this state body. In the licensing unit (Room 20), the list of documents necessary for obtaining the license is displayed. There is a reminder to check the accuracy of all documents before submitting them, and a posting of the expected wait time for a license – 1 calendar month. The following documents are required in the ministry, although they are not required by the Law or Regulation:

• 2 years experience as a lawyer in a company; • Reference from the Ministry of Internal Affairs on absence of convictions; • History of employment; • Photo (4x6 cm); • Copy of passport.

Ministry of Economy and Trade The ministry issues licenses for tourism activity. It does not take longer than 10-15 minutes to obtain the list of requirements for a license in this activity. At one department, the applicant received the list of necessary documents, length of time of the application process, and a list of required documents. Many of these are not regulated by the Law or the Regulation: • Graduation Certifi cate of the short-term courses on tourism business (at least 2 weeks); • Employment history.

58 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

recommendations

1. Extend the duration of licenses and introduce permanent licenses. This can be achieved by: 1.1 Introducing by law a minimum 5-year validity period for all licenses (as in most countries); 1.2 Identifying licenses that can be issued once, i.e., permanent licenses that are revoked only if infringements are identifi ed; 1.3 Enforce provisions of the law on duration of issued licenses to avoid the current discrepancy between legal terms and practical ones.

Expected impact

By extending the validity period of licenses, the government will further reduce the barrier to market entry that will: • Provide an incentive for entrepreneurs to enter into the market, by ensuring that they have suffi cient time to 3 make a return on their investment without the constant risk of losing their license to operate. This will increase the number of active companies and the size of the productive investments,32 which are both quite limited at the moment; • Reduce the immediate costs of doing business by reducing offi cial and unoffi cial payments, as well as time spent dealing with license renewals. This time could be translated into greater profi ts, more taxes paid, and more investments.

These changes will lead to: • Higher profi tability of existing companies would result in more taxes paid, compensating for the reduction in licensing fees; • More investments into the economy, which in turn will produce larger and more solid companies to increase employment and tax revenues; • More start-up companies, especially in sectors that the Government considers to be a priority, resulting in higher employment and tax revenues.

2. Introduce the possibility, particularly for individual entrepreneurs, to obtain long term licenses, while at the same time paying in yearly instalments. This would secure their rights for a longer time frame and reduce their fi nancial burden, particularly heavy for cash-constrained individuals.

Expected impact

The immediate benefi ts of introducing payments by instalment for licenses would be two-sided:

• For entrepreneurs: it would reduce the immediate burden for individuals lacking access to funding, resulting in:

- Easier entry for start-up businesses, leading to more companies active in the economy to generate profi ts and state tax revenues; - Extended licenses, as applicants would apply more frequently for longer term ones, resulting in more secure rights and lower unoffi cial payments.

• For the state budget: it would secure a more stable revenue fl ow.

32 For more details on investments by SME sector see Chapter 1.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 59 LICENSING

3. Reduce the duration of the license issuing process by enforcing the existing 30-day limit and introducing transparency into the decision process. This can be achieved by:

3.1 Introducing a “silence is consent” principle for all licensing bodies at the end of the 30-day consideration period, which would automatically grant a license in case no explicit refusal decision is made (the application form in that case should represent the license document); 3.2 Requiring licensing bodies to substantiate their refusal or delay of the application; 3.3 Introducing a monitoring system that allows ex-post verifi cation of the average length of the licensing process; 3.4 Introducing a simplifi ed process (with shorter time, e.g., 15 days) for renewals and repeated applications after a refusal.

Expected impact

The immediate benefi ts of enforcing an application review time limit and bringing transparency into the decision- making process will be: • Reduced time spent by entrepreneurs dealing with the procedure, leading to higher profi ts and higher state tax revenues; • Reduced unoffi cial payments, as a result of the more transparent decision-making process, that in turn could create higher profi ts and higher tax revenues.

4. Evaluate the need for a further reduction in licensed activities to include only those activities which: • Require strict government oversight to protect health and safety; • Deal with the allocation of scarce resources or with natural monopolies; • Do not foresee specifi c permit requirements.33

In particular it would be advisable to:

• Reconsider the licensing requirements for sectors not directly falling into the above-mentioned categories (e.g., tourism, trading of jewelry, precious stones and metals, maintenance of motor vehicles and railway transports, repair and maintenance of cargo lifting devices, etc.); • Launch a comprehensive review of licensing and permit requirements for specifi c sectors, to identify potential overlaps and select the most appropriate form of governmental control (either licensing or permit).

Expected impact

By further reducing the number of activities subject to licensing, the benefi ts will be: • Reduced expenses for entrepreneurs dealing with the procedure, which could in turn increase their profi ts and generate additional tax revenues; • Further entry into the relevant sectors (thanks to the reduced barriers to entry) with positive effects on private sector profi ts and tax revenues; • Faster development of priority sectors for the government (e.g., tourism); • Higher competition in the sectors impacted by reduced licenses that could represent a market-oriented alternative to regulation; • Less government resources dedicated to administrative procedures, redirecting the savings for different needs.

33 Detailed analysis for possible further reduction of the number of activities is provided in FIAS (2006).

60 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

3. Reduce the duration of the license issuing process by enforcing the existing 30-day limit and introducing transpar- 5. Reduce the scope of licensing suspension. In particular by: ency into the decision process. This can be achieved by: 5.1 Clearly defi ning for each licensing agency a “closed list” of situations requiring a license suspension; 5.2 Evaluating the option to subject license suspension to court approval. 3.1 Introducing a “silence is consent” principle for all licensing bodies at the end of the 30-day consideration period, which would automatically grant a license in case no explicit refusal decision is made (the application Expected impact form in that case should represent the license document); 3.2 Requiring licensing bodies to substantiate their refusal or delay of the application; By reducing the scope of license suspension, entrepreneurs will gain more secure rights, leading to: 3.3 Introducing a monitoring system that allows ex-post verifi cation of the average length of the licensing process; • Fewer cases of unoffi cial payments to licensing bodies; 3.4 Introducing a simplifi ed process (with shorter time, e.g., 15 days) for renewals and repeated applications after • Reduced entry costs, leading to more companies active in the economy, generating profi ts and state tax a refusal. revenues.

Expected impact 6. Increase entrepreneurs’ awareness of licensing procedures through the publication and dissemination of information regarding procedures, costs and validity of licenses. This can be achieved by: 3 The immediate benefi ts of enforcing an application review time limit and bringing transparency into the decision- 6.1 From the government side: by enforcing information requirements for each licensing agency. Each agency making process will be: should be required to produce and distribute a set of application documents, sample of completed applica- • Reduced time spent by entrepreneurs dealing with the procedure, leading to higher profi ts and higher state tions and relative regulations free of charge to each applicants. A related implementation mechanism, provid- tax revenues; ing for fi nes in cases of non-compliance should also be put in place; • Reduced unoffi cial payments, as a result of the more transparent decision-making process, that in turn could 6.2 From the private sector side: business associations and other non-governmental organizations should develop create higher profi ts and higher tax revenues. information materials to be disseminated within the country to their members and SMEs.

4. Evaluate the need for a further reduction in licensed activities to include only those activities which: Expected impact • Require strict government oversight to protect health and safety; • Deal with the allocation of scarce resources or with natural monopolies; By increasing the legal awareness of entrepreneurs, the benefi ts will be: • Do not foresee specifi c permit requirements.33 • Reduction in the need for unoffi cial payments, thanks to their greater empowerment, with direct impact on profi ts and tax revenues; In particular it would be advisable to: • Reduction in the time needed to deal with the procedure, as the information will be more readily available, having a positive impact on profi ts and in turn on tax revenues. • Reconsider the licensing requirements for sectors not directly falling into the above-mentioned categories (e.g., tourism, trading of jewelry, precious stones and metals, maintenance of motor vehicles and railway transports, repair and maintenance of cargo lifting devices, etc.); • Launch a comprehensive review of licensing and permit requirements for specifi c sectors, to identify potential overlaps and select the most appropriate form of governmental control (either licensing or permit).

Expected impact

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 61 LICENSING

annex attachment 3.1. issuing bodies

The state bodies that issue licenses most frequently refl ect the legislative changes related to the introduction of the licensing law. In fact local executive authorities of oblasts, rayons and cities (Khukumats) and TajikPisheProm (Commit- tee for Food and Processing), which were among the largest issuers of licenses in 2002, do not appear in the ranking, as Khukumats are no longer eligible to issue licenses, and the licensing authorities of TajikPisheProm were transferred to the Ministry of Agriculture.

The Ministry of Economy and Trade, in charge of licensing tourism activities, issued the most number of licenses in 2005. This ministry has also become responsible for issuing fi duciary licenses to patent attorneys, which may explain the rise as well as an overall increase in the number of tourism businesses in Tajikistan.

The growth in the number of licenses issued by the Ministry of Health is due to the increase of the number of private practices, especially in the Dushanbe area and Sughd province, which are subject to licensing by this authority.

The dedicated licensing department of the Ministry of Transportation has become responsible only for international passengers and freight transportation. Thanks to improved access to international transportation routes, international freight transportation has increased in Tajikistan. Other transportation activities subject to licensing are dealt with at the Transport inspection of this Ministry. As mentioned above, the Ministry of Agriculture took over the licensing authorities of TajikPisheProm in 2005; therefore, there is a remarkable increase in licensing activity compared with 2002.34

Chart 3.21. LICENSES OBTAINED IN 2002 AND 2005, BY GOVERNMENT AGENCIES

% OF RESPONDENTS OBTAINING LICENSES

Ministry of Economy and 21 Trade 9

13 Ministry of Health 8

Ministry of Transportation 12

11 Ministry of Agriculture 14

State Scientifi c Centre of the Medi- 9 cine Examination (Ministry of Health)

7 Ministry of Energy 0.6

4 Ministry of Justice 2

Ministry of Industry 3

Khukumats 25

6 Transport Inspection 16

Committee for Food and Processing 10

. 2002 . 2005

34 Except licensing for the sale of seeds and veterinary services, this Ministry issues licenses for the trade and production of ethyl spirit, alcoholic products and products containing spirit.

62 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

attachment 3.2. comparison of the licensing legislation in different countries

tajikistan Belarus Georgia russia ukraine

Law On Principles of Issuing Licenses Law On Licensing Law On Licensing Decree of the Presi- Law On Licensing and Permits for Car- Specifi c Activities, Specifi c Economy The regulating legal dent On Licensing Specifi c Activities, rying out Business August 8, 2001. Activities, act Specifi c Activities, May 17, 2004 Activity and Law (amended Febru- June 1, 2001 July 14, 2003 On Licenses and ary 7, 2005) Permits Dues Activities that can Licensing is done Activities that can Protection of the damage the rights, for the sake of na- damage the rights, rights, legal inter- legal interests, tional safety, public legal interests, ests, life and health health of the citi- order, protection of health of the citi- of the citizens, Licensing Principle zens, defense and rights and liberties, zens, state defense protection of the safety of the state, morals, health of and safety, the environment and the cultural herit- the population, cultural heritage of ensuring the safety age of the citizens environmental the citizens of the of the state of RT protection Russian Federation 3

Number of activities 66 49 36 110 68 subject to licensing

Most licenses are For general activi- permanent, but ties, 5 years can be suspended or revoked entirely Not less than 5 Not less than 3 Duration Not less than 3 5 – 10 years if the licensee does years years years for special not eliminate the activities (Article 18) infringements within 3 months

Up to 30 days after Up to 30 days after Within 10 business Time to issue the receipt of the ap- Up to 45 days receipt of the ap- Within 45 days days after receipt license plication plication of the application

attachment 3.3. extract from the law of the rt “on licensing of certain kinds of activities”

Article 18. Special list of the activities that requires a license

1. According to the present Law, the following activities are subject to special licensing procedures: • carrying out banking transactions; • dealing with foreign currency; • manufacturing and selling of ethyl alcohol, goods containing alcohol and spirits; • electrical communication; • mining and geological excavations; • use of objects of fl ora and fauna listed in the Red Book of Tajikistan of endangered species; • activities in the fi eld of nuclear power.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 63 LICENSING other Hydro meteorol- ogy and related activities Usage of satellite and radio frequencies for TV and radio broadcast- ing Extraction, processing, exploration of oil, gas and coal finance consulting services Patent attorneys tourism, hotel business consumer services Education- al activities Opera- tion of oil and gas networks Storing oil, gas and the goods from their processing communication General electrical communications activities (phone, mobile phones, internet, …) transport medical services pharmaceuticals catering trade Import- export of tobacco products Sales of alcoholic products Trading of oil, gas and the derived products Sale of ferrous/non-ferrous metals scrap and waste construction Installation and setup of power facilities and equipment agriculture processing of agriculture production Manufac- turing of tobacco products Manufac- turing of alcoholic products production of consumers goods Manu- facturing, transmission and distribution of electric power Collect- ing and processing of ferrous/ non-ferrous scrap and waste Processing of precious metals and stones sectors Bodies ministry of agriculture and environment protection state service on surveillance and regulation in the field of communication ministry of economic development and trade ministry of education ministry of energy and industry attachment 3.4. activities subject to licensing

64 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING other Activities of private pension funds Usage of infection agents Collecting of herbs and preparation of medicine finance Exchange activities (stock, commodity) Insurance activities Securities markets consulting services Audit activities (general audit, audit of insurance and investment companies ) Lawyers and attorneys tourism, hotel business

3 consumer services Pawnshops Gambling activities Mainte- nance of medical equipment Employ- ment related activities communication transport medical services Private medical practices Private veterinary service pharmaceuticals Pharma- ceutical activity Breeding of narcotic plants for c scientifi purposes Trade of narcotics and psychotropic substances) Trade of narcotics and psychotropic substances) catering trade Trading of palae- ography products protected from fal- cation sifi (securities, checks, …) Trading of jewellery, precious metals and stones Trading of civil and military weapons construction Assem- blage, repair and service in re fi eld of fi safety agriculture processing of agriculture production production of consumers goods Manufac- turing of palae- ography products protected from cation falsifi (securities, checks, …) Production disinfect- of ants sectors Bodies ministry of finance ministry of health state supervision centre on pharmaceutical and medical activity ministry of internal affairs ministry of justice ministry of labour and social security

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 65 LICENSING other Manufac- turing, storage and distribution of industrial explosives Use of protected ora and fl fauna (endangered species) finance consulting services Evaluation and assessment of properties tourism, hotel business consumer services Mainte- nance of motor vehicles and railway transport Technical services for air transport Evaluation of industrial safety Collection, storage and disposal of dangerous waste communication transport Transporta- tion services and road by railway Operation of passengers and cargo air terminals, transportation Repair and maintenance of cargo lifting devices Transpor- tation of industrial explosives Transpor- tation of dangerous waste medical services pharmaceuticals Harvest- ing and collection of medical herbs for medical purposes catering trade Sale of py- rotechnical devices construction Design, construction and repair of road infrastructure Design and construction of buildings Geodesy and car- tography (on works connected with construction) Repair of power facilities and equipment agriculture processing of agriculture production production of consumers goods Manufac- turing of pyrotechni- cal devices Work with explosive, amma- infl ble, and chemically hazardous industrial facilities sectors Bodies state service for supervision and regulation in the field of transportation state committee for investment and managing of state property head department of the state surveillance over the safety works in industry and mining agency of construction and architecture under the Gov- ernment of rt state supervision service of environment protection

66 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING other Exploring, use of “interior” of the earth finance consulting services tourism, hotel business

3 consumer services Activity involved in protection of con- dential fi information Detec- tion of electronic devices in premises and industrial facilities Activities in eld of the fi electronic digital signatures communication Televi- sion, radio broadcast- ing and audiovisual presenting transport medical services pharmaceuticals Trade of narcotics and psycho tropic substances) catering trade Trade of equipment used to obtain private information construction Geod- esy and cartogra- phy (on the works connected with land management) agriculture processing of agriculture production production of consumers goods Manufac- turing of equipment to obtain private information Manufac- turing of information protection equipment sectors Bodies agency for land management, land-sur- veying, and car- tography under the Govern- ment of rt committee of televi- sion radio Broadcast- ing central agency of protection of the state secrets agency for control of drug-dealing head department for Geology under Gov- ernment of rt

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 67 LICENSING other Use of radioactive substances Use of atomic energy finance Banking operations Banking operations with precious stones and metals consulting services Audit of banking activities tourism, hotel business Tourism activity consumer services communication transport medical services pharmaceuticals catering trade construction Geodesy and car- tography agriculture processing of agriculture production (1) - The license is issued by a Commission, which consists of representatives Ministry Health, Internal Affairs and Agency for Control Illegal Drug-Dealing production of consumers goods Use of sources of ionization radiation (such as generators) sectors Bodies national Bank of tajikistan national agency of the space, Geodesy and car- tography academy of science committee on youth affairs, sport and tourism

68 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 4. PERMITS PERMITS

4. permits

Permits represent an additional administrative hurdle for establishing and running a business in Tajikistan. The permit system is a remain findinGs sult of two complementary forces: the bulk of permits, arising from Soviet-era technical requirements, along with permits resulting • About 60% of entrepreneurs needed to from new, market-oriented regulations, which have been added obtain at least one permit. On average, somewhat chaotically over the past 15 years. The overall system entrepreneurs need 2 permits to conduct has never gone through a proper rationalization and represents a business activities. heavy, and sometimes unnecessary, burden for SMEs. In addition, the system is opaque, as many regulations are not disclosed to • Permits are more frequent among start- the general public. up businesses (2/3 of entrepreneurs) and

among small and medium companies (al- Permits are widespread (two out of three Tajik entrepreneurs can- most 3/4 of entrepreneurs). not start their businesses without obtaining permits fi rst) and permit issuance can be extremely time consuming. The absence of es- • Duration of the application procedure tablished legislative norms and requirements, as well as diffi culties and the cost of permits are highly variable: in accessing information, leave room for rent seeking opportunities and force entrepreneurs to use unoffi cial payments. - Individual entrepreneurs spend on av-

erage 71 somoni ($22) and 8 working Taking into account offi cial and unoffi cial payments and missed days to obtain all necessary permits; business opportunities, the permit system generates a substantial burden for SMEs. In particular, it represents a barrier to entry for - Small and medium companies spend start-up businesses, reaching up to 12% of the annual profi t of a on average 365 somoni ($114) and 34 small and medium company just launching its activity. working days;

The problems indicated above are, to a great extent, due to the - Dehkan farmers spend on average 44 absence of an integrated system regulating the purposes and somoni ($13) and 4 working days. functions of permits: the areas of their application, the bodies issuing them, the process cost and timeframe of issuance and can- • Existing businesses are under pressure to cellation. obtain a permit, since they are more vul-

nerable if the permit is denied. Permit reform is not only necessary to reduce the administrative burden on entrepreneurs, but it is also a needed complement • Nearly half of entrepreneurs who obtained to the reforms developed so far by the Government of Tajikistan a permit in 2005 resorted to unoffi cial solu- in the area of licensing and inspections. The risk is that without tions. a proper intervention, a proliferation of permits might undermine the progress done in the other two areas.

70 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

4.1 permits: the leGal framework

According to the Tajik legislation, SMEs can start their activity from the moment of state registration, with the exception of activities BOX 4.1. EXAMPLES OF DIFFERENT PERMIT-LIKE requiring a license.1 DOCUMENTS

However, the survey reveals that in most cases entrepreneurs must 1. Permit: authorization of the issuing body giv- also obtain one or more permits. Two out of three entrepreneurs ing the applicant the right to accomplish starting their activity in 2005 received permits for organization and an action and/or realize an activity; development of their business. For those businesses, obtaining a 2. Approval: consent of the issuing body with permit is a necessary prerequisite for starting their activity. the accomplishment of the activity and/or realization of activity; A permit is a document that gives the applicant a right to under- 3. Conclusion: a resolution based on an au- take a specifi c action. Tajik legislation does not provide a unifi ed thorized body’s examination or analysis of defi nition of a permit. As a result, a number of permit documents goods/products, regarding the possibility fall into the defi nition of permits (for the purpose of this report, a to perform an activity and/or realization of “permit” will be used to refer to any type of permissive document activity.2 as defi ned in Box 4.1). The absence of a normative defi nition creates confusion, both among issuing bodies and entrepreneurs. Additionally, a permit is very often confused with a license, which 4 is a special permit to conduct an activity on a regular basis.

The current permit system in Tajikistan has two origins: BOX 4.2. LEGAL BASIS OF PERMITS IS OFTEN 1. The original principles and technical requirements governing UNCLEAR permits were elaborated during Soviet times and have not been modifi ed since, despite the changes that took place in • According to Article 78 of the Law of RT “On the economy and society. In particular, some of these rules Normative Legal Acts,” all acts of state and are still based on old technological principles; local authorities, self-governing bodies, set- 2. In addition, during the past 10-15 years, the government tlements and villages come into force after adopted a number of norms in an effort to adapt to and reg- examination and registration in the Minis- ulate the development of a market economy. try of Justice of RT and offi cial publication in newspapers and magazines of the state The result of these two driving forces is a system characterized by bodies. However, conducted analysis of the overlaps and inconsistencies due to the lack of a systematic ap- legislation reveals that some acts relating to proach. permits, although applied in practice, did not go through this examination procedure The lack of overarching principles governing the permits system (see Attachment 4.2 in Annex); has led to: • The Code of Administrative Violations of RT lists more than 50 cases of administrative re- • The proliferation of permits, i.e., the introduction of a number sponsibilities in cases of absence of permits of permits from different government bodies without a clear to engage in certain activities. Still, the le- legal basis (see Box 4.2) that are sometimes incompatible with gal requirements for these permits (and the the requirements of a market economy; administrative responsibility in case of their • The absence of homogeneous rules and procedures. For ex- absence) are not foreseen by the law. ample, the permits system in most cases requires that entre-

1 Articles 24 and 51 of the Civil Code of RT. 2 E.g., laboratory analysis of market products’ compliance with sanitary norms.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 71 PERMITS

preneurs renew their permits annually, regardless of whether ”... and problems consist not only in obtaining permits, but also in the need to obtain them an- their business has undergone substantial changes. This adds nually…” instability to the terms of entrepreneurial activity.

-Entrepreneur, focus-group participant European countries have long been in search of the optimum balance between freedom of entrepreneurship, protection of the population, and state regulation. This has led to defi ning certain principles of state regulation, which could also be partially applied in Tajikistan (see Box 4.3).

BOX 4.3. PERMITS IN THE EUROPEAN UNION3

Basics Permits in the European Union are based on risk management. Permits are used as a tool to protect consumers’ health and safety and to protect the environment. Constitutional courts prevent abuses, overseeing the list of permits introduced by the state bodies.

Overall constitutional principles: - Parliamentary law should defi ne whether a specifi c activity requires a permit; - A permit can only be required and issued if envisaged by the law.

Law defi nes key criteria: - Objects and activities subject to permits; - Material and procedural criteria for issuing permits; - Responsibility of permit issuing bodies; - Fees associated with issuing permits; - Conditions for revocation of permits; - Opportunities for appealing decisions and other legal measures in cases of denial or issuance delay (such as “silence is consent”).

Types of permits: - Administrative preventive permits: i) as a condition to undertake and commence certain activity; ii) issued by a single decision of a public institution (e.g., environmental permits, construction permits); - Registration and notifi cation system: i) individual decides whether he/she can meet the conditions of the law; ii) activity can be commenced after registration or notifi cation; iii) public institution is entitled to control the fulfi llment of the defi ned conditions and criteria and can prohibit to carry out an activity (i.e., catering services, retail food shops).

4.2 overall assessment: procedures are most complicated for small and medium companies

Two out of fi ve entrepreneurs obtaining permits consider the overall procedure as complicated or very complicated. Remarkably, small and medium companies seem to face the most diffi cult situation (see Chart 4.1), despite their greater resources (human and material resources, higher educational level to deal with proce-

3 Based on materials of republican conference “Permits and Approvals in Entrepre- neurship Activity,” Minsk (Belarus), December 20, 2006.

72 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

Chart 4.1. ASSESSMENT OF PERMIT PROCEDURE: OVERALL COMPLEX

% OF RESPONDENTS WHO OBTAINED PERMITS

Individual entrepreneurs 13 49 32 5

Small and 3 50 43 4 medium companies

Dehkan farmers 11 53 35 2

75% 50% 25% 0% 25% 50% . Very easy . Rather easy . Rather complicated . Very complicated dures). This partly confi rms our hypothesis that state bodies especially target companies to force them to use unoffi cial ways to solve permit issues.

4.3 permit coveraGe and freQuency: staBle overall

The Tajik legislation neither clearly specifi es the number of bodies Chart 4.2. MORE THAN HALF OF BUSINESSES OBTAINED allowed to issue permits nor foresees the list of permits necessary AT LEAST ONE PERMIT to operate a business. As a result, state bodies at all levels intro- % RESPONDENTS 4 duced permits independently and according to specifi c require- 76% ments, resulting in: 58% 58% 50% • Wide coverage of activities subject to permits; • Proliferation of (typologies of) permits; • Differentiated issuance procedures; • Different cost of issued permits; • Variable consideration periods. Total Individual Small and Dehkan SME sector entrepreneurs medium com- farmers A preliminary analysis by IFC has calculated that in Tajikistan, panies there are more than 50 state bodies that are entitled to issue more than 250 different types of permits.4 The following sections will go through the different areas in detail.

4.3.1 OVERALL COVERAGE AND FREQUENCY STILL EXTREMELY Chart 4.3. ALMOST 4 OF 5 SMALL AND MEDIUM COM- WIDESPREAD PANIES NEEDED TO OBTAIN PERMITS IN 2005

% OF RESPONDENTS The number of entrepreneurs who needed to obtain a permit is 83 very high: 58% of entrepreneurs needed to obtain at least one 75 permit in 2005 (see Chart 4.2). This number is even higher for start- 66 67 56 57 59 up businesses, as 66% had to obtain at least one permit. 49

Unfortunately permits are needed not only to start a business, but also to continue activity. The number of existing businesses requiring a permit (in most cases the renewal of an existing one) is extremely high, particularly for small and medium companies (see Total Individual Small and Dehkan Chart 4.3). SME sector entrepreneurs medium com- farmers panies Start-ups Existing businesses 4 . . In January 2007, IFC Business Enabling Environment Project with the support of the Government of Tajikistan launched a comprehensive review of the permit system with the goal of mapping the total number of permits, the issuing bodies and the issuance process.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 73 PERMITS

Chart 4.4. OUT OF SELECTED CIS COUNTRIES, TAJIKISTAN’S As in the case of licensing, existing businesses are more vulnerable ENTREPRENEURS ARE REQUIRED TO OBTAIN THE MOST PERMITS if their permit is not renewed, opening the door to unoffi cial ways

% OF RESPONDENTS WHO OBTAINED AT LEAST 1 PERMIT to solve issues and, as a result, higher expenditure (see section 4.7.2). 58 54 45 Tajikistan ranks fi rst among other CIS countries in terms of the per- 35 centage of SMEs who obtained at least one permit in the last year (see Chart 4.4). Not only Georgia, which has launched a dramatic regulatory simplifi cation effort, but also Uzbekistan, which

3 reformed its permits system only in the recent past, have made great progress compared to Tajikistan.

Tajikistan Ukraine Belarus Uzbekistan Georgia Local executive bodies (Khukumats), Sanitary and Epidemiologi-

Source: IFC (2006a), IFC (2006b), IFC (2007a), IFC cal Service (SES), and Fire Authority cover the large majority of (2007b) permits (see Chart 4.5). In fact, according to IFC analysis:

• Local executive bodies are entitled to issue more than 10 different permits; • SES issues more than 30 permits; • Fire Authority issues 8 permits.

Chart 4.5. KHUKUMAT, SES AND FIRE AUTHORITY MOST FREQUENTLY REQUIRE PERMITS

% OF RESPONDENTS OBTAINING PERMITS

49 49 42 43

32 28 25 36 23 23 23 22 15 12 11 8 7 5 4 6 5

Labour, social protec- Energy Energy distribution Khukumat SES Fire Authority Water authority tion surveillance Barki Tojik . Individual entrepreneurs . Small and medium companies . Dehkan farmers Since many normative legal documents that regulate the issuance of permits are not registered at the Ministry of Justice, there are many cases in which different state bodies and different hi- erarchical levels within the same body demand double requirements from SMEs. In these cases, one body could take over both of these functions (an example is described in Box 4.4).

There are also cases in which permits overlap with other regulatory tools of regulation (i.e., certifi cation, licensing5). To obtain a conclusion from the Sanitary-Epidemiological Service (SES), the applicant also needs to provide a product conformity certifi cate, which certifi es the quality of the product.

5 For more details on doubling with licenses see chapter “Licensing.”

74 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

BOX 4.4. AN EXAMPLE OF OVERLAPPING PERMITS IN ORDER TO BEGIN OPERATIONS AS A RESTAURANT

In order to start operations, a restaurant must fi rst obtain a permit from the national Environment Protection Committee of the city of Dushanbe to place the garbage in a certain place for garbage collection. In addition, the restaurant must also work with the State Environment Protection Committee to ensure that its business will not impact the environment signifi cantly.

One way to optimize the process would be to transfer authority to a single body.

The State Industrial Safety Enforcement Agency issues permits for the operation of gas sites. However, in order to get gas, the restaurant needs to sign an according agreement with the state enterprise “Tajikgas,” which requires a preliminary inspection.

In this case it would be reasonable to transfer the functions of issuing permits and conducting safety inspections of gas sites to Tajikgas, since the Agreement is the whole of reciprocal obligations, in this case between the state and the entrepreneur.

4.3.2 NUMBER OF PERMITS IS LINKED TO THE SIZE OF ACTIVITY

On average, each SME is required to obtain more than 2 per- Chart 4.6. SMALL AND MEDIUM COMPANIES HAD TO OBTAIN mits per year. The number of required permits is related to the MORE PERMITS THAN ANY OTHER TYPE OF BUSINESS 4 legal form of enterprises: while individual entrepreneurs and de- AVERAGE # OF PERMITS, BY TYPE OF BUSINESSES hkan farmers are subject to fewer permit requirements, small and medium companies, distinguished by their larger size and higher turnover, require more than double the number of permits than 4 the remaining categories (see Chart 4.6).

2 2 The absence of unifi ed legislation on permits has led to regional differences, characterized by the level of regulation of the local 1 government bodies in each region. As Chart 4.7 shows, even considering the same type of business (individual entrepreneurs) and the same sector (retail trade), wide differences in the number of Total Individual Small and Dehkan SME sector entrepreneurs medium farmers necessary permits appear. companies

Chart 4.7. INDIVIDUAL ENTREPRENEURS INVOLVED IN RETAIL TRADE IN GBAO NEED TO OBTAIN MORE PERMITS THAN THEIR COLLEAGUES IN OTHER REGIONS

# OF PERMITS

2 2 2 2 2

1 tion B tion A Sughd province Dushanbe Kulyab district lican Subordina- lican Subordina- Districts of Repub- Districts of Repub- (Khatlon province) (Khatlon province) Gorno-Badakhshan Kurgan-Tube district Autonomous Oblast

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 75 PERMITS

Chart 4.8. THE NUMBER OF AGENCIES ISSUING PERMITS The decrease in the number of bodies issuing permits (Chart 4.8) DECREASED CONSIDERABLY FROM 2002 TO 2005 is nevertheless a positive message, as it testifi es to the success of

# OF BODIES consolidating the number of governmental bodies with whom 5 5 SMEs have to deal with,6 although there is still potential for further reduction and improvement in the number of interactions be- 3 3 tween entrepreneurs and state bodies. This reduction is especially

2 crucial for activities requiring different permits from different bodies (adding to the time and cost spent), e.g., construction activi- 1 ties. In such cases introduction of “one-stop-shop” principle could facilitate the overall process, where entrepreneur needs to apply to one single body which takes care of interaction with other bod-

Individual Small and medium Dehkan farmers ies and gathering all necessary permits, resulting in reduced time entrepreneurs companies and cost. . 2002 . 2005 4.4 issuinG process: unreGulated, opaQue, and unnecessarily time-consuminG

Chart 4.9. SMALL AND MEDIUM COMPANIES SPENT Due to the lack of unifi ed regulations governing the application ABOUT 1.5 MONTHS TO OBTAIN ALL NECESSARY PERMITS process, businesses spent a lot of time obtaining permits. Even in

BUSINESS DAYS cases in which the need to obtain certain permits stems from the 34 laws and provisions regulating the legal activity of state bodies, nevertheless these documents do not outline specifi c requirements: the list of documents necessary to obtain permits or approvals, permits pricing issues, duration of application review period, and validity period of permits are not clearly defi ned by the legislation. 8 4 In particular, lack of a clear and unifi ed regulation can be as-

Small and sessed by the length of a permit application procedure. Pro- Individual Dehkan medium entrepreneurs farmers longed consideration puts entrepreneurs under pressure and companies Business leads to unoffi cial solutions. While the overall procedure for in- days spent to obtain one 3 8 4 dividual entrepreneurs and dehkan farmers is not particularly permit time-consuming, small and medium companies spent almost 1.5 months to obtain all necessary permits, and on average 8 business days for each permit (see Chart 4.9). This could be Chart 4.10. EXISTING SMALL AND MEDIUM COMPANIES SPEND MORE TIME THAN START-UPS TO OBTAIN NECESSARY PERMITS due to the fact that offi cials consider companies as rent-seeking targets and prolong the issuance process intentionally. BUSINESS DAYS 34 It is also remarkable that existing small and medium companies 27 spent more time obtaining permits than start-up companies, even though they already gained experience in dealing with administrative requirements. This could be evidence of the pressure from state bodies to force existing entities into rent-seeking opportunities, since they are more vulnerable in case of permit denial (see Chart 4.10).

Existing business Start-ups Business days spent to obtain one 8 7 permit 6 As well as refl ecting a likely reduction in the number of required permits.

76 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

An unclear normative basis is often the cause of this lengthy procedure lasting in some cases up to 160 business days (see Attach- ment 4.3 in Annex).

The lack of clear procedures is further exemplifi ed by the regional variation in the duration of the application process: Chart 4.11 considers the example of individual entrepreneurs working in retail trade.

Chart 4.11. RETAIL TRADERS IN GBAO SPENT THE MOST TIME TO OBTAIN NECESSARY PERMITS

BUSINESS DAYS 16

8 6 4 4 5 5 ince) tion B tion A Sughd province province) Dushanbe mous Oblast Kurgan-Tube Gorno-Bada- Kulyab district (Khatlon prov- district (Khatlon khshan Autono- lican Subordina- lican Subordina- 4 Districts of Repub- Districts of Repub- Business days spent to obtain one 2 3 2 3 4 4 3 permit

4.5 permits expenses

Legislation does not provide clear rules for charging payments for issuance of permits (see Box 4.5). The absence of legislative norms BOX 4.5. PAYMENTS FOR PERMITS ARE NOT FORE- regulating permit costs does not exclude the fact that payments SEEN BY LEGISLATION are made in practice. In particular, not only can these payments be high (see Chart 4.12), but entrepreneurs often cannot distin- The Law “On Diverse Obligatory Payments Into guish between offi cial and unoffi cial portions. the Budget” provides for about 20 different types of obligatory payments,7 but payments for obtaining a permit are not mentioned. This law as Chart 4.12. SMALL AND MEDIUM COMPANIES PAID THE MOST TO OBTAIN PERMITS a whole regulates the obligatory payments that SOMONI arise from administrative procedures. Accord- ONE PERMIT ALL PERMITS ingly, permits not covered by this law should be 365 free of charge. 87

71 33 33 44

Small and Small and Individual Dehkan Individual Dehkan medium medium entrepreneurs farmers entrepreneurs farmers companies companies

7 Law of RT “On Diverse Obligatory Payments Into the Budget” dd. July 28, 2006.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 77 PERMITS

Chart 4.13. SMALL AND MEDIUM COMPANIES WORKING Small and medium companies seem to bear the largest burden IN RETAIL TRADE PAID MORE THAN INDIVIDUAL ENTREPRENEURS during issuance of permits, both in terms of the number of neces- WITHIN THE SAME SECTOR sary permits, as well as costs. For instance, companies working in SOMONI 616 retail trade paid signifi cantly more than individual entrepreneurs working in the same sector (see Chart 4.13).

4.6 economic impact of permits

120 Entrepreneurs spend not only fi nancial resources, but also labor 58 35 and time resources to obtain the necessary documents from state bodies: Individual Small and medium entrepreneurs companies • Due to wasted time, a business loses the opportunity to gain . One permit . All permits additional profi t (for start-up businesses); • Staff members involved in obtaining necessary documents are diverted from operational work (for existing businesses).

These losses represent an additional burden in the form of opportunity costs for businesses. Taking into account all the costs involved in the procedure, we estimate that entrepreneurs lose between 3% to 15% of their annual profi ts dealing with permits issues (see Chart 4.14). 8 The burden is especially high for small and medium companies, in particular for start-ups.

Chart 4.14. ECONOMIC IMPACT OF PERMITS BURDEN RANGES BETWEEN 3%-15% OF ANNUAL PROFITS

SOMONI

14% 5% 15% 3% 8% 3% of annual of annual of annual of annual of annual of annual profi ts profi ts profi ts profi ts profi ts profi ts

2,870

650 570 450 180 190

Individual Small and medium companies Dehkan farmers entrepreneurs

. Start-ups . Existing businesses 4.7 access to information and unofficial payments

The absence of a clear legislative basis and lack of transparency in the requirements increase the complexity of the procedure and lead to unoffi cial solutions.

8 Calculation is done for SMEs that underwent this procedure, i.e. which had to obtain at least one permit. For more details on the methodology see Box 3.6 in Chapter 3.

78 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

4.7.1 DIFFICULTIES FACED WHILE OBTAINING PERMITS

Almost half of entrepreneurs going through the permits procedure Chart 4.15. LACK OF INFORMATION IS STILL THE faced certain diffi culties during the process (seeChart 4.15). How- MAIN PROBLEM TO OBTAINING PERMITS ever, the number of entrepreneurs facing diffi culties with the per- % OF RESPONDENTS OBTAINING PERMITS WHO FACE PROBLEM mits process has decreased with respect to 2002. In 2005, 54% of respondents who obtained permits mentioned having problems 18 Lack of information 23 during the procedure, down from 63% in 2002. Large number of re- 12 quired documents 17

Insuffi cient legal literacy of entrepreneurs considerably compli- Unclear require- 9 ments 12 cates the overall procedure. Entrepreneurs have diffi culties in determining which activities require permits. In addition, due to the . 2002 . 2005 lack of transparency, entrepreneurs have limited access to the normative basis which regulate the permits procedure. Accord- “...When I fi rst started the business, it was very dif- ing to the fi ndings of the survey, it is diffi cult or very diffi cult to ob- fi cult to fi nd information regarding what I need- tain the necessary information on procedures by different bodies ed to do to get the permit. I also had no friends (see Chart 4.16). In some cases, it is the state bodies themselves who could help me...” that complicate the situation, with insuffi cient training and limited - Entrepreneur, focus–group participant resources to deal with entrepreneurs’ requests. 4

Chart 4.16. ACCESS TO INFORMATION FROM STATE BODIES REMAINS VERY DIFFICULT

% RESPONDENTS CONSIDERING ACCESS TO INFORMATION AS HARD OR VERY HARD

State Automobile 56 Inspection (GAI)

Committee for Architecture and 52 Construction

State Scientifi c Center of the Medi- 52 cine Examination (Ministry of Health)

State Industrial Safety Enforcement Agency 51

Energy Distribution Barki Tojik 35

Energy Surveillance 31

Khukumat 31

Fire Authority 28

Trade Inspections (MoET) 27

SES 24

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 79 PERMITS

4.7.2 UNOFFICIAL WAYS TO SOLVE ISSUES ARE WIDESPREAD

The share of entrepreneurs who used unoffi cial payments in 2005 “...the main thing is – I know who to turn to and fell in comparison to 2002 (see Chart 4.17). However, the relation- how much it will cost, therefore personally I have ships between entrepreneurs and offi cials are transforming into no problems...” closer relationships, where rather than unoffi cial payments, other - Entrepreneur, focus-group participant means like presents, invitations to lunches, and other services are used to solve the issues: 47% of entrepreneurs used unoffi cial ways to obtain permits in 2005 (see Chart 4.18).

Chart 4.17. THOUGH UNOFFICIAL PAYMENTS ARE DECLINING... It is also remarkable that existing small and medium companies % OF RESPONDENTS OBTAINING PERMITS reported using unoffi cial payments more frequently than start-up 39 companies, confi rming the assumption that due to their longer term investments, they are under greater pressure of refusal (see 25 Chart 4.19).

There is a certain regional difference in the use of unoffi cial payments for solving permit issues (see Chart 4.20). This difference can be due to the relationship entrepreneurs and offi cials built up dur- Unoffi cial payments Unoffi cial payments ing their interaction. in 2002 in 2005

Chart 4.18. ...UNOFFICIAL SOLUTIONS ARE HIGH

% OF RESPONDENTS OBTAINING PERMITS

22 47

Unoffi cial payments Other unoffi cial ways in 2005 in 2005 unoffi cial ways in 2005

Chart 4.19. EXISTING SMALL AND MEDIUM COMPANIES Chart 4.20. SOLVING ISSUES IN UNOFFICIAL WAYS VARIES ACROSS REGIONS MAKE UNOFFICIAL PAYMENTS TO AVOID REFUSAL % OF RESPONDENTS OBTAINING PERMITS % OF RESPONDENTS OBTAINING PERMITS 61 36% 52 50 50 33% 41 35 27% 26% 24%

17% province) Dushanbe mous Oblast Kurgan-Tube Gorno-Bada- Kulyab district district (Khatlon khshan Autono- Sughd province Dehkan farmers can Subordination (Khatlon province) Individual Small and medium Districts of Republi- entrepreneurs companies . Existing businesses . Start-ups 80 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

recommendations

1. Reduce permits coverage. This in turn can be achieved by:

1.1 Reviewing the number of permits currently issued (see Attachment 4.1) in order to rationalize the existing legal basis according to the risk management principles. The necessary steps in this process are: • cancellation of outdated and anti-market permits; • consolidation/elimination of redundant permits, i.e. overlapping permits issued by different levels of the same agency, or by different agencies; • elimination of permits covering areas already regulated by licensing (see Chapter 3); • elimination of permits covering areas already covered by other administrative procedures (i.e., compulsory or voluntary certifi cation).

1.2 Identifying by law the agencies allowed to issue permits.

Expected impact

Reduced coverage of permits will decrease the entry cost for new businesses and cost of doing business for existing 4 ones, with possible impact on the number of active companies and positive contribution to the budget.

2. Streamline the application process. This can be achieved by:

2.1 Introducing the “silence-is-consent” principle. Once an applicant for a permit submits the required paperwork, the failure of an issuing agency to respond with a decision within a given timeframe counts as an application approval (see Chapter 3); 2.2 Introducing an administrative principle of application review process, which limits the range of state intervention and clearly defi nes the required steps in case of refusal (see Chapter 2); 2.3 Specifying a uniform permits application procedure.

Expected impact

• Clear procedures would reduce the overall burden of the entrepreneurs in terms of time and money. In particular, introduced measure would reduce the number of unoffi cial payments; • Transfer of responsibility from applicant to offi cial would force the latter to examine documents in a timely manner, reducing the overall time of consideration; • Clearly substantiated cases of refusal would improve the overall process and reduce entrepreneurs’ dependence on unfair decisions of offi cials.

3. Reduce the burden of permit renewals. This can be achieved by:

3.1 Extending the validity period of issued permits, thus reducing the need for repetitive renewals; 3.2 Designing a dedicated process with limited steps in case of no changes in business activity.

Expected impact

Simplifi ed and less frequent renewal procedure would reduce the cost of doing business, while at the same time streamline the work of public bodies.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 81 PERMITS

4. Introduce the “one-stop-shop”9 principle of issuance of some permits (e.g., construction), which will help to decrease the length of the process and increase the effectiveness of the procedure, both for entrepreneurs and the state bodies (see Attachment 4.4). In particular, in would be advisable to adopt a one-stop procedure for sectors requiring multiple permits.

Expected impact

Possibility to apply at “one-stop-shop” would reduce the overall burden for entrepreneurs in terms of time and cost spent and have a positive impact on transparency and reduction of unoffi cial solutions between entrepreneurs and offi cials.

5. Launch an information campaign to increase the legal awareness of entrepreneurs and government offi cials, including seminars, publications and distribution of explanatory materials.

Expected impact

Introduction of standard rules and requirements will bring clarity and will regulate the procedure of obtaining permits, improve accessibility to information, decrease the opportunities for unoffi cial payments and increase the legal protection of entrepreneurs.

9 A one-stop-shop is any institution that unites government offi cials from different departments in one location to provide improved information and/or services to its citizens. For an example of a “one-stop-shop“ principle for registration procedure see Chapter 2.

82 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

annex attachment 4.1. rapid regulatory reform: the “guillotine” approach10 4. Introduce the “one-stop-shop”9 principle of issuance of some permits (e.g., construction), which will help to decrease the length of the process and increase the effectiveness of the procedure, both for entrepreneurs and the Programs for revising and eliminating old legal acts were conducted in Great Britain (Cancellation of the Act of 1944, Regula- state bodies (see Attachment 4.4). In particular, in would be advisable to adopt a one-stop procedure for sectors tive base reform, 2001), Mexico, Hungary and South Korea. In 2004, Moldova also applied a similar approach after passing the requiring multiple permits. new Law “On Revision of Legal Base Regulating Activity of Businesses,” which was nicknamed the “Guillotine” Law.

Expected impact The “guillotine” approach can be used to reduce outdated and redundant permits with a single legislation and under a limited timeframe. The advantage of this exercise is to consolidate all legislative amendments into one general decision, reducing the Possibility to apply at “one-stop-shop” would reduce the overall burden for entrepreneurs in terms of time and cost time and effort needed to perform large scale reforms. spent and have a positive impact on transparency and reduction of unoffi cial solutions between entrepreneurs and offi cials. The “guillotine” mechanism can be synthesized in the following steps:

5. Launch an information campaign to increase the legal awareness of entrepreneurs and government offi cials, a. The government identifi es the general scope of documents up for revision (in the case of Tajikistan, this would apply to including seminars, publications and distribution of explanatory materials. permits, approvals and conclusions); b. The government provides all ministries with a specifi c deadline to elaborate a list of internal documents subject to revision Expected impact according to point a; c. The government sets a deadline to each ministry to assess the necessity of each document based on a checklist that veri- Introduction of standard rules and requirements will bring clarity and will regulate the procedure of obtaining per- fi es its legality and suitability to market requirements; mits, improve accessibility to information, decrease the opportunities for unoffi cial payments and increase the legal d. Every document and its justifi cation is assessed by three separate instances: the responsible ministry itself, an independent 4 protection of entrepreneurs. group of government experts and the interested stakeholders (e.g., entrepreneurs, business associations, etc.); e. As a result of the review, each document is either: • included into the “short-list” of accepted documents; • rejected or returned for modifi cation; f. After the set deadline, the short-list is published and any document not included in it is automatically rejected through a single legal act (e.g. a decree implementing the reform); g. The “short-list” is included into a judicial database which represents the offi cial register of all legal documents: provisions not included in the given register can not be applied toward business entities.

attachment 4.2. examples of the legal acts foreseeing obtaining of permits which did not undergo examination in the ministry of justice of rt

Agency Type of activity subject to permit Regulating legal norm State Communication Inspection Use of frequencies Regulations on state communication inspection under Ministry of Communication of RT, ap- Import of radio-electronic equipment (REE) and proved by оrder of Ministry of Communication high-frequency facilities (HFF) leading to r-ra- No.117, dd. December 5, 2003. diation or high-frequency magnetic radiation Purchase, building and use of REE and HFF Ministry of Health Medical use of medicine Regulations on order of issuance of medicine prescriptions and medicine distribution from chemistries of RT, approved by Ministry of Health No.380, dd. December 23, 2002. Destruction of a consignment of faulty medi- Regulations on safe destruction of medicine cine which do not comply with relative standards of RT, approved by Ministry of Health No.370, dd. December 16, 2002. Crossing of international borders by medicines SES Use of water for drinking purposes Instruction on approval and issuance of the permits for special water usage, approved by Head of State Committee of Environment Pro- tection and Forestry of RT, dd. January 20, 2005.

10 For more details see Putnina (2005).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 83 PERMITS

attachment 4.3. procedure of getting permits and approvals in order to open a shop

3 Fire Authority Application KHUKUMAT 4 (LOCAL GOVERNMENT) City Electricity Provider Start of activity 2 5 SES 1 Trade department

6 TajikStandart

Overall procedure 60 – 160 business days

1. Entrepreneur applies to the local government in order to obtain a permit to start the shop’s activity; 2. Sales department of the local government reviews and checks documents and then passes on for review to the head of the local government. After getting the permit from the local government, entrepreneur applies to the following bodies in order to get the necessary permits and approvals: 3. Permit from Fire Authority; 4. Sign agreement with the administration of town electricity department; 5. Permit from Sanitary-epidemiological Service (SES) and issuance of medical books for sellers; 6. Get a certifi cate verifying the shop’s compliance with the present standards of TajikStandart.

attachment 4.4. an example of “one-stop-shop” principle introduced in italy

In 1997, Italy passed a law that established widespread introduction of the “one-stop-shop” system

The main goals of this policy were: • Simplifi cation of administrative procedures for existing and potential enterprises; • Development of trade in underdeveloped regions of the country.

Results of “one-stop-shop”: • The registration and permits process is simplifi ed; • Registration and permit issuance period decreased almost by 3 times; • “One-stop shop” departments are established in more than 160 municipalities.

Effective introduction of “one-stop-shop” system requires the following: - Establishment of the authorized body responsible for appropriate functioning of “one-stop-shop”; - Establishment of an effective mechanism of cooperation between state bodies; - Identifi cation of the rights and responsibilities of cooperative bodies; - Identifi cation of the document revision period of by each body.

84 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 5. ENTREPRENEURS AND FINANCE ENTREPRENEURS AND FINANCE

5. entrepreneurs and finance

The relationship between entrepreneurs and fi nancial institutions in main findinGs Tajikistan is weak. Entrepreneurs do not perceive banks as reliable partners in addressing their needs of supporting their growth over • The relationship between the SME sector time. This is partly a result of the low level of confi dence of the and banks is still extremely limited: overall general public toward the banking system as a whole, as well as only 14.6% of respondents have bank of the limited capability of the local banks to address the needs accounts (a decline from 18% since the last of their corporate customers. IFC survey in 2002), in particular: - 5% of individual entrepreneurs; The absence of a regular relationship between banks and - 30% of dehkan farmers; entrepreneurs also explains to a great extent the limited size of - 81% of small and medium companies. the lending market. In fact credit, in particular toward small and medium businesses, can only be extended when banks have • Entrepreneurs still have limited access to developed long term relationships with these businesses, and can lending as only 23% of the entrepreneurs accurately assess the risks related to lending – in particular, credit needing funding obtained it from a bank or risk. In this absence, lending is “rationed,” i.e., fi nancial institutions a microfi nance organization (MFO). In fact: tend to reduce their risk by limiting their credit exposure, in terms - a third of respondents was in need of of number of borrowers and/or size of the loans or by applying external funding; risk mitigating factors, limiting the exposure to a very short period, - about one-third of those in need applied require high interest rates and/or high level of collateral. to a bank or an MFO (27%); - 86% of the applicants were successful, On the other hand, Tajik banks face a complex market for funding, likely as a result of a self-selection process where although interest rates on deposits are in the range of 20%, of applicants, i.e. only those who qualifi ed they are not able to attract funds from individuals. for a loan applied for it. As a result, only a small percentage of Tajik entrepreneurs in need • The loan granting process shows signifi cant of external fi nancing apply for a bank loan. Most pursue other improvements with respect to 2002 and it means of fundraising (e.g., family or friends) or do not borrow at takes on average 15 days to obtain a loan all. from a bank and 18 days from a MFO. In this context the only alternative to local banks are MFOs, which • However, lending availability is still an issue: nevertheless cover only a very specifi c section of the lending - Interest rates are extremely high (about market, i.e., micro-loans targeting micro-businesses. The effect of 36%), as a result of high rates on deposits this situation on growth is particularly evident when the companies and credit risk; at stake are incorporated, and their fi nancial needs can no longer - Loan maturity remains very short, with an be fulfi lled by informal short-term loans. average maturity of 10 months for banks and 8 months for MFOs; - Collateral requirements also make access to fi nance extremely diffi cult (in particular for start-ups): more than half of the borrowers were required to provide collateral, which, on average, amounted to 140% of the total loan amount; - The share of the borrowers who used unoffi cial ways of solving the issues is still signifi cant (26% of applicants).

86 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

5.1 tajikistan’s financial sector: an overview

Tajikistan’s fi nancial sector has seen dynamic growth in recent Chart 5.1. EVOLUTION OF NUMBER OF BANKS years, due to two driving forces: the consolidation of players, thanks AND BANKING BRANCHES to the enforcement of stricter minimum capital requirement,1 and # OF BRANCHES # OF BANKS the entrance into the market of new players, mainly micro-fi nance 250 18 organizations as well as a few branches of foreign institutions (see 209 14 201 Chart 5.1, Chart 5.2 and Attachment 5.1). 12 12 9 125 117 The increase of the loan to GDP ratio (from 14% in 2002 to 18 % 6 in 2005) as well as the deposit to GDP ratio (from 4% in 2002 to 8% in 2005) testifi es to a rapid growth and a more central role of 0 0 the fi nancial sector in the Tajik economy, albeit from a very low as of 2002 2005 base. 30.06.2006 Source: NBT (2006) Nevertheless these indicators are still the lowest among the Central Asian countries and well below Eurozone2 countries and show the still limited development of the sector (see Chart 5.3).

Chart 5.3. COMPARISON OF SOME INDICATORS IN THE BANKING SECTOR OF SELECTED Chart 5.2. BANK BRANCH DENSITY IS VERY LOW IN TAJIKISTAN COUNTRIES IN 2005 # OF BANK BRANCHES PER 10,000 INHABITANTS

LOAN/GDP RATIO, IN % DEPOSITS/GDP RATIO, IN % 10

104 90 4 3 2 5 57 0.3 0.5 38 34 33 30 27 28 22 19 18 12 8 Spain Belarus Ukraine Tajikistan Germany Uzbekistan

Kazakhstan Kyrgyzstan Latvia Ukraine Russia Tajikistan Eurozone Source: National Banks of the countries, National Banking Associations and Central Banks. Source: Annual and monthly Central Banks reports; Business Monitor International ltd.

5.1.1 LENDING: GROWING AT HIGH PACE, BUT STILL LIMITED

As a result, the total amount of lending from 2002-2005 increased Chart 5.4. LOAN VOLUME DEVELOPMENT annually by 41.4% and reached 1.3 billion somoni ($405 million) by the end of 2005 (see Chart 5.4). Taking into account the average MILLION SOMONI 1286 infl ation rate during this period,3 the real growth of lending totaled 31.1%.

5.1.2 DEPOSITS: SIGNIFICANT DEVELOPMENT TO BE SUPPORTED BY 457 AN INCREASE IN THE TRUST OF PEOPLE IN THE FINANCIAL SYSTEM 14% of GDP 18% of GDP

The volume of deposits also increased remarkably between 2002 2005 2002-2005 and amount to 540 million somoni ($169 million), which Source: NBT (2006)

1 Since January 1, 2005, the minimum capital requirement has been $5 million. 2 Eurozone includes 12 countries which introduced in 2001 the united currency – Euro. 3 Average infl ation rate between 2002 and 2005 being 10.2%.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 87 ENTREPRENEURS AND FINANCE

Chart 5.5. DEPOSIT VOLUME DEVELOPMENT represents an annual real growth rate of 48.5% (see Chart 5.5).

MILLION SOMONI The growth in volume of deposits continued in 2006 and reached 539 690 million somoni ($169 million) by June 2006.

However, individuals still show limited trust toward the fi nancial sector: 70.7% of deposits come from legal entities, while only 29.3% from individuals. 147

4% 8% 4 of GDP of GDP In fact although banks offer quite high interest rates on deposits, the overall population still prefers to keep cash in hand. 2002 2005 Source: NBT (2006) Additional evidence of the limited trust towards the fi nancial sector comes from the high fl ow of remittances from migrant workers5: about 90% of these fl ows conveyed through fi nancial intermediaries are withdrawn the same day they are received.6

BOX 5.1. INTEREST TAX ON DEPOSITS7

In accordance with the Tax Code, the tax rate for interest earned on bank deposits amounts to 12%, which is directly deducted by the banks (withholding tax). In 2005, the state budget received less than 1 million somoni from the tax on interest (i.e., less than 0.1% of all tax revenues). A decrease in the tax rate on deposits, in particular on the ones denominated in local currency, would provide individuals and companies with an incentive to make more frequent use of bank accounts.

5.2 access to BankinG for small and medium Businesses still limited

The access of small and medium enterprises to the fi nancial sector “... After I could not get my money from remains quite limited: most of the transactions are still conducted the account during the fi nancial crisis in the early ’90s, I’ve preferred to deposit my in cash and only a small fraction of businesses develops a money at home: it is safer, requires no bank relationship with banks or other fi nancial institutions. bureaucracy and funds are available 24 hours a day...” Only 14.6% of the respondents have an account in a bank in Entrepreneur, focus group participant Tajikistan. This fi gure also shows a sharp decline from the already low level of 2002 (18%) (see Chart 5.6).

The overall average discloses different forms of behavior. In fact, out of the three categories of respondents (individual entrepreneurs, companies and dehkan farmers), only companies

4 Average interest rate for deposits from 6 months to 1 year amounted to 20.2% in local currency (somoni) and 13.8% in foreign currency in 2005 - NBT (2006). 5 In 2006 remittances have been estimated between 2 and 3.3 billion somoni ($ 0.6- 1 billion). 6 “Tajikistan: economical perspective,” Asia-plus, 20.11.2006. 7 Estimates based on statistics from NBT (2006).

88 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

Chart 5.6. FEW SMES HAVE BANK ACCOUNTS

% OF RESPONDENTS 2002 2005

5% Individual entrepreneurs 6%

81% Small and medium companies 82%

30% Dehkan farmers 47% 15% Average of SMEs 18% have frequent access to a bank account, with 81% of companies having a bank account.8

Yet the share of companies having a bank account is still below the expected level, i.e., 100%. Incorporated companies would indeed be expected to make use of bank accounts. This situation refl ects the cash nature of the economy, which limits the demand for banks, but is also due to some defi ciencies on the supply side, as banks do not proactively pursue corporate customers with services fi tting their needs.

The share of individual entrepreneurs and dehkan farmers who have a bank account is much lower, and declining further. In particular, dehkan farmers in the sample show the sharpest decline, from 47% in 2002 to 30%. Most likely newly established farms do not open a bank account. 5

Use of bank account appears to be mostly related to the size of business as well as to the sector of activity.

BOX 5.2. DEPOSIT INSURANCE

The Law “On Guarantee of Deposits of Individuals” determines the following repayment scheme for deposits in case of bank default: i) deposit amount below 250 somoni ($78) is reimbursed fully; ii) deposit amount up to 2,500 somoni ($781) is 90% repaid; iii) deposit amount above 2,500 somoni repaid 70%.9 For the purpose of deposit guarantees a special Fund of Guarantees of Deposits of Individuals is created by commercial banks in Tajikistan. The Fund is managed by a Supervisory Board and an Executive Board. The Supervisory Board consists of representatives of the Executive Apparatus of the President of RT, Majlisi Namoyandagon Majlisi Oli, National Bank and commercial banks.

Commercial banks contribute to the Fund through: i) a one-off payment in the amount of 1% of the amount of deposits of individuals; and ii) quarterly payments in the amount of 0.1% of the balance deposits of individuals at the bank. All major commercial banks of Tajikistan are participants of this fund. Additionally legislation requires to reserve 18% of the overall deposit volumes of each commercial bank in the National Bank.

8 This higher ratio can be explained by regulatory requirements for SMEs during the registration process. In order to complete its registration, an SME needs to show deposits up to 50% of the nominal capital (depending on the legal form of SME, the requirement is between 30% and 50%). For this purpose, many SMEs just open temporary accounts in which they deposit the cash equivalent of the required capital. 9 Law “On Guarantee of Deposits of Individuals” dd. August 1, 2003.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 89 ENTREPRENEURS AND FINANCE

Data show a clear relationship between enterprise size and availability of bank accounts (see Chart 5.7).

Chart 5.7. ACCOUNT AVAILABILITY IS DIRECTLY CORELATED TO BUSINESS SIZE

% OF RESPONDENTS HAVING A BANK ACCOUNT 72% 65% 62%

40%

13% 4%

1 employee 2 to 5 6 to 10 11 to 20 21 to 50 over 50 employees employees employees employees employees

Chart 5.8. AVAILABILITY OF THE BANK ACCOUNT BY Among the largest SMEs, only dehkan farmers are the least likely BUSINESS WITH MORE THAN 20 EMPLOYEES to have a bank account. In fact in the case of dehkan farmers,

% OF RESPONDENTS an increase in size does not necessarily refl ect a more structured business activity, requiring the need of more formalized fi nancial no bank account have bank account relationships (see Chart 5.8).10

44% The reasoning above is seen as the main reason for not having an account: more than 89% of the respondents do not see any need

97% for an account nor any signifi cant benefi ts from having one (see Chart 5.9). 56%

Chart 5.9. MAIN REASON FOR NOT HAVING A BANK ACCOUNT - NO PRACTICAL NEED11 Small and medium Dehkan farmers companies % OF RESPONDENTS HAVING NO BANK ACCOUNT

No need/ no practical benefi ts 89%

Trouble with obtaining cash 6%

High fees 5%

Banking bureaucracy 4%

Avoiding of taxation 2%

Other 1%

On the other hand, the (limited number of) respondents that “...I don’t need a bank account because do have an account do not experience problems (61% of SMEs most of my transactions are done in cash. If using a bank account reported no troubles). Among the troubles I were to use an account, it would cost me too much time with complicated procedures entrepreneurs were confronted with when dealing with their banks: and gathering lots of documents...” withdrawing cash (17%), long duration of bank transactions (15%) Entrepreneur, focus group participant and complicated requirements of the banks during the process of the transactions (14%) (see Chart 5.10).

Nevertheless, even among bank account holders, about one fourth (27%) think that the bank discloses information about his/her account without approval, further confi rming the low confi dence of entrepreneurs toward the fi nancial system.

10 For more specifi c information on lending in rural areas see FAO/EBRD (2006). 11 Respondents could have chosen several answers.

90 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

Chart 5.10. MAJORITY OF SMES EXPERIENCE NO PROBLEMS IN USING A BANK ACCOUNT12

% OF RESPONDENTS HAVING A BANK ACCOUNT

No troubles 61%

Diffi culty withdrawing cash 17%

Duration of the account transactions 15% Numerous bank requirements on 14% account transactions Need of unoffi cial payment 11%

Bank bureaucracy 8%

High commissions fee 6%

Usage of the information on the funds 4% fl ows of your account by state bodies Lengthy duration of converting national 2% currency into foreign currency Others 2%

The legislation entails that banks disclose information regarding the accounts and the available properties of its customers on request of the head of the taxation bodies.13 The implementation of stricter requirements for disclosure of information, i.e., on the basis of a court decision, could reinforce the trust of the population toward banks.

BOX 5.3. EXTRACT FROM THE LAW “ON BANKS AND BANKING”

One of the major conditions for increasing trust toward banks is raising the confi dence among the population that the 5 information about the bank account is not easily accessed or disseminated. At the same time a legal basis for access to bank account information should be provided to prevent misuse of the fi nancial sector. This access should be fi rst granted on the decision of the court if there is any suspicion of illegal activities. Tajik legislation, however, grants the tax bodies additional authorities to get access to bank information based on the written request of the head of the tax body. Surely, if access was granted only on the basis of a court decision it would increase the confi dence among the population in the banking system.

Article 32. Bank secrecy Information making up the bank secrecy is disclosed to: • … • Taxation bodies: on questions concerning payment of taxes on the basis of a letter of the head of the taxation body….

Information on the balance and fl ow of funds of the account of an individual, as well as information on details and value of property, stored in safes and buildings of the bank, and information making up the bank secrecy is disclosed to: • … • Taxation bodies: on the questions mentioned above

5.2.1 LENDING: LIMITED DUE TO SELF-SELECTION PROCESS

Obtaining external funding still remains quite complicated for entrepreneurs: more than 60% of entrepreneurs assess the process

12 Respondents could have chosen several answers. 13 Tax Code of RT, Article 118.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 91 ENTREPRENEURS AND FINANCE

of obtaining funding as complicated or very complicated (see Chart 5.11).

Chart 5.11. OVERALL ASSESSMENT OF THE PROCESS OF OBTAINING EXTERNAL FUNDING

% OF RESPONDENTS

Individual entrepreneurs 2 43 43 11

Small and medium companies 4 22 53 21 Dehkan farmers 2 26 42 30 50% 25% 0% 25% 50% 75% . Very easy . Rather easy . Rather complicated . Very complicated Most worrisome, although small and medium-sized companies should have easier access to fi nance because of their greater degree of sophistication, they are the ones assessing access to funding as most complicated. In fact, about three-quarters of them consider borrowing a complicated procedure, likely due to their most pressing fi nancial, which cannot be fulfi lled by informal loans or by MFOs.

Our fi ndings on complexity of access to fi nance further support the results of the “Doing Business 2007” report, which ranks Tajikistan 143rd among 175 countries for the ease of obtaining a loan.14

Overall the banking sector is still not attractive from the SME point “...It makes no sense to apply for a bank of view. The situation, although improving with respect to 2002, is loan, because I know in advance that I can not get the loan for some reasons. That is still quite negative. As a result, only about of 14% of SMEs in need why I borrow money from friends, relatives or of a loan obtained one from a bank or a MFO – internal sources acquaintances...” and private savings still remain the major source of funding for Entrepreneur, focus group participant entrepreneurs.

On the other hand, the approval rate improved greatly in comparison to 2002: 81% of bank applicants and 96% of MFO applicants received a loan in 2005. In 2002, only 31% of bank applicants and 48% of MFO applicants got a loan. This improvement can be explained partly by the signifi cant support of the international donor community to develop the banking sector in general and micro lending in particular (see Box 5.4).

The improvement in the approval rate could testify a higher fl exibility to lend by fi nancial institutions, a greater readiness from

BOX 5.4. INTERNATIONAL COMMUNITY SUPPORTS THE DEVELOPMENT OF BANKING IN TAJIKISTAN

EBRD’s Tajik Micro and Small Enterprise Finance Facility (TMSEF), co-fi nanced by IFC and Swiss SECO, started its activity in 2003 and focuses on institution building in selected partner banks and the delivery of sustainable and effi cient fi nancing to Micro and Small Enterprises. First Microfi nance Bank (FMFB),15 the fi rst international fi nancial institution operating in Tajikistan since, 2004, has also remarkably contributed to the development of the banking sector with a special focus on micro loans.

14 IFC - World Bank (2006). 15 The shareholders of FMFB are AKF, KfW and IFC.

92 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

the SME sector to receive funding, as well as a self-selection of Chart 5.12. HIGH INTEREST RATES ARE AMONG MAJOR REASONS 16 applicants. In fact, only the more credit-worthy companies FOR NOT APPLYING FOR LOAN applied to banks, while the rest either got funding from other % OF RESPONDENTS sources or did not receive funding at all. High interest rate 43%

No need 37% There are three main reasons why survey respondents did not pursue a loan (see Chart 5.12): Collateral requirements 21% Lack of long term loans/ 1. no need: availability of alternative source of funding or insuffi cient amount of loan 12%

insuffi cient qualifi cations to apply for a bank loan; Banking bureaucracy 6% 2. inconvenient lending conditions: high interest rates, Other 9% unavailability of long-term loans/insuffi cient loan amount, need for unoffi cial payments, bank bureaucracy; 3. strict requirements: high level of collateral.

Though there is remarkable improvement of the approval rates for Chart 5.13. FEW SMES IN NEED OF EXTERNAL loans, only a small share of SMEs in need of external funding was FUNDING GOT IT FROM A BANK OR MFO able to get it from a fi nancial institution (see Chart 5.13). % OF RESPONDENTS WHO WERE IN NEED FOR EXTERNAL FUNDING

Bank loan MFO loan 5.2.2 INDIVIDUAL ENTREPRENEURS: INCREASING LENDING 27% 27% 2% About one third of individual entrepreneurs needed external 12% funding. About one third of them applied to a bank or an MFO and almost all of them received a positive answer (see Chart 5.14). 25% 11% This situation shows a great improvement with respect to 2002, as 15% 4% far as bank applications and approval rates are concerned. 7% 5 Individual Small and medium Dehkan entrepreneurs companies farmers Chart 5.14. ACCESS TO LOANS BY INDIVIDUAL ENTREPRENEURS IMPROVED

% OF RESPONDENTS

2002 2005

6% No

65% No 92% No 65% No 66% No 71% No

94% 94% Yes

34% 12% Yes, by MFO 35% Yes 35% Yes Yes 17% Yes, by bank 8% Yes

Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding?

5.2.3 SMALL AND MEDIUM COMPANIES: IMPROVED LENDING

Companies are confi rmed to be those most in need of external fi nancing (almost half need additional funding). Nevertheless also in this case only one-third of them apply for a loan, almost in all cases from a bank, likely due to the size of loan needed (see Chart 5.15).

16 Respondents could have chosen several answers.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 93 ENTREPRENEURS AND FINANCE

Companies, with respect to individual entrepreneurs, have a higher rejection rate (only about two-thirds of them obtain a loan). Yet this situation has improved with respect to 2002.

Chart 5.15 ACCESS TO LOANS BY SMALL AND MEDIUM COMPANIES IN 2005 IMPROVED

% OF RESPONDENTS

2002 2005

50% No 27% No 54% No 63% No 72% No 65% No

94% Yes, by MFO 73% Yes 50% 3% 35% 46% Yes Yes 28% Yes Yes 34% Yes, by bank

Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding? 5.2.4 DEHKAN FARMERS: LOW LEVEL OF APPLICATIONS

Dehkan farmers, due to the nature of their business and the size of the companies, also require external funding quite frequently. However, only a relatively small fraction of them decides to apply for a loan (see Chart 5.16).

Chart 5.16. ACCESS TO LOANS BY DEHKAN FARMERS IN 2005 IMPROVED

% OF RESPONDENTS

2002 2005

52% No 43% No 61% No 83% No 87% No 80% No 94% 57% Yes 48% 39% Yes Yes 6% Yes, by MFO 17% Yes 13% Yes 14% Yes, by bank

Did your Did you apply Did you get Did your Did you apply Did you get company for a loan from a loan? company for a loan from a loan? need external a bank? need external a bank/MFO? funding? funding?

Chart 5.17. APPROVAL RATE OF THE LOANS APPLIED BY DEHKAN Approval rates have dramatically improved with respect to FARMERS 2002, to a large extent thanks to the presence of MFOs. Indeed, % OF RESPONDENTS APPLYING FOR A LOAN the approval rates between loans provided to dehkan farmers

yes no by banks and MFOs show a remarkable difference (see Chart 5.17). Commercial banks generally provide dehkans with long- 20% 54% term loans that are larger in size, but MFOs have a much higher approval rate. This phenomenon most likely refl ects self-selection

80% on the part of the applicants: larger loans are requested from banks, while smaller loans are applied to MFOs (which lend less, 46% but often require no collateral).

Did you get the Did you get the loan from a bank? loan from MFO?

94 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

5.2.5 LOAN DURATION: STILL TO BE IMPROVED Chart 5.18. DURATION OF LOANS IS SHORT

% OF RESPONDENTS OBTAINING A LOAN Long-term lending is still scarce in Tajikistan. Lending is still mostly by BANKs to fi nance short-term working capital (less than 12 months). The 45% lack of funding available for long-term investments is especially critical for mid-size companies, as only investments could allow 30% 22% them to grow.

2% Overall, average loan maturity is 10 months for loans provided by 1% banks and 8 months for loans provided by MFOs. Almost no loans are provided beyond the 12-month horizon (see Chart 5.18). by MFOs

61% As for today, banks and MFOs are gradually addressing this need by developing special loan products to satisfy the different requirements of their clients – for example, the needs of the 21% agricultural sector – but more should be done in order to satisfy 16% the need for long-term investments. 2%

Up to 3 3 to 6 6 to 12 12 to 24 Above 24 The unavailability of long-term lending can be explained by three months months months months months factors: 1. Long term lending is by its nature more risky, requires higher knowledge of the borrower and higher skills to be evaluated, “...We need money for a longer period, all elements that are still lacking in the current Tajik context; because in the short-term, we are not able to use money effectively and it might also be risky 2. Long term lending is often associated with real estate for us in case we do not obtain the required collateral (e.g., land, buildings), which are constrained by harvest..”. 5 the current Tajik legislation on use of immovable property as Dehkan farmer, focus group participant collateral (see Box 5.5); 3. Limited availability of long-term funding for banks: Tajik banks

BOX 5.5. IMMOVABLE PROPERTY AS COLLATERAL IN TAJIKISTAN not envisage the pledge of land plots, despite of the fact that Article 362 of the Civil Code allows pledge of the rights for a Item 2, Article 359 of Civil Code land plot under the terms set by the land legislation. According The collateral of the right to use a land plot, enterprises, to the Constitution of the Republic of Tajikistan the property buildings, constructions, apartments and other immovable rights to land belong to the state only. Therefore legal entities property (mortgage) is regulated by the Mortgage Law. The and individuals cannot own the land and selling the land is general collateral rules indicated in this Code are applied to not allowed. Moreover, the land legislation does not envisage mortgage when other rules are not stipulated by the present alienation through selling (passing) the land use rights, which Code or the Mortgage Law. prohibits mortgage of foreclosure of the land. Actually, placing a lien on land plots does not take place in real life due to Item 3, Article 362 of Civil Code the absence of the normative-legal base duly regulating the Pledge of rights for a land plot and other natural resources issues of land mortgage. This lack of regulations brings certain is allowed under the terms set by the land or other law on diffi culties and problems to the use of the norms regulating land natural resources. mortgage, and makes it diffi cult for dehkan farmers to pledge property due to the need for additional legal regulation of The civil legislation refers the regulation of the pledge of rights these legal relations. for a land plot to the land legislation. But the land code does

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 95 ENTREPRENEURS AND FINANCE

Chart 5.19. DISTRIBUTION OF THE BANK COLLATERAL on the one hand cannot place their own bonds on the

% OF RESPONDENTS OBTAINING LOAN (practically non-existent) domestic market, while on the other 50% average collateral - 72% of hand cannot access international markets, which would principal amount require more transparency of their account as well as ratings from internationally acknowledged rating agencies. 21% 12% 9% 8% 5.2.6 COLLATERAL: STILL A HINDERING FACTOR

No 1 to 50% 50% to 100% to above collateral 100% 150% 150% One obstacle in applying for a loan by a fi nancial institution remains the high collateral ratio. In fact, every other lender had to provide some sort of collateral. Chart 5.20. MAJORITY OF BANK BORROWERS STILL REQUIRED A COLLATERAL IN 2005 The collateral requirements by the banks were on average 72% % OF RESPONDENTS REQUIRED COLLATERAL of the principal amount (see Chart 5.19). Considering only the 2002 2005 loan assisted by collateral, the average collateral ratio was about 88% 84% 140%. One of the reasons behind high collateral requirements, 71% 62% could be the complexity for banks to recover the collateral in 48% 41% case of default due to lengthy and costly court procedures.

The lower collateral requirements for individual entrepreneurs and dehkan farmers can be explained by the nature of disbursed Individual Small and medium Dehkan loans: in most cases they are micro or group-loans, not supported entrepreneurs companies farmers by collateral. In contrast, 84% of small and medium companies were required to provide collateral, which represented a serious

Chart 5.21. COMPANIES PROVIDE THE HIGHEST constraint for their lending operations (see Chart 5.20). COLLATERAL FOR BANK LOANS Not only small and medium companies had to provide collateral % of collateral of principal amount in most cases, but the requirements were extremely high: on 158% average more than 130% of the loan principal (about 160% if 144% 123% considering only those loans assisted by collateral, as shown in Chart 5.21).

It is also worth mentioning that the Tajik legislation does not allow for use of the land user’s certifi cates as collateral for loans, reducing the opportunity for dehkan farmers to access external sources

Individual Small and Dehkan farmers of funding. An additional burden is the processing of collateral entrepreneurs medium contracts. First, the contract is verifi ed in the notary offi ce, then companies registered at the bodies of justices. This all prolongs the overall process and adds up additional cost and time for entrepreneurs.

“...The banks introduced very compli ca ted Insuffi cient collateral is among the major reasons for refusal of a collateral procedures. First you need to verify bank loan (see Chart 5.22). your collateral contract at the notary offi ce and then go to the bodies of justice to get this contract registered. This is addi tio nal costs and Due to the smaller loan amounts disbursed and the nature of time for me...” their activity, loans provided by MFOs are mostly unsecured. In Entrepreneur, focus group participant 2005, only 14.3% of respondents that obtained a loan from an MFO (almost all individual entrepreneurs and dehkan farmers)

96 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE provided collateral (see Chart 5.23). In those cases, the collateral represented about 92.7% of the principal amount.

Some countries successfully introduced alternative market-based mechanisms to facilitate SME access to funding by leveraging different typologies of credit insurance tools (see Box 5.6 and Box 5.7), which could be considered for the Tajik context as well.

Chart 5.22. INSUFFICIENT COLLATERAL IS THE MAIN REASON FOR REFUSAL OF A BANK Chart 5.23. MFOS REQUIRED LESS COLLATERAL LOAN % OF RESPONDENTS PROVIDING COLLATERAL % OF RESPONDENTS WHO APPLIED FOR LOAN

17% Insuffi cient collateral 62%

Lack of initial 19% project capital 3% Unwillingness to make 16% unoffi cial payment Individual Dehkan entrepreneurs farmers

Poor business plan 12%

Project considered as 12% non-profi table

Low quality 10% of business plan

The bank considered the 7% project as non-priority project

Applicant’s refusal to accept the loan 6% 5

Activity is not 3% a suitable for funding criteria

Other 9%

BOX 5.6. BUSINESS ASSOCIATIONS INSURANCE: THE ITALIAN exchange for this insurance, a participant pays a fee (in the EXPERIENCE OF “CONFIDI”17 range of 2-5% of the principal amount). The CONFIDI provides its insurance based on the concepts SMEs in Italy face an issue of credit availability, due mostly to of: the limited reliability of their fi nancial reporting. Banks often – Double “risk screening”: before being accepted for the require small and medium businesses to provide a relevant guarantee, each associate is assessed by the CONFIDI and amount of personal guarantees or collateral to offset then in turn by the lending bank their risk. In order to limit collateral requirements, business – “Risk-pooling”: a CONFIDI ensures a high number of small associations have developed a different form of (partial) lenders, diversifying its risk credit insurance, called CONFIDI (i.e., “shared lending”). CONFIDI: some data CONFIDI: working mechanism As of the end of 2004 about 1.000 CONFIDI exist in Italy, A CONFIDI is a risk-sharing mechanism that provides credit providing guarantees for €7 billion supporting loans worth insurance for its associates, covering up to 50% of the about €20 billion, corresponding to about 12% of the total credit risk faced by the banks lending to its participants. In SME loans.

17 Banca d’Italia (2006).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 97 ENTREPRENEURS AND FINANCE

BOX 5.7. CREDIT INSURANCE18 – THE UZBEKISTAN CASE

Credit insurance is a widely tool used to limit credit risk and Application documents: all the documents submitted to the foster lending from fi nancial institutions. The goal of the credit bank for the credit proposal as well as a confi rmation from the insurance is to protect the bank in case of non-repayment from bank that the project is under consideration. the borrower. The lender can ensure part of the loan through an insurance company, facilitating the lending process from Coverage and premium: the insurance covers up to 50% of the bank. The insurance company analyzes the project and the principal amount (on average 40-50%) and the required assesses whether to take the risk and at what conditions, i.e., % premium starts ranges usually from 5 to 6% of the insured of risk underwritten, as well as the price. amount.

Chart 5.24. HOW COLLATERAL REQUIREMENTS AND 5.2.7 INTEREST RATES: EXTREMELY HIGH LOAN MATURITY AFFECT INTEREST RATES

INTEREST RATES PER ANNUM, IN % Average interest rate on banking loans amounted to 2.6% monthly 39% or 36% annually. Taking into account infl ation, the real interest rate 35% 29% in 2005 would be equal to 28.9%.19

10 5 12 The survey shows that interest rates are also linked to collateral months months months requirements as well as maturity (see Chart 5.24): No collateral Collateral Collateral between 1 and above 100% 100% • Loans provided with zero collateral have higher interest rates Chart 5.25. RELATION BETWEEN DEPOSIT AND LOAN RATES than ones provided with collateral. (OFFICIAL DATA) • Loans with higher collateral requirements have higher interest % DEPOSIT RATE % LOAN RATE rates, but their average maturity is longer 30.9 28.9 27.6 25.4 25.6 20.2 21.5 Loans disbursed by MFOs are characterized by slightly higher 17.5 14.6 nominal interest rates, which amount on average to 2.9% monthly or 41% annually.

3.1 This could be explained by: Less than 1 1-3 3-6 6-12 Over 1 • lower collateral requirements: typically MFOs do not require month months months months year collateral; As the offi cial statistics shows commercial banks have the highest margin between deposit and loan rates for short term funds: the • higher weight of operational costs due to the smaller size of longer the maturity, the higher the funding costs, while at the same time, lending rate declines as most lending is secured by collateral. disbursed amounts; Source: NBT (2006) • currency of loans: in many cases MFOs loans are denominated BOX 5.8. COMPONENTS OF THE LOAN INTEREST RATE

Coverage of the Coverage of operational Profi tability of the bank Risk coverage attracted deposit rate expenses activities

• Deposits • Credit risk • Credit assessment • Attracted resources • Currency risk • Administrative expenses on the inter banking • Interest rate risk • Credit management market • Liquidity risk

INTEREST RATE ON LOANS

Source: experts’ interview

18 It covers investment projects only, i.e., medium-long term versus working capital fi nance. 19 The infl ation rate in 2005 amounted to 7.1%. Offi cial statistics indicate the average nominal loan rate to be 25.6%.

98 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

in somoni and as such require higher interest rates to refl ect the higher cost of borrowing.20

5.2.8 UNOFFICIAL WAYS OF SOLVING THE ISSUES: VERY COMMON

Unoffi cial payments are a serious issue faced by entrepreneurs Chart 5.26. UNOFFICIAL WAYS ARE USED ADDITIONALLY accessing the banking sector. 10% of the entrepreneurs indicated BY OBTAINING BANK LOANS using them to solve their issues positively. Altogether unoffi cial % OF RESPONDENTS PROVIDING COLLATERAL ways of solving issues21 represent a high burden for entrepreneurs 16% 26% (see Chart 5.26).

10% Furthermore, small and medium companies are particularly targeted by unoffi cial payments, with 29% of them facing the Unoffi cial Other Overall problem (see Chart 5.27). Again, this is particularly relevant as payments unoffi cial unoffi cial ways solutions companies should rely on banks to a greater extent to fi nance their growth.

Unoffi cial solutions need to be addressed with the greatest Chart 5.27. UNOFFICIAL PAYMENTS ARE COMMON possible emphasis by the fi nancial sector if banks expect to FOR SMALL AND MEDIUM COMPANIES increase confi dence of the general public. % OF RESPONDENTS WHO OBTAINED LOAN

22 Unoffi cial payments are rarer in MFOs , where only 2.4% of the Individual 5% respondents indicated that they obtained a loan after making entrepreneurs unoffi cial payments (on average, 10% of the loan amount). Small and medium 29% companies 5 5.2.9 LOAN PROCESS: QUITE STREAMLINED

Dehkan 23% It took on average 15 days to obtain a bank loan, from application farmers until disbursement. This average nevertheless discloses high variances according to the type of business (see Chart 5.28) – small and medium companies required the most time (more than a month).

Nevertheless, even taking these variances into account, the loan underwriting process can be considered quite effi cient, likely refl ecting the self-selection process of applicants described above.

The lending processing also varied by region. In GBAO, it took an average of 34 days to get a loan, while in DRS B, respondents spent only 6 days on average to get a loan. One of the reasons for this situation is the limited supply of fi nancial services in GBAO, where only few branches of commercial banks are present.

Quite similarly, entrepreneurs spent 18 days to get a loan from an MFO.

20 Over the past 3 years the differential is in the range of 6% per annum. 21 Including gifts, lunches or unoffi cial payments. 22 In the case with MFOs respondents were asked only about unoffi cial payments.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 99 ENTREPRENEURS AND FINANCE

Chart 5.28. DURATION OF OBTAINING BANK LOAN IS Regionally the lending process was very fast in Kulyab, where LONGEST FOR SMALL AND MEDIUM COMPANIES applicants spent only 4 days to get a loan. The longest processing % OF RESPONDENTS was observed in Sughd region. Entrepreneurs spent almost 40 days

Individual entrepreneurs to get a loan on average. MFOs in Sughd region have a certain established activity and move gradually from small scale lending 81% 14 days on average of individuals to bigger amounts provided to companies. With the increase of the loan amount also the processing duration grows accordingly.

14% 4%

Small and medium companies

57% 25 days on average

29%

7% 7%

Dehkan farmers

71% 16 days on average

21%

1-20 days 20 to 40 40 to 80 above 80 days days days

LEASING: AN ALTERNATIVE SOURCE OF FUNDING

Leasing is a possible alternative source of funding for Only 5.2% of the respondents aware of leasing applied for enterprises. In 2004 the fi rst leasing company “Nahust a leasing contract, while one third of those fi nalized it. leasing” was registered. Some leasing transactions

were also conducted by Tojiksodirotbank and one by Chart 5.29. LIMITED AWARENESS ABOUT LEASING

Agroinvestbank. The total volume of those operations % OF RESPONDENTS amounted to about 7 million somoni. Know about leasing Do not know about leasing Nevertheless, the volume of leasing operations in Tajikistan did not grow signifi cantly in 2005. Leasing operations are constrained by the lack of state incentives (e.g., tax remissions), which could redirect the fi nancial fl ows toward 70% 92% 92% production companies as well as limited long-term funding available from fi nancial institutions and awareness from entrepreneurs. 30% 8% 8% Survey confi rms the limited awareness of leasing among Individual Small and medium Dehkan farmers SMCs. Less than 10% of respondents know about it. entrepreneurs companies

100 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

recommendations

1. Provide incentive systems for banks to reduce credit rationing to SMEs, by reducing their credit risk. This in turn can be achieved:

1.1 From the government side by: • Implementing and developing improved pledge legislation measures and collateral enforcement regimes through: - introducing alternative dispute resolution mechanisms; - unifi ed verifi cation of collateral contracts in notary offi ces to speed up and facilitate the lending process; - introducing the possibility of using land user certifi cates as collateral for loans; • Establishing a national credit registry which would provide banks with additional borrower information, facilitating bank verifi cation of credit requirements and credit history of borrowers; 1.2 From the banking side by: • Enhancing internal credit risk analysis capabilities by training credit offi cials and introducing advanced credit analysis methodologies (e.g., credit rating tools); • Promoting alternative fi nancing mechanisms which imply reduced credit risk such as leasing; 1.3 From the private sector side by: • Introducing credit insurance provided by business associations (i.e. the Italian CONFIDI), that, in exchange for a fee, could ensure part (up to 50%) of the principal amount provided to a specifi c SME.

Expected impact 5 By reducing the credit risk faced by fi nancial institutions, three results are expected, which would reduce credit rationing and make fi nancial resources more easily available to SMEs: • Increased amount of lending available to SMEs (i.e., for the same credit risk, more lending available); • Reduced interest rates, as a result of higher level of guarantees; • Reduced collateral requirements, as a result of higher level of guarantees.

2. Put in place policies to increase the confi dence of the general public in the Tajikistan fi nancial sector. This could be achieved:

2.1 From the government side by: • Increasing the awareness of the population of the Fund for Deposit Insurance, and strenghten its role for low/middle income households by introducing an upper limit to the coverage while increasing the threshold for full coverage (currently 250 somoni - $78); • Amending the banking legislation to introduce bank secrecy disclosure only on the basis of a court decision; 2.2 From the commercial banking side by: • Improving their internal controlling and auditing processes to eliminate unoffi cial payments from their branches; • Increasing accountability by introducing the principles of bank corporate governance and, over time require international rating companies to provide independent evaluation of their fi nancial stability23; • Promoting the creation of an Inter-banking Association to develop common standards and promote banking interests on different levels as well as promoting banking activities among the population;

23 In the short term, unfortunately Tajik banks cannot benefi t from a rating provided by international rating agencies as the sovereign rating of Tajikistan provides an upper bound for their evaluation.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 101 ENTREPRENEURS AND FINANCE

Expected impact

Increased confi dence in the fi nancial sector will foster its development in several ways, among which, by: • Channeling fi nancial resources to the fi nancial sector, i.e., increasing the share of deposits, allowing for an increased intermediary role between individuals and the SME sector; • Narrowing the confi dence gap between SMEs and banks, allowing them to revert more frequently to banks in case of need.

3. Create alternatives to lending by local banks, by:

3.1 Fostering the entry into the Tajik banking market of international fi nancial institutions specializing in SME lending, which could easily leverage internationally developed credit and organizational skills as well as higher ability to leverage funding obtained on the international markets; 3.2 Further developing microfi nance institutions by unifying the regulating legislation and simplifying the bookkeeping and reporting systems.

Expected impact

By allowing the entry of foreign players into the Tajik fi nancial sector (allowed legally since 2005), lending opportunities will be increased through:

• More fi nancial resources will be directly available to SMEs; • Competition will force local players to align to best practices in terms of product availability and conditions. 4. Support the development of banking services by creating a “need for banks”:

4.1 From the government/NBT side by: • stimulating the use of “cashless” payment systems (i.e., by introducing the possibility to direct debit charge bank accounts for the payment of local utilities); • conducting an awareness campaign addressed to communicate the benefi ts of using banks for the general public; • reducing the 12% withholding tax on deposit interests to attract more deposits from individuals. This measure could be applied to deposits denominated in somoni only to provide incentives to invest in local currency; 4.2. From the commercial banking side: • developing and disseminating informational materials on available banking products, including deposits, credit cards, payment systems and fi nancing (including guidelines on loan application procedures as well as samples of relevant forms and applications).

Expected impact

Allowing banks to develop closer relationships with SMEs, which will in turn reduce the information asymmetry which creates a limit to the lending market. This in its turn would channel excess cash into the fi nancial system, reducing the funding constraints for banks.

102 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

annex Expected impact attachment 5.1. financial sector of tajikistan

Increased confi dence in the fi nancial sector will foster its development in several ways, among which, by: The fi nancial sector of Tajikistan can be grouped into two • Channeling fi nancial resources to the fi nancial sector, i.e., increasing the share of deposits, allowing for an subcategories: increased intermediary role between individuals and the SME sector; • First level: National Bank of Tajikistan; • Narrowing the confi dence gap between SMEs and banks, allowing them to revert more frequently to banks • Second level: in case of need. – commercial banks; – microfi nance organizations, non-banking fi nancial 3. Create alternatives to lending by local banks, by: institutions, and loan societies.

3.1 Fostering the entry into the Tajik banking market of international fi nancial institutions specializing in SME lending, The National Bank of Tajikistan (NBT), created in 1991, provides which could easily leverage internationally developed credit and organizational skills as well as higher ability to the banking surveillance function24 in addition to conducting leverage funding obtained on the international markets; the monetary policy to control infl ation and money creation 3.2 Further developing microfi nance institutions by unifying the regulating legislation and simplifying the bookkeeping function. and reporting systems. commercial banks Expected impact The banking sector underwent major changes in the last 3 years By allowing the entry of foreign players into the Tajik fi nancial sector (allowed legally since 2005), lending opportunities and is now composed of 9 players: 6 banks in the form of joint- will be increased through: stock companies, 1 joint-venture bank, 1 foreign bank and 1 state bank (“Amonatbank,” carrying out the functions of state saving- • More fi nancial resources will be directly available to SMEs; bank). Of these 9 players, 8 are private. • Competition will force local players to align to best practices in terms of product availability and conditions. Chart 5.30. THE STRUCTURE OF THE FINANCIAL SECTOR OF REPUBLIC OF TAJIKISTAN 5 4. Support the development of banking services by creating a “need for banks”:

4.1 From the government/NBT side by: Financial sector of Tajikistan • stimulating the use of “cashless” payment systems (i.e., by introducing the possibility to direct debit charge bank accounts for the payment of local utilities); • conducting an awareness campaign addressed to communicate the benefi ts of using banks for the National bank of Tajikistan general public; • reducing the 12% withholding tax on deposit interests to attract more deposits from individuals. This measure could be applied to deposits denominated in somoni only to provide incentives to invest in local currency; Commercial banks Non-banking organizations 4.2. From the commercial banking side: • developing and disseminating informational materials on available banking products, including deposits, credit cards, payment systems and fi nancing (including guidelines on loan application procedures as well Credit societies as samples of relevant forms and applications).

Expected impact

Non-banking fi nancial Allowing banks to develop closer relationships with SMEs, which will in turn reduce the information asymmetry which organizations creates a limit to the lending market. This in its turn would channel excess cash into the fi nancial system, reducing the funding constraints for banks.

Microfi nance organizations

24 NBT conducts the surveillance over commercial banks, microfi nance organizations, non-banking fi nancial institutions, and loan societies.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 103 ENTREPRENEURS AND FINANCE

Foreign investments started to play a role in the Tajik fi nancial market: the First Microfi nance Bank created in 2004 by international fi nancial institutions is becoming one of the most active players in the market.

The rise of the requirement on minimum capital for commercial banks to $5 million was one of the major forces behind the consolidation of the sector as it forced some of the weakest institutions out of the market. As a result, the concentration of the sector is quite high; in fact, the 2 largest players, Orienbank and Agroinvestbank, with 43% of the branches, cover about 60% of the market while the 4 largest players (Orienbank, Agroinvestbank, Amonatbonk and Tojiksodirotbank) reach more than 80% of it (see Chart 5.31).

For the time being, there exists no inter-banking association representing and lobbying the interests of commercial banks in Tajikistan. Such an association could additionally promote the popularization of the banking sector among the population.

Chart 5.31. INFORMATION ABOUT FUNCTIONING COMMERCIAL BANKS OF RT AS OF JULY 1, 200625

LOAN PORTFOLIO, MILLION SOMONI % OF TOTAL DEPOSITS, MILLION SOMONI % OF TOTAL NUMBER OF BRANCHES % OF TOTAL LOAN VOLUMe DEPOSIT VOLUME NUMBER

OJSC “Agroinvestbank” 132 31% 121 24% 57 28% OJSC “Orienbank” 115 27% 190 38% 31 15% OJSC “Tojiksodirotbonk” 55 13% 74 13% 9 4% State saving bank “Amonatbonk” 44 10% 64 15% 74 36% CJSC “Tajprombank” 32 8% 9 2% 11 5% OJSC “Sohibkorbank” 16 4% 1 0.1% 11 5% OJSC “Bank Eskhata” 15 4% 16 3% 8 4% CJSC “FMFB” 20 3% 12 2% 3 2% Tijorat Bank 0 19 4% 0

Non-banking ﬁ nancial institutions

Non-banking fi nancial institutions are legal entities that provide some banking services that range from lending, deposit taking, money transfer, cash transactions, emission and acceptance of credit cards, etc (see Box 5.10). The list of provided services by different types of non-banking institutions is determined by the current legislation as well as set in the issued licenses.

Non-banking fi nancial institutions include:

25 The information is only provided on 9 existing banks to the date of reporting. In 2005, 12 banks were operating in Tajikistan. In 2006 banks “STB-Investbank” and “Bank Olimp” were closed because of non-fulfi llment of banking legislation, while “Kafolatbonk” was reorganized into a credit society.

104 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

• non-banking fi nancial organizations (NFO)26; • credit societies (CS); • Microfi nance organizations (MFOs): the range of non-banking fi nancial organizations was expanded with the adoption of the law ”On Regulation of Microfi nance Organizations” in July 2004, and thereby the second level of the banking system was created (loan/deposit taking organizations).

These institutions are aimed to fi ll in the market niches uncovered by the banks. NFIs are also seen as helpful platform for banks. If a bank can not fulfi ll the minimum capital requirement, it can get reorganized as a NFO/CS without being completely pulled out of the fi nancial market. Sometimes banks can use NFIs to split up their operational departments. For instance, the bad performance of a large portion of the cotton loans was a decisive factor in the splitting up of Agroinvestbank, and the transfer of the cotton portfolio into a separate vehicle - NFO “Kredit-Invest”. According to the assessments of the World Bank in Tajikistan the total debt of the cotton farms amounts to $280 million27 and a large chunk of it is provided by non-banking fi nancial institutions.

In the last years the role of microfi nance in the fi nancial sector has become more signifi cant. As of April 1, 2006, there are 20 micro lending funds (MLF), 1 micro lending organization (MLO), and 2 micro deposit organizations (MDO) working in the Republic of 5 Tajikistan.28

BOX 5.9. AMFOT AND MFOS IN TAJIKISTAN the cash assets (safe). The NBT does not require the minimal capital for MLF. Association of the microfi nance organizations of Tajikistan 2. Micro lending organization (MLO) – is a commercial MFO (AMFOT) supports the strengthening and development of the which can be created as Closed Joint-stock company microfi nance market of Tajikistan. It acts as a representative (CJSC) or as a Limited liabilities company (LLC). The activity of of the interests of microfi nance organizations in the country. MLO is subject to the licensing from NBT. The minimal capital AMFOT protects the rights and interests of its members through requirement is $10,000. A MLO can provide the same services elaboration of unifi ed strategic and tactical approaches and as a MLF does. coordination of the MFOs’ actions. 3. Micro credit deposit organization (MDO) – is also a commercial organization and its activity is also subject to Currently 25 MFOs are members in AMFOT. According to the the licensing from NBT. The minimal capital requirement by legislation there are three types of MFOs: MDO amounts to $100,000. Additionally, MDOs can provide: 1. Micro lending foundation (MLF) – is a non-commercial MFO i) deposits taking from legal entities and individuals; ii) which works on the basis of certifi cate issued by National administration of the client accounts; iii) cash transactions; iv) Bank of Tajikistan. The MLF can provide the following services: money transfer; v) emission and acceptance of credit cards; i) loans up to $20,000 per client; ii) leasing operations; iii) loan vi) pledging of security. borrowing by other organizations; iv) factoring; v) storing of

26 To differentiate them from banks, non-banking fi nancial organizations cannot provide lending transaction. 27 World Bank (2006a). 28 http://www.nbt.tj/?c=44&id=44&a=242.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 105 ENTREPRENEURS AND FINANCE

The loan portfolio of microfi nance organizations (MFO) increased during the period from March 2005 to July 2006, from $8 million to $10 million and the total number of clients rose from 57,000 to 84,000.29 Despite this positive development, the demand for micro loans remains high and experts estimate an annual demand for micro loans of about $100 million.30

BOX 5.10. DEFINITION OF NON-BANKING FINANCIAL ORGANIZATION AND CREDIT SOCIETY A credit society is a legal non-banking commercial entity that conducts its activity on the basis of a license from the National A non-banking fi nancial organization (NFO) is a legal entity Bank of Tajikistan. A credit society is entitled to provide the which is not a bank and operates on the basis of a license following bank transactions: from the National Bank of Tajikistan. It is entitled to provide a • Cash transactions: reception, converting, exchange, specifi c set of banking services, which is determined for each wrapping and storage of the bank notes and coins; organization separately: • Lending operations only for the members of the society; • Cash transactions: reception, converting, exchange, • Deposit taking operations only among the members of the wrapping and storage of the bank notes and coins; society; • Lending operations; • Clearing transactions only among the members of the • Transfer operations; society; • Safe operations: storage of papers, documents and • Safe operations: storage of papers, documents and valuables of the clients, including rent of the safe boxes and valuables of the clients, including rent of the safe boxes and rooms; rooms. • Clearing transactions, etc.

The minimal capital requirement for the credit societies is set The minimal capital requirement is set by the NBT for each NFO to $300,000. The provided operations are conducted only in separa tely. The provided operations are conducted only in national currency. national currency.

29 Only on members of AMFOT. 30 Based on results of National conference „Microfi nance in Tajikistan: possibilities and perspective”.

106 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 6. INSPECTIONs INSPECTIONS

6. inspections

It is essential that the inspections system for businesses ensures compliance with the legislation while not creating an unneces- main findinGs sary burden for private enterprises.

• Until mid 2006, inspections lacked a com- Survey data show little change since the previous report1; inspec- prehensive regulatory framework: our data tions still represent one of the most burdensome procedures for refl ect the pre-reform situation. SMEs, resulting in unnecessary costs and missed business opportunities, as well as ineffi cient use of public resources. Despite the • The lack of a risk based approach for se- frequency of inspections, limited steps are taken to ensure com- lecting businesses for inspections resulted in pliance with the underlying provisions. offi cials inspecting as many entrepreneurs as possible: 96% of the respondents were During the surveyed period, the Tajik government initiated a com- inspected in 2005, with an average of 13 prehensive reform of the inspections system, which resulted in the inspections per entrepreneur. July 2006 adoption of Laws establishing a new basis for the inspections system.2 The new Laws provide for a system of conducting • The procedure for conducting inspections inspections and selecting businesses for inspections that should was also unclear and resulted in a loss of be more effective and effi cient in ensuring compliance. signifi cant resources in 2005: The Inspections Law represents a crucial step in the reform of the - Individual entrepreneurs spent 6 busi- inspections system, but to achieve its goal, it needs to be sup- ness days and 250 somoni ($78) deal- ported by additional measures: amendments to the secondary ing with inspectors, for a total impact legislation, creation of checklists to facilitate compliance, and estimated at about 7% of their annual development of inspections manuals at each inspecting agency profi ts3; level. - Small and medium companies spent almost 20 business days dealing with The effectiveness of reform will depend on how well the inspectors inspectors, paying out 1050 somoni can understand and correctly apply the new methods in practice. ($328), for a total impact estimated at Therefore it should be accompanied by a larger scale program about 7% of their annual profi ts; aimed at raising the qualifi cation of inspecting offi cials. In addi- - Dehkan farmers spent 3 business days tion the numerous technical requirements underlying inspections and 70 somoni ($22) dealing with in- are often outdated and contradictory. Their revision and update spectors, for a total impact estimated will be the necessary complement to the above reform. at more than 1% of their annual profi ts. Finally, the results of the reform will not be fully realized until peo- • The legal awareness of entrepreneurs re- ple are completely aware of their rights and duties. For this reason, mains very low; on average, only every fi fth equally important will be programs aimed at raising awareness of surveyed entrepreneur reported having a the entrepreneurs to make them able to capture the benefi ts of good knowledge of the legislation regulat- the new legislation fully. ing his activity. The next survey will be able to measure the results of the under- • Every second entrepreneur used unoffi cial taken efforts. ways to solve issues related to inspections in 2005, whereby 33% of them solved inspections problems through unoffi cial pay- 1 ments. IFC (2004b). 2 No.154 dd. July 28, 2006, hereinafter the Inspections Law and No. 193 dd. July 28, 2006. 3 This profi t equivalent also includes the opportunity cost of labor and lost income (see more details further in the chapter).

108 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

6.1 inspections: the leGal framework

Inspections are essential components of the regulatory system, ensuring that business activities are conducted according to regulations aimed at protecting the health and safety of the citizens, “An inspection is a form of controlling activity mean- their consumer rights, and the safety of the state. Nevertheless, it ing the actions (...) of the controlling bodies aimed to ensure that business entities observe and follow is essential that the state balance this control with effi cient use of the terms and requirements set by the laws of RT, economic resources. to discover and suppress violations of the law, to prevent them and to apply sanctions.”

At the time of data collection, no unifi ed regulatory framework for Article 2 of the Inspections Law inspections existed in Tajikistan. As a result, each agency conducted inspections according to its own rules. This situation refl ected that of 2003, when the fi rst survey of the business environment in Tajikistan showed that inspections were a signifi cant obstacle to the development of entrepreneurs’ activities.4

The system of inspections in the country causes many complaints, not only from entrepreneurs but also from government offi cials at all levels (See Box 6.1).

Realizing the importance of the development of the private sector for Tajikistan’s economy, the government took active steps to improve the system of selecting and conducting inspections:

• In 2001 the Decree of the President of the Republic of Tajikistan created the Inspections Registration Book (IRB)5 - an important and effective tool for reducing unjustifi ed inspections6; • In 2004, the government started a reform process that culmi- nated with the July 28, 2006 approval of two laws that radically changed the inspections system in the country: the In- 6

BOX 6.1: THE ANNUAL ADDRESS OF THE PRESIDENT OF THE REPUBLIC OF TAJIKISTAN TO MADJLISI OLI IN 2004 GAVE ADDITIONAL INCENTIVE TO THE REFORMS IN THIS AREA

“The sector of entrepreneurship (...) still has not taken the proper place in the country’s economy, because its development is hindered by many bureaucratic obstacles. (...) and encounter large problems during (…) various inspections on the part of numerous bodies …”

“...specifi cally defi ne the power of authority and the responsibility of each controlling body. Based on this, to ensure transparency of the entrepreneurs’ rights and the legal power of authority of the state inspecting bodies....”

From the annual address of the President of RT E. Rakhmon to Madjlisi Oli, April 30, 2004

4 See IFC (2004b) page 51. 5 Decree No. 542 of the President of RT, dd. February 28, 2001 “On Introduction of the Inspections Registration Book.” 6 IFC distributed 125,000 copies of the IRB in 2006 among all entrepreneurs of Tajikistan. For more details, see page 124.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 109 INSPECTIONS

spections Law and the Law On Changes and Amendments to the Tax Code.

The Law On Changes and Amendments to the Tax Code refers to inspections conducted by tax bodies, while the Inspections Law covers the remaining set of agencies7 (for more details on the coverage of the Inspections Law, see Attachment 6.1 in the Annex).

The Inspections Law introduces the following principles: - Risk management: inspections are conducted and enterprises are selected based on the assessment of the risk that their economic activity poses to public safety; - Functional division: inspection results decision and the fi ne amount are determined by different individuals than the ones conducting the inspection; - Transparency and compliance: in order to be able to comply with the rules, entrepreneurs need to have a full understanding of the regulations and of their own duties and responsibilities.

The Inspections Law sets clear and specifi c procedures for all

BOX 6.2. SOME PROVISIONS OF THE INSPECTIONS LAW

Main objective Regulating the activities connected to arranging and carrying out inspections of business entities

1. Not more than once in 2 years (in some cases not more than once in 6 months); Frequency of inspections 2. New SMEs are not subject to inspections for the fi rst 3 years of their work.

1. For legal entities: Financial audits < 20 calendar days / Other inspections < 5 business days. Duration of inspections 2. For individual entrepreneurs: Financial audits < 10 calendar days / Other inspections < 5 business days.

1. Authorization to conduct an inspection; 2. Prior notifi cation (3 days before the audit starts); Procedures for 3. Use of the checklist; conducting inspections 4. No simultaneous inspections from different levels of one body; 5. A written report detailing the results of the inspection.

Rights To obtain information on the inspection / To know who is authorized to inspect. Rights and duties of entrepreneurs Duties To produce required materials and documents / Not to impede the inspection / To execute the decisions.

Rights To request written explanations / To request documents. Rights and duties of inspectors Duties To present the authorization for the inspection / To explain the rights and duties of entrepreneurs as well as their own rights and duties.

Inspection bodies Make normative documents accessible to the public. Entrepreneurs awareness Publish an annual report, short summary of fi nding as related to inspections, short review based on the assessment, the plans and priorities for the next year.

7 See Article 2, Item 2 of the Inspections Law.

110 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS stages of inspections, starting from the preparatory one to the follow-up phase:

• Before an inspection: - an inspecting body selects the businesses subject to an inspection based on the risk management principle (non-risky economic activities are inspected at most once in 2 years8); - new businesses are not inspected in the fi rst 3 years of operations; - the inspecting body must authorize an inspection offi cially; - an advance notifi cation of the inspection is sent to the business.

• During an inspection: - an inspection is conducted on the basis of the inspection checklist,9 which is specifi c for each type of business activity and publicly available to the business; - an inspection is documented in an offi cial inspection document; - the duration of a non-fi nancial inspection cannot exceed 5 working days.

• After an inspection: - the head of the inspecting agency reviews the inspection document and issues a decision on the inspection results; - the appeal procedures are clearly described in the decision.

Thus, the new Inspections Law represents the basis for the development and improvement of the inspections system in Tajikistan. However, adoption of the law is not suffi cient to change the situation radically. Many other activities need to be implemented, 6 beginning with bringing the legislative and normative base into conformity with the Law, and launching a broad-scale information campaign.

The Chart 6.1 presents the main stages of the inspections system reform based on the Inspections Law.

The expected result of the reform is a system that increases the overall compliance with the regulations by introducing compliance promotion tools (e.g., advance notice), by raising the entrepreneurs’ awareness (e.g., through checklists) and by introducing risk-management principles that will allow inspections to focus on the activities most likely to affect public welfare. The outcome should result in reduced burden for businesses and increased ef-

8 With exception for tax inspections: thematic inspections on taxation once in a year, complex inspections on taxation once in two years, Tax Code of RT. 9 With exception for tax inspections.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 111 INSPECTIONS

Chart 6.1. SCHEME OF THE INSPECTIONS SYSTEM REFORM IN TAJIKISTAN

August 2006 – 2007 March 28, July 28, Activities to be implemented by all inspectorates 2001 2006

Inspections Regis- Inspections Inspection manu- Risk Sectorial Laws Checklists tration Book Law als management

Presedential Decree Law No. 194 “On Amendments to the Standardized proce- Set up categories of risk A questionnaire serv- No. 542 “On Intro- Inspections of Eco- laws to refl ect the dures for conduct- and defi nition of risky ing as the basis for an duction of Inspec- nomic Activities in risk management ing inspections in sites to be inspected inspection tions Registration Tajikistan” principle accordance with more frequently Book in Tajikistan” the Inspections Law

Chart 6.2. MOST BUSINESSES UNDERWENT AT LEAST ONE fi ciency of the inspecting bodies. INSPECTION IN 2005

% OF RESPONDENTS SUBJECT TO INSPECTIONS The effect of the inspections reform strategy undertaken in Tajikistan will be traced in subsequent surveys. 98% 99% 98% 99% 96% 96% 94% 88% 6.2 coveraGe and freQuency of inspections remain critical issues for smes

The tendency found in 2002 survey for state bodies to inspect a Total SME Individual en- Small and Dehkan farm- sector trepreneurs medium com- ers large majority of enterprises still prevails in 2005. About 96% of SMEs panies were inspected at least once a year in 2005 (see Chart 6.2). . 2002 . 2005

In addition, the number of inspections per enterprise, although Chart 6.3. THE NUMBER OF INSPECTIONS IS SLOWLY DECLINING declining overall, is still signifi cant: on average, SMEs are inspect- AVERAGE # OF INSPECTIONS PER RESPONDENT ed 13 times per year (see Chart 6.3). The most signifi cant decline is seen for dehkan farmers, and can be attributed to 2 factors: the 16 17 15 13 13 decreased frequency of tax inspections, and the elimination of 11 10 most of the licensing requirements, which in turn reduced inspec- 10 4 tions by licensing authorities.

Start-up businesses underwent more inspections than existing SME sector Individual en- Small and Dehkan farm- trepreneurs medium com- ers business on average. It is expected, however, that the number panies of inspections for start-ups will decline substantially with successful . 2002 . 2005 implementation of the new law, which provides a 3-year grace

Chart 6.4. START-UP BUSINESSES ARE MORE SUBJECT TO period for start-ups (see Chart 6.4). INSPECTIONS More than 70% of inspections are carried out by three agencies: AVERAGE # OF INSPECTIONS PER RESPONDENT 16 tax bodies (Tax Inspectorate and the Tax Police) conduct the 15 13 14 most inspections, followed by the Sanitary and Epidemiological 11 10 Service and Fire Authority (see Chart 6.5). 5 4 Interestingly, the Tax Police reportedly carried out more than one SME sector Individual en- Small and Dehkan trepreneurs medium farmers companies 10 . Existing businesses . Start-ups For more details, see the Chapter 3.

112 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

BOX 6.3. INFORMATION ON INSPECTIONS IN SOME COUNTRIES BASED ON THE RESULTS OF THE SURVEYS CONDUCTED BY THE IN- TERNATIONAL FINANCE CORPORATION

The table below provides a comparison of inspections data from similar IFC surveys in the region. Those countries which began reforms earlier have already achieved positive results, such as a decrease in coverage and number of inspections. At the same time it should be noted that the application of risk management principles leads to focusing inspections to riskier businesses, increasing the duration of inspections of those entities. Approaches to reform in other countries are analyzed in Attachment 6.2.

Belarus Georgia uzbekistan Ukraine Tajikistan Coverage, % 66 32 22 95 96 Average number of inspections per one SME 4.6 0.6 0.9 3.8 12.7 Average duration of one inspection, days 1.4 4.5 2.9 2.2 0.5 Average duration of all inspections, days 6.3 2.7 2.6 8.5 6.5 Cost of all inspections, USD 425 83 N/A N/A 83

* countries in bold made important steps to reform inspection system

Source: IFC (2006a), IFC (2006b), IFC (2007a), IFC (2007b) inspection per enterprise per year on average. According to the 11 Tax Code of RT, the Tax Police are entitled to participate in the Chart 6.5. TAX, SES AND FIRE AUTHORITIES COVER ABOUT 13 inspections conducted by the Tax Inspectorate, but have no right 70% OF INSPECTIONS FACED BY ONE ENTREPRENEUR 12 to carry out independent inspections. That they do so regardless AVERAGE # OF INSPECTIONS PER SME is indicative of the limited compliance by state bodies with the existing regulations. 3 13 0.3 2 1 5 1 There is also the problem of multiple inspections. These can be carried out by the same body at different organizational levels (district, city and regional), as well as by different bodies con- 6 ducting overlapping inspections. For instance, an audit of the Total Others

payment of social tax is conducted by tax bodies as well as by Tax police Fire Authority

the Pension Fund (which has a right to inspect, but with the coor- Tax inspection dination of tax and fi nance bodies).14 The same overlaps are seen Social protection demiological Service with the State Electricity Supervision Body (Energonadzor)15 and Sanitary-andand Epi- Fire Department,16 which both have jurisdiction over the safety of electrical wires and electricity generating plants. The two bodies sometimes duplicate each others’ activities during their inspections of fi re standards.

11 Article 128 ”The Rights of the Tax Police Divisions.” 12 The functions of the tax police were transferred to the newly established Agency on State Financial Control and Fight against Corruption, Presidential Decree, dd. November 30, 2006, No. 9. 13 Category ”Others“ include: Department of Internal Affairs, State Automobile In- spection (GAI), Tajikstandard, Environment protection body, Khukumat, etc. 14 In accordance with the Law of RT “On State Social Insurance,” No. 517, dd. De- cember 13, 1997, FSP letter No. 10/570, dd. November 29, 2002. 15 In accordance with the Law of RT “On Energy,” No. 33 as of November 29, 2000, Government Resolution No. 84 dd. March 6, 1998, Government Resolution No.465 dd. October 17, 1996. 16 Law of RT ”On Fire Safety,” No. 995 dd. July 21, 1994, Government Resolution No.726 dd. December 7, 1995, Government Resolution No. 457 dd. October 5, 1995.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 113 INSPECTIONS

Chart 6.6. THE FREQUENCY OF INSPECTIONS SHOWS HIGH The average number of inspections also shows regional differenc- GEOGRAPHICAL VARIANCE es. Individual entrepreneurs in Dushanbe, for example, undergo

AVERAGE # OF INSPECTIONS PER INDIVIDUAL ENTREPRENEUR almost double the number of inspections as their counterparts in other regions (see Chart 6.6).

25 19 18 Regional difference can be explained by several factors, but the 14 14 13 8 main driver appears to be the ratio between inspectors and enterprises. Most of the inspecting bodies are located in the capital, Dushanbe. Therefore entrepreneurs in Dushanbe are subject to inspections at several organizational and administrative levels: Oblast

Dushanbe rayon, city and national. Kulyab district Subordination B Sughd province (Khatlon province) (Khatlon province) Districts of Republi-

Kurgan-Tube district 6.3 who is inspected? the rationale and outcomes can Subordination A Districts of Republican are still unclear

Gorno-Badakhshan Autonomous The rationale for inspections is unclear (see Table 6.1).

6.3.1 INSPECTIONS ARE NOT RISK BASED TABLE 6.1. MAJOR CHARACTERISTICS OF THE IN- SPECTIONS IN TAJIKISTAN characteristics description Analysis of the distribution of inspections by sectors of the economy 1. High coverage Nearly 100% coverage without proves that the system for planning and conducting inspections in risk-based approach. the country is not risk based. The number of inspections (see Chart 2. No offi cial conse- In 90% of cases inspection had 6.7) does not show a high variance among sectors of activity: for quences no consequences. example, consumers’ services and retail trade businesses, which 3. Duration is too short 50% of undertaken inspections to be effi cient lasted no more than 1 hour. do not pose high levels of risk to the population, were inspected in 2005 more often than the construction businesses.

Entrepreneurs involved in provision of services were inspected Chart 6.7. IN 2005, ENTREPRENEURS IN CATERING AND TRANS- PORT WERE INSPECTED MORE THAN THOSE IN OTHER SECTORS17 twice by Energonadzor (Electricity Supervision), while those involved in manufacturing consumer goods were inspected just AVERAGE # OF INSPECTIONS – EXCLUDING TAX INSPECTIONS once, despite a higher risk involved in working with equipment.

Non-compliance with a risk-based inspections system implies Public Catering 11 waste of public resources as well as unnecessary burden for busi-

Transport 11 nesses. Box 6.4 gives an example on risk-based approach.

Consumer services 9 6.3.2 MANY INSPECTIONS, FEW RESULTS

Wholesale trade 7 More than 80% of the interviewed entrepreneurs underwent the

Retail trade 6 inspections without any consequences – i.e. only about one in fi ve faced sanctions (see Chart 6.8). Penalty sanctions and withdraw- Production 6 of consumer goods al of products from sale were the most commonly used punitive actions by inspecting bodies. Construction 5

Agriculture 3

Others 6

17 Category “Others” include: consulting services, processing of agricultural production, medical services, pharmaceutical products, tourism and hotel business, and communication.

114 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

BOX 6.4. RISK ASSESSMENT AND MANAGEMENT

In an inspection system driven by risk-assessment and risk-management principles, the inspecting body selects the sites that have a high possibility of violating the existing legislation. There is an assumption that certain activities cannot breach the legislation and therefore are not subject to inspections. Thus, there is no need for 100% control over all activities, which is in any case impossible due to limited resources. In other words, the inspectors focus on lowering the risk factors in a risk-management system.

By using risk-management techniques when selecting inspection sites, inspection agencies can more effi ciently utilize their limited resources to ensure compliance with the law. Strategic planning and clear institutional objectives can also lead to more effective use of resources. In practice, this can be as follows:

• Labor inspectorate has specifi c objectives and specifi c tasks in terms of observation of the basic legislation. • It has the staff, technical equipment and other resources to fulfi ll its duties. — The total working hours of the inspectors can be calculated as follows:

WL=(NO-NA)*(DB-DV-DL), where NO- Number of staff, NA- number of administrative and other staff, DB- number of business

days, DV- number of vacation days, DL- sick leave days. — The calculated number of working hours of the inspectorate can be distributed according to a strategic planning mechanism driven by the priorities discovered while using risk reduction methodologies. For example: » Preventive measures – 40% of the working time: - Preventive work in 1-2 priority areas having risk factors, and set to carry out within a certain year (e.g. construction and installation works, etc.) can take about 20% of the working time; - Other preventive work, like holding information campaigns on a certain topic, inspections aimed at providing information and consultations for entrepreneurs, operating in high risk fi elds and in the fi elds with high law violations rate can take up to 20% of the remaining working time. » Training of inspectors and day-to-day trainings to maintain the professional qualifi cations (in the school for the State offi cials, on the job training, self-education) –15% of the working time. » Offi ce work (work with visitors/applicants, preparation of various reports and other documents) – 25% of the working time. » Other fi elds of activity as per specifi cs of some countries and specifi cs of the controlling body – up to 20% of working time. 6 • A crucial element of the system is that staff must report on the results of above events and that a performance evaluation system is in place to monitor the achievement of the objectives. • Work priorities must be reviewed at least once a year in accordance with the current information and decision-making policy to ensure the most effi cient use of resources.

Chart 6.8. ONLY SMALL NUMBER OF INSPECTED ENTREPRENEURS The ratio between inspected companies and actual conse- RECEIVED A PENALTY OR OTHER ADMINISTRATIVE ACTION quences is explained by two reasons: on the one hand it testifi es % OF RESPONDENTS SUBJECT TO INSPECTIONS to the absence of a proper selection mechanism, which would 81% No consequences allow the agencies to place higher priority on inspecting the en- 19% Consequences terprises most likely to violate regulations. On the other hand it is directly linked to unoffi cial payments. In fact, a large number of entrepreneurs (almost 1 out of 3) prefer to avoid any sanctions from inspecting bodies by resorting to unoffi cial payments (see Chart 6.9).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 115 INSPECTIONS

Chart 6.9. SMES RESORTED TO UNOFFICIAL SOLUTIONS BOTH TO However, even entrepreneurs who did receive administrative AVOID AND TO REDUCE VIOLATION FINES sanctions and fi nes made some unoffi cial payments, likely to re-

% OF RESPONDENTS WHO MADE UNOFFICIAL PAYMENTS duce the size of the fi ne and alleviate the consequences of inspections. 47

31 Overall, the low number of infringements is a sign of the ineffi - ciency of the inspection system. In fact, if no infringements were revealed during the last inspection (at most one year before) and the business does not belong to a high risk category, it is unclear No fi nes Fines what purpose repeated inspections will serve, apart from increasing rent-seeking opportunities. “Frankly speaking, we are bothered by these inspections, when the city administration comes after the rayon to check the same thing…” 6.3.3 INSPECTIONS ARE TOO SHORT TO BE EFFECTIVE

- Entrepreneur, focus-group participant Very often the duration of inspections is too short to be effective. Every third inspection of individual entrepreneurs lasted less than BOX 6.5. EXTRACT FROM INSPECTIONS LAW 30 minutes. Some inspections lasted only 15 minutes, which is insuffi cient to assess compliance of the entrepreneur’s activity with “1. Every inspecting body carries out inspections prescribed norms (see Chart 6.10). A possible explanation for this … not more than once in two years, except for the might be an informal relationship between offi cials and entrepre- cases envisaged in the present Law.” neurs. Article 10 6.3.4 UNOFFICIAL WAYS ARE IN MOST CASES THE EASIEST SOLU- Chart 6.10. EVERY FOURTH INSPECTION FOR INDIVIDUAL TION ENTREPRENEURS LASTED LESS THAN 15 MINUTES

% OF RESPONDENTS INDICATING DURATION OF INSPECTION NOT LONGER THAN 30 According to the survey, about 52% of the interviewed entrepre- MINUTES neurs used unoffi cial means to resolve inspections issues in 2005 (see Chart 6.11). This includes unoffi cial payments, reference to 14% friends and relatives, and other informal options (invitation to 12% 9% lunches, etc.).

less than 10 minutes between 10 and 15 between 15 and 30 Although unoffi cial means are common across all regions of the minutes minutes country, they are especially widespread in the Kurgan-Tube region of Khatlon province, where almost all entrepreneurs preferred to solve problems through unoffi cial methods (see Chart 6.12).

Many entrepreneurs perceive unoffi cial solutions as a normal aspect of their business activity. This encourages transformation Chart 6.11. UNOFFICIAL WAYS OF SOLVING ISSUES – COM- of the “inspector-entrepreneur” relationship into one in which MON BY INSPECTIONS they become “partners” in bypassing the offi cial system. This re- % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS lationship has developed due to various factors: the high level 19 of administrative interference into entrepreneurship activities, the 52 complicated and often outdated norms and requirements of in- 33 specting bodies, the low level of awareness of entrepreneurs, as well as the low salary level of government offi cials, whereby the Unoffi cial Other unoffi cial Unoffi cial solutions monthly wage is below the consumption norm (see Box 6.6). payments ways

116 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

6.4 inspections: a relevant Burden for smes … Chart 6.12. UNOFFICIAL WAYS OF SOLVING ISSUES ARE COMMON IN ALL REGIONS OF THE COUNTRY 6.4.1 …IN TERMS OF TIME % OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS

96% Analysis of the legislation showed that prior to the new Inspections 76% 63% Law most inspecting bodies did not have clear guidelines for car- 47% 35% 31% rying out inspections.

The duration of inspections is clearly linked to the size of businesses: while it decreased signifi cantly in 2005 for individual entrepreneurs

(almost 3 times) and dehkan farmers (more than twice), it also Dushanbe Kulyab district

showed an increase for small and medium companies in com- Sughd province can Subordination (Khatlon province) (Khatlon province) Districts of Republi- Gorno-Badakhshan Kurgan-Tube district parison to 2002 (see Chart 6.13). Autonomous Oblast

“I’ve known the inspectors for a long time, and we The reduction of time spent in inspecting individual entrepreneurs have a mutually benefi cial relationship – they help and dehkan farmers can be explained on the one hand by the me and I help them …” reduction in the number of inspections (as it is the case for de- - Entrepreneur, focus-group participant hkan farmers), and on the other by the limited scale of the inspections (in particular for individual entrepreneurs). For example, the Chart 6.13. TIME SPENT FOR ALL INSPECTIONS RANGES most frequent inspections are fi eld audits by the tax inspectorate. FROM THREE DAYS TO A CALENDAR MONTH These inspections are limited to verifi cation of the entrepreneur’s 2002 2005 # OF BUSINESS DAYS . . patent and cash receipts. As these practices have become more 19 20 17 known among entrepreneurs, the duration of the audits has likely reduced with respect to 2002. 6 7 3 Inspections of small and medium companies take the most time, Individual Small and Dehkan lasting nearly one calendar month (20 business days) and inter- entrepre- medium farmers rupting their usual activity. This is an increase from the previous sur- neurs companies Duration of vey despite the reduction in the number of inspections. The longer 1 inspection 5 14 3 in hours 6 BOX 6.6. AVERAGE SALARIES OF INSPECTORS, CONSUMPTION NORM AND INSPECTIONS REVENUES

The nominal average monthly wage of wage-earners …while the cost of food in the consumer basket per one household in the tertiary sector was 82 somoni in 2005… member (consumption norm) was 87 somoni in 2005.18

To change the existing situation, it is important to raise entrepreneurs’ legal awareness, to raise the inspectors’ technical qualifi cations, and most importantly to introduce incentive systems that link public offi cials’ salaries with their performance. In particular until salaries allow the offi cial to afford normal living standards, unoffi cial payments will not be eradicated. Raising salaries per se is not a solution. Introducing risk-based inspection mechanisms should bring effi ciency by reducing the number of needed inspectors, and in turn free up resources to be dedicated to increased salaries according to a performance based system. According to our data, it can be estimated that inspections-related payments in the country (including tax inspections) range between 30-40 million somoni ($10-$12 million).19 Even if these payments were to be offi cial, they would represent no more than 3% of total government revenues. Therefore, it is diffi cult to justify inspections, in particular tax inspections, based on revenue motivations. On the other hand, if we consider the total number of inspectors active in Tajikistan (~4,000), the monthly revenue generated by each of them is about 620–830 somoni ($195-$260), which appears to be the amount necessary to integrate the offi cial salaries.

18 NBT (2006). 19 By multiplying average cost of all inspections 265-330 somoni ($83-$103) by the total number of SMEs in the country (121,000 entities).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 117 INSPECTIONS

BOX 6.7. EXTRACT FROM INSPECTIONS LAW

“1. The duration of a fi nancial audit of the activity of a legal entity must not exceed 10 calendar days. 2. Inspection ... by other inspecting bodies ... with duration, not exceeding 5 business days.” Article 14

Chart 6.14. INSPECTIONS BY STATE AUTHORITIES OF SMALL AND duration of inspections for small and medium companies is clearly MEDIUM COMPANIES ARE THE LONGEST linked to the higher complexity of these more structured business

HOURS PER 1 INSPECTION activities (as Chart 6.13 shows, the duration of one inspection for them is about three times the one for individual entrepreneurs), 3 but also by the higher number of bodies performing inspections. Tax inspection 24 6 Distribution of the duration of one inspection indicates that some 4 Tax police 9 of the inspections have very short-term character. For instance 7 about 60% of individual entrepreneurs had inspections no longer 2 than 1 hour. This could be due to the fact that inspectors visit en- Social 7 protection trepreneurs just to collect a bribe (see Chart 6.15). 5

2 Environmental Chart 6.15. ABOUT 50% OF INSPECTIONS LAST NOT MORE THAN 1 HOUR 5 protection 3 % OF RESPONDENTS SUBJECT TO INSPECTIONS 3 39% TajikStandart 7 35% 36% 1

2 25% Komarchstroi 24% 9 21% (architecture) 19% 20%

12% 12% State surveil- 1 11% 10% 8% 9% lance on labor 6 6% 6% 4% protection 6 2%

5 Offi ce of Public 18 up to 30 30-60 1-3 3-5 hours 5-10 hours above 10 Prosecutor 5 minutes minutes hours hours

. Individual entrepreneurs Individual Small and medium Dehkan . Small and medium companies entrepreneurs companies farmers . Dehkan farmers 6.4.2 …AS WELL AS DIRECT COSTS Chart 6.16. SMALL AND MEDIUM COMPANIES HAD THE HIGHEST EXPENDITURES FOR INSPECTIONS IN 2005 As with the duration of inspections, the expenses related to in-

SOMONI spections (offi cial and unoffi cial payments) differ greatly for each 1,049 SME type. Chart 6.16 shows that in 2005, small and medium companies spent, on average, 1049 somoni ($378) on inspections. This amount is four times higher than individual entrepreneurs and 15 times higher than dehkan farmers.

251 264 71 Duration of inspections and costs appear to be directly corre- SMEs on lated: it is in fact possible to identify a daily cost of an inspec- average tion, which also does not substantially differ among typology of Individual Small and Dehkan farmers entrepreneurs medium companies

118 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

companies. This supports the hypothesis that unoffi cial payments Chart 6.17. “DAILY COST” OF INSPECTIONS appear to be the main drivers behind inspection costs (see Chart SOMONI 6.17): inspectors are in fact receiving a similar contribution from 53 each typology of inspection. 42

At the same time, the inspections-related expenses of entrepre- 24 neurs differ depending on the region.

Other regional variances can be attributed to the lack of uniform normative approaches to conducting inspections, leading to a Individual Small and Dehkan farmers entrepreneurs medium difference in the number and duration of inspections (as illustrat- companies ed in Chart 6.18).

Chart 6.18. REGIONAL DIFFERENCES IN TERMS OF NUMBER AND DURATION OF RETAIL TRADE INSPECTIONS IN 2005, BY STATE AGENCIES

AVERAGE # INSPECTIONS PER SME DURATION OF ONE INSPECTION, HOURS 11 9 7 7 7 5 5 4 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 ince) ince) province) province) Districts of Districts of Dushanbe Dushanbe Republican Republican mous Oblast mous Oblast Kurgan-Tube Kurgan-Tube Gorno-Bada- Gorno-Bada- Kulyab district Kulyab district Subordination Subordination (Khatlon prov- (Khatlon prov- district (Khatlon district (Khatlon khshan Autono- khshan Autono- Sughd province Sughd province . Tax inspection . Fire Authority . SES . Tax inspection . Fire Authority . SES

6.4.3 …LEADING TO AN OVERALL SIGNIFICANT ECONOMIC IM- PACT 6 The above-mentioned costs can be characterized as direct ones. At the same time, we must point to indirect costs associated with the opportunities lost – that is, the loss in profi t caused by suspension and limitation of business activity, as well as the human resources lost due to involvement of employees in inspections. Taking into account the direct and indirect costs involved in inspections, we can estimate the total economic impact of inspections on each typology of business:

• Individual entrepreneurs face a total cost of about 290 somoni ($91) on inspections, corresponding to 7% of their annual profi ts; • Small and medium companies face a total cost of about 1,450 somoni ($453), or 7% of their annual profi ts; • Dehkan farmers face a total cost of about 80 somoni ($25), which correspond to 2% of their annuals profi t (see Chart 6.19).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 119 INSPECTIONS

Chart 6.19. ECONOMIC IMPACT OF INSPECTION BURDEN RANGES BETWEEN BOX 6.8. ECONOMIC IMPACT ESTIMATE 2% AND 7% OF ANNUAL PROFITS

SOMONI Entrepreneurs spend not only fi nancial resources to 7% of annual 7% of annual 2% of annual deal with administrative procedures. They also use profi ts profi ts profi ts human resources and lose revenues in case their businesses are stopped as a result of an inspection. 1,450 Our estimates of the costs associated with inspections include all these cost categories:

• Direct administrative costs: n*(EO+EU); • Indirect “additional” costs consisting of: 290 - Labor cost: w*d; 80 - Loss of profi ts:(L*s/b)*p where: Individual Small and medium Dehkan farmers entrepreneurs companies • n – Number of times a business is inspected in

a year; This situation is expected to change after implementation of the • E - offi cial cost of each inspection; O Inspections Law. The expected results described in Box 6.9 are the • E - unoffi cial cost of each inspection; U following: • d - Business days of full-time employee time

dedicated to inspections; • reduction of offi cial and unoffi cial payments • w - Daily employee salary;

• L - annual profi t losses for an active company - advance notifi cation of inspections should push compliance stopped because of inspections, but which re- and in turn reduce fi nes and unoffi cial payments; tains all its production factors; - checklists will increase transparency of the regulations, which • s - time, in business days, that a company’s ac- in turn will facilitate compliance and reduce payments; tivity is stopped due to inspections; - the introduction of an offi cial inspection document evalu- • b - Number of business days per year in the ated by a different individual than the one conducting the economy; inspection will raise objectivity of inspections and reduce un- • p - probability that company’s activity is offi cial payments; stopped. - the 3-year grace period will allow entrepreneurs to avoid burdensome expenses during business establishment and development during the fi rst years of experience; - limit in the number of inspections should reduce the unoffi cial payments, which showed a clear link with the number of in-

“Why don’t people speak of how much money we spections. ‘lose’ because we suspend activities for the inspections? It is not only us, who do not make profi t. It is • reduction of labor costs also the budget of the country, which does not get the taxes from the transactions that we might have made...” - imposing a limit on of the duration of inspections will avoid

- Entrepreneur, focus-group participant prolonged inspections; - checklists should facilitate inspections and in turn reduce time spent dealing with them; - advance notice will allow for better planning of the time of employees involved in inspections, leading to reduction of labor costs; - limit in the number of inspections and the 3-year grace period

120 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

would limit the number of inspections and in turn reduce the BOX 6.9. EXPECTED IMPACT FROM INSPECTIONS LAW time spent dealing with inspectors; nevertheless one should

take into account that the duration of each inspection could Area of impact increase due to the lower frequency.

Unoffi cial Stopping Labor & offi cial • decrease of the opportunities to close a business business cost payments

- the introduction of checklists, by bringing transparency into Provisions the inspection process and increasing compliance, should

also reduce the chances of closing a business; Limit the # of inspections, - the limit in the duration of inspections should in turn reduce Avoid redundant √ √ the chances a business will be shut down as a result of an inspections inspection; - the inspection document and the separation of the decision- making process should reduce prejudgment in decision making and introduce objectivity of inspections results. Advance notice √ √ 6.5 amBiGuous and unclear norms create difficulties for appealinG

About 1 in every 8 entrepreneurs felt the decisions made by the inspecting bodies were illegal. Nevertheless only 20% of them de- Duration of inspection cided to appeal by turning to higher bodies of authority and high- √ √ er offi cials. This shows an extremely low confi dence in the appeal process (see Chart 6.20).

The main reasons for this reluctance to appeal are fear of the negative consequences from the inspecting bodies and doubts Checklists √ √ √ as to the positive outcome. Some entrepreneurs also doubt the effectiveness of this mechanism in light of the required time and costs (see Chart 6.21). 6 Inspection document & Separation It should be pointed out that before the adoption of the Inspec- of inspection and tions Law, while the responsibilities of SMEs were more or less clear, decision- √ √ making the responsibilities of inspectors at various inspecting bodies in functions most cases were not. In particular, most entrepreneurs did not know that they can appeal a decision when the inspector was going beyond his or her powers or what the appeal procedure No inspections in the fi rst was. 3 years of operations √ √

That is why in questionable situations, most entrepreneurs prefer to decrease the likelihood of negative outcomes by compromising with inspectors.

To give entrepreneurs a better understanding of their legal rights, the Inspections Law obliges all inspectorates to introduce an In- ”To appeal… costs more. The state bodies will never spections Manuals which should contain among other things a admit the mistakes of their inspectors....” detailed description of the appeal mechanisms. Open access to - Entrepreneur, focus-group participant

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 121 INSPECTIONS

this information will help raise the legal awareness of entrepreneurs and enable them to defend their rights, as the reforms planned in this sphere and those in progress will not have effect without the support and active participation of the private sector.

In order to make the appeal system fully functional, it is important to conduct reforms, in particular within the court system, to enable entrepreneurs to fully protect their legitimate interests.

Chart 6.20. ONLY FEW ENTREPRENEURS APPEALED DECISIONS Chart 6.21. MOST OF SMES DID NOT APPEAL THE WRONGFUL ACTIONS OF THE INSPECTING BODIES, WHICH THEY FELT WERE ILLEGAL OF INSPECTORS DUE TO APPREHENSIONS OF NEGATIVE CONSEQUENCES FOR THEIR BUSINESS % RESPONDENTS UNDERGOING INSPECTIONS

% OF RESPONDENTS THAT THOUGHT IT NECESSARY TO APPEAL, BUT DID NOT

45% In 2 consideration 10 No answer 23% 35 14% Did not succeed 6% 5% 5% 2%

Not 81 Did not 77 necessary appeal Other appeal

63 fective ways Long process legal services) Doubts as to the positive outcome There are more ef- I don’t know how to

It was nec- 19 Costs (the state dues, Appealed 13 essary Succeeded from the inspecting bodies

Was it necessary to Did you appeal? Results appeal the illegal, of appeal in your opinion, decisions of the inspecting bodies? Possible negative consequences to my business

6.6 outdated reQuirements and low leGal awareness make compliance more difficult

The norms and rules serve as the tools to regulate the actions of “... Some of the technical requirements are so ab- SMEs. But this goal can only be achieved if the norms and rules are surd that it is very surprising they have not been feasible and understood by all. revised already. Yet these requirements are strictly enforced.” As entrepreneurs said, there are multiple rules and technical re- - Entrepreneur, focus-group participant quirements that are confusing and impossible to execute. For instance, the cost of a fi re-prevention warning system at an 8 square meters retail trade shop can be equal to the amount of annual turnover.

Rules and regulations are not only complicated, but also often unfeasible. In most cases they are inaccessible. Information is not shared between government bodies and entrepreneurs and in

122 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

most cases regulations are only available (in limited copies) to Chart 6.22. SHARE OF ENTREPRENEURS KNOWING THE LEGIS- government offi cials. Clearly this makes compliance literally im- LATION REGULATING INSPECTIONS WELL IS INCREASING % OF RESPONDENTS possible. 40% 36% As a result the majority of entrepreneurs are unaware of the de- 32% tailed requirements for their business activity. Without a well-developed mechanism for informing small and medium businesses 19% 20% on normative-legal acts, entrepreneurs only get to know these re- 18% quirements during the course of inspections. Lack of information is also one of the major obstacles that entrepreneurs face with during their business activity.

The survey shows a positive trend in raising the legal awareness Individual entre- Small and medi- Dehkan farmers among entrepreneurs. In 2005, there was a 12% increase in the preneurs um companies number of dehkan farmers who had a better knowledge of the . 2002 . 2005 legislation (see Chart 6.22).

The checklists developed under the Inspections Law should solve the problem of low awareness among entrepreneurs. The check- “We have repeatedly asked the Ministry of Trans- port to show us the rules that regulate our activity, lists detail the various technical requirements and should simplify but we have not received any.” the inspection process, helping entrepreneurs understand and - Entrepreneur, focus-group participant meet their responsibilities.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 123 INSPECTIONS

ENTREPRENEURS DID NOT MAKE EFFECTIVE USE OF THE INSPECTIONS REGISTRATION BOOK IN 2005

Chart 6.23. PRIOR TO 2006 IRB WAS NOT AVAILABLE FOR 50% OF ENTREPRENEURS The Inspections Registration Book (hereafter IRB) is a document in which % OF RESPONDENTS WHO HAVE IRB the information on each inspection is kept, including the name of the inspector, date of inspection and inspection results.

81% 83% The IRB was introduced in 2001 with the goal of reducing unoffi cial and

69% unjustifi ed inspections by inspecting bodies. It was expected that compulsory registration of each inspection in the IRB should restrain the unjustifi ed

43% inspections. However, this did not happen, as the number of inspections 33% was not limited by legislation and no one cared about the numerous en- 29% tries in the IRB by the same inspecting agencies.

In 2006 the IFC Tajikistan Business Enabling Environment - SME Policy Project

Individual Small and Dehkan published and distributed the IRB on a large scale throughout Tajikistan. entrepre- medium farms The initiative was fi nanced by the Swiss State Secretariat for Economic neurs companies Affairs (SECO). Distribution took place after conduction of survey and its . 2002 . 2005 impact is to be measured in a follow-up survey.

Chart 6.24. THE REASONS WHY ENTREPRENEURS DO NOT The survey does not demonstrate dramatic changes over the past 3 years HAVE INSPECTIONS REGISTRATION BOOKS with respect to IRB availability: as of 2005 a large majority of individual % OF RESPONDENTS WHO DO NOT HAVE IRB entrepreneurs still do not have the IRB.

I don’t know what it is 44% The high numbers of small and medium companies that had the IRB can

No need, I don’t see the 24% be explained by the better resources (e.g., qualifi ed staff to track chang- advantages to using it es in the legislation) and higher need for companies due to increased I didn’t know there was 18% an IRB compliance requirements compared to dehkan farmers and individual entrepreneurs. I didn’t have time to obtain it 9%

I don’t know where to Low awareness of entrepreneurs is one of the major factors affecting the 9% obtain it distribution and use of the IRB and the entrepreneurs’ activities in general I don’t think it’ll change 8% things for the better (see Chart 6.24).

Chart 6.25. MAJOR PART OF INSPECTING BODIES However, the low circulation of the IRB is caused not only by the low REGISTERED THE INSPECTIONS AT IRB IN 2005 awareness of entrepreneurs, but by the lack of control of IRB entries made % OF RESPONDENTS by inspecting agencies. The latter would easily register inspections in the 65 62 book, as there were no limitations to the number of inspections, and registration in the IRB would therefore not prevent them from another visit. If 50 there were clear procedures for the inspecting bodies, the IRB use would be more effective and entrepreneurs themselves would seek it out and 27 23 22 23 start using it. 16 12 The survey shows that the majority of inspectors make records in the In- spections Registration Book when carrying out their activities (see Chart

Always Sometimes Never 6.25).

Tax Inspectorate SES Fire Authority . . . The survey results demonstrate that the main reason that inspectorates

124 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

Chart 6.26. MAIN REASONS FOR NOT FILLING IN THE IRB IN do not fi ll out the Inspections Registration Book is that the entrepreneur 2005: SME DID NOT REQUEST IT himself does not insist on recording the inspection in the IRB. Inspectors % OF RESPONDENTS should nonetheless request the IRB from businesses before the start of the 81% 76% inspection, to register the inspection and fi ll in the appropriate columns of 70% the Book.

Some entrepreneurs explain that they don’t want to record the inspection 30% 24% because they are not sure of the result of the inspection, and are afraid of 19% the possible negative consequences (see Chart 6.26).

At the same time, entrepreneurs point to certain improvements that fol- Tax SES Fire Inspectorate Authority lowed the introduction of the Inspections Registration Book. Every fi fth interviewed entrepreneur mentioned some positive change from using the . The inspector refuses to fi ll in IRB. . I myself do not insist on fi lling in

BOX 6.10. FREE DISTRIBUTION OF IRBs IN 2006

In 2001 a Decree of the President of Tajikistan introduced the Inspections Registration Books for business entities in Tajikistan as fulfi lment of the terms for a structural adjustment credit (SAC) provided by the World Bank to the Government of Tajikistan. Unfor- tunately by 2005 only a limited number of SMEs possessed and used the book (as later confi rmed by our survey results - seeChart 6.23), which in any case lacked a uniform format. In order to fi ll in this gap the IFC Business Enabling Environment Project decided to publish 125,000 copies of IRBs. The initiative was fi nanced by the Swiss State Secretariat for Economic Affairs (SECO).

IFC experts developed an information section of the IRB, to help entrepreneurs obtain more information on the procedures and basic principles of inspections, as well as on their own rights and duties. The information includes the list of the laws regulating entrepreneurs’ activity as well as the contact information for state bodies authorized to carry out inspections and the organizations providing support for entrepreneurs.

The distribution of the copies was undertaken through the local offi ces of the Ministry of State Revenues and Taxes of RT (the 6 current Tax Committee), who took the responsibility to ensure adequate distribution reach (by December 2006 about 70% of the copies were distributed) .

Chart 6.27. EFFECT OF IRB 63%

9% 8% 6% 5% 4% 4% 2%

I do not have the IRB Number of Don’t know/Hard Number of inspec- Number of Number of First inspection Other inspections to answer tions decreased, inspections did inspections did happened by decreased, but and the proce- not change, and not change, but availability of the procedures dures became the procedure the procedures IRB. That is why did not change more clear and remained unclear became more it’s hard to transparent and non-trans- clear and trans- judge. parent parent

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 125 INSPECTIONS

RECOMMENDATIONS

As we described in the chapter, the critical change needed to reform inspections in Tajikistan will be to switch from a system focused on “hunting” for infringements to one focused on preventing and eliminating the causes of future infringements.

The basis of this change is included in the provisions of the new Inspections Law, which implementation will be critical to solving most of the issues and concerns raised in this chapter. As a general recommendation, we suggest developing a thorough implementation mechanism to reach the expected outcome. As such our detailed recommendations will be focused specifi cally on the implementation mechanism as well as on additional suggestions not directly linked with the Inspections Law, but which will be complementary to it.

1. Disseminate among the wide public the provisions of the Inspections Law and in particular the detailed inspection process as envisaged by the new law. This in turn can be achieved by:

1.1 Developing information campaigns via media addressed to a wide audience; 1.2 Targeting specifi c audiences, i.e., business associations, business incubators, NGOs with specifi c training programs aimed at raising their knowledge and making them able to support SMEs;

Expected impact

Higher level of awareness of the Inspections Law and a standardized and transparent inspection process will empower entrepreneurs vis-à-vis inspectors by providing them with some direct tools to reduce the burden of inspections and at the same time warrant compliance. The expected results are:

• Reduced number of inspections by applying the frequency limit provided by the law; • Higher level of compliance due to the application of the advance notice mechanism; • Reduced unoffi cial payments as a result of the two points above.

2. Provide entrepreneurs with clear, up-to-date and easily available regulations/instructions. This in turn can be achieved by implementing the provisions of the Inspections Law:

2.1 Developing sector-specifi c checklists at each inspectorate level, which incorporate all technical regulations; 2.2 Making checklists and regulations available to entrepreneurs in advance in large-scale information campaigns and before inspections, so that entrepreneurs can be better prepared; 2.3 Reviewing the regulations underlying inspections to align them with international best practices as well as with the institutional context of Tajikistan; 2.4 Developing violations preventing activity to reveal the causes of violations, their analysis, development and the implementation of measures to eliminate them;

Expected impact

The elaboration of checklists at the agency level, based on up-to-date regulations, and their dissemination should on the one hand create awareness and on the other bring transparency to the inspection process, leading to:

• Higher level of compliance, as the rules will be available, clearer, easy to read and to apply, facilitating their implementation; • Lower fi nes for businesses induced by higher compliance;

126 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

• Reduced need for unoffi cial payments, as clearer rules and simple yes/no answers will empower the entrepreneurs vis-a-vis the inspectors.

3. Implement risk-based selection mechanisms of SMEs to be inspected. These criteria will be differentiated for each inspection agency according to specifi c risk parameters set by the regulations to be implemented. This in turn can be achieved by:

3.1 Implementing the provisions of the Inspections Law requiring differentiation of inspected entities based on their potential risks, and in particular the high risk category requiring higher frequency inspections; 3.2 Defi ning risk-management principles within each category, which would allow inspectors to identify businesses with higher likelihood of infringements – i.e., selection based on past infringement records and random selection mechanisms.

Expected impact

The defi nition of risk categories should drastically reduce the coverage of inspections and change their very nature. Indeed, inspections should not represent the norm; rather, the exception, unless specifi c reasons exist. A business in fact should be inspected more frequently only if it belongs to a high risk category or if company-specifi c conditions exist. A risk-based inspection system should result in:

• Lower direct and indirect costs for businesses, both in terms of fi nes as well as opportunity costs, i.e., loss of labor and missed business opportunities; • More effi cient use of public resources, as inspections will only be focused on high risk areas.

4. Revise the organizational structure, professional qualifi cations, incentive systems and the salary scale of inspectorates. This in turn can be achieved by:

4.1 Rationalizing the number of inspectors to be allocated to each agency and their geographical distribution, according to the number of entities to be inspected and the risk level associated with the inspected entities; 4.2 Submitting inspectors to regular training programs and professional tests to improve professional skills and the 6 effi ciency of the inspection process; 4.3 Reviewing the salaries of inspectors and introducing incentive systems linking work effectiveness with their salaries.

Expected impact

An improved organization of the key inspectorates should complement the introduction of risk-based principles of inspections. A lower number of highly skilled, professionally trained and better rewarded inspectors should warrant:

• Improved outcomes of inspections, warranting higher level of standards despite the reduction in the number of inspections; • Reduction in unoffi cial payments, as a result of an incentive system linking salary with performance.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 127 INSPECTIONS

annex attachment 6.1 Chart 6.28. INSPECTIONS COVERAGE IN 2002 – 2005 BY INSPECTING BODIES.

% RESPONDENTS

91% Tax Inspection 95% 35% Fire authority 52% Sanitary-and-epide- 30% miological Service 44% Khukumat (oblast/ 9% city/rayon) 35% Environmental 11% protection 27% 21% TajikStandart 23% 5% Prosecutor’s offi ce 9% GosGorTechNadzor (State 1% technical Surveillance) 6% . 2002 . 2005 attachment 6.2. approaches to reforms in some countries

The search for ways to improve the functions of inspections is not just a characteristic of developing countries. Many countries in more advanced stages of economic development are also looking for an optimal balance that preserves the freedom of entrepreneurs’ activity while retaining state regulation (control) and ensuring consumer safety. A review of the best examples from these inspections improvements demonstrates the availability of different approaches.

ARMENIA Development and adoption of the Law on Inspections established the minimal procedural norms and rights of SMEs (defi ning the list of inspecting bodies, time frames for carrying out inspections, basic rights of entrepreneurs, etc.). Development and adoption of the Law on Tax Authority (defi ning the mandate, rights and responsibilities of the parties). Development and adoption of the Guidelines for conducting inspections.

LATVIA The government initiated a task force with various objectives: to develop a program emphasizing the clear rights and obligations of inspectors and entrepreneurs; to conduct a wide information campaign for entrepreneurs; to establish a Coordination Council; to run trainings for inspectors, etc.

POLAND Development and adoption of the Law On Free Economic-Business Activity, where minimum procedural requirements and rights of entrepreneurs are established. The law regulates all aspects of state control and inspections of the activity of business entities and envisages the basic minimum of procedural requirements for carrying out inspections.

ROMANIA Incorporation of several inspections into a single state body of control, introduction of a single inspections register, development of the Code of Conduct and guidelines for inspectors, etc.

RUSSIA Adoption of basic norms and rights of entrepreneurs under the Law On Protection of the Rights of Legal Entities and Natural Per- sons In the course of Inspections (Surveillance) by the State Bodies of Control. This is a framework law to protect entrepreneurs from illegal inspections and to ensure minimal intrusion into economic activity of private sector).

128 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 7. TAXATION TAXATION

7. taxation

The unifi ed Tax Code, which went into effect on January 1, 2005, main findinGs was a great improvement to the Tajik tax system, but tax legislation is still under development: the Tax Code has been amended

• Patent taxation system is the preferred sys- 4 times in the last 2 years and most implementing instructions, reg- tem among individual entrepreneurs: more ulations and manuals are still to be developed. than 90% chose it. Although the overall tax burden of SMEs does not appear to be

• Retail trade tax is an ineffi cient taxation excessive, the tax system is nevertheless complicated, taking into tool detracting signifi cant resources. Re- account the economic “literacy” of SMEs. On the one hand, it tail trade tax administration is the primary hinders development of the sector, while on the other hand push- source of frequent tax audits: individual es business entities into the shadow economy. entrepreneurs were inspected 9 times per year. However retail trade tax makes up The tax system foresees simplifi ed taxation for most types of busi- only 2% of the overall tax revenues of the nesses, but none of those mechanisms are straightforward or trans- country’s budget. parent enough to warrant accountability of SMEs and tax authorities. The result is a complicated system, which hinders growth and

• Only about 50% of small and medium com- development of businesses, but which is also diffi cult and costly panies opt for the simplifi ed taxation sys- to administer. tem, as the tax burden under the simplifi ed system is not radically different from that Individual entrepreneurs can opt for an effi cient lump-sum taxa- of the standard system, and no substantial tion system (the patent), which should spare them from compli- simplifi cation is offered. cated reporting and unnecessary inspections: nevertheless, the obvious benefi ts of this system are eliminated by the necessity to

• Overall payment of taxes is burdensome for pay retail trade tax and social tax based on realized revenues small and medium companies: companies and profi ts, respectively. As a result, entrepreneurs face the high- under the simplifi ed system make 16 pay- est number of tax audits. Retail trade tax, in particular, is also in- ments per year and companies under the effi cient for the tax authorities, as it absorbs signifi cant resources standard one make at least 25 payments. while generating limited revenues.

• More than half of dehkan farmers think that Legal entities of smaller size have the choice to opt for a simplifi ed the unifi ed tax for agricultural producers revenue based taxation system, but its benefi ts are far from clear, had a positive impact on their activity, but as the implicit tax burden is not radically different from that of the 42% do not, mainly due to their inability to standard system, while tax administration does not present clear reduce the tax burden in cases of low pro- advantages. ductivity. Dehkan farmers are in a better situation: their lump-sum taxation

• “Land improvement payments” (i.e., unof- system is simpler and spares them from very frequent inspections. fi cial “voluntary” payments, not foreseen by Nevertheless, they are not offered the possibility to reduce their legislation, charged by local authorities for tax burden during unprofi table years. maintenance of nearby areas, event planning, etc.) are common: more than 50% of Tax administration procedures are the greatest burden for busi- SMEs made these payments. nesses. On the one hand they are cumbersome, as they require frequent and complicated payments. On the other hand, tax

• Assessed share of entrepreneurs hiding their compliance is most often pursued through tax inspections, which sales decreased from 39% in 2002 to 24% in leave a high degree of discretion to the tax inspectors and as such 2005. are prone to corruption. A typical example of these procedures is the so-called “chronometry measurement,” which is supposed to

130 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

determine the yearly income of businesses based on subjective evaluation of generated revenues during inspections, creating a clear confl ict of interest and leaving ample room for unoffi cial payments. Additionally, tax inspections are ineffi cient from the standpoint of public administration, as they focus on pursuing the most vulnerable businesses, rather than the “big tickets.”

In this context, entrepreneurs’ awareness of regulations is low. This, together with the complexity and non-transparency of the taxation process, appear to be the main driver of unoffi cial payments.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 131 TAXATION

7.1 review of the current tax system in tajikistan

Chart 7.1. TAX REVENUES ARE INCREASING CONSISTENTLY... It is very important that a tax system complies with the general level of economic development of a country and, as far as SME SOMONI, ‘000S 1,192,505 taxation is concerned, is consistent with entrepreneurs’ institution- 933,263 712,589 al capacity. In fact, a system with unreasonable requirements for 496,500 SMEs hinders the development of businesses. Instead of promoting 351,350 233,491 tax compliance, the complicated tax system partly or completely pushes entrepreneurs into the “shadow economy.” 2000 2001 2002 2003 2004 2005

Source: State Statistical Committee (2006). Tax revenues in Tajikistan have increased signifi cantly over the past six years (see Chart 7.1), with an average nominal growth of Chart 7.2. ...ALTHOUGH GROWTH IS SLOWING DOWN about 40% (20% in real terms).

CHANGE FROM THE PREVIOUS YEAR, IN % However, after a rapid growth from 2001 to 2003, the nominal 55% growth rate in the recent years is slowing down (see Chart 7.2). 47% 47%

34% 29% In international comparison, tax revenues are quite low in relation to offi cial GDP (see Chart 7.3). 2001 2002 2003 2004 2005

Source: State Statistical Committee (2006). While the limited fi scal pressure could be partially explained by the low level of economic development, the large contribution of Chart 7.3. TAX - TO - GDP RATIO IS LOW indirect taxation to overall revenues (see Chart 7.5 ) partially refl ects the limited revenue generating capability of the tax authori- %, 2005 ties. Tajikistan’s indirect tax share of the overall tax revenues is high 52% 51% 46% (see Chart 7.4), even in comparison with other CIS countries.

32% 31% 26% Although offi cial statistics do not provide specifi c data on SMEs’ 17% contribution to tax revenues, it is possible to estimate it by using the revenue data of the survey and offi cial statistics (see Attach- ment 7.1). Accordingly, estimated tax revenues from SMEs represent about one quarter of the overall tax revenue (23%).1 Ireland France Estonia Sweden Tajikistan Denmark Kazakhstan The 2005 Tax Code,2 is the main legislative document establish- Source: Eurostat (2007), for Tajikistan – State Statistical Committee (2006). ing a framework for taxation in Tajikistan. It has introduced several

Chart 7.4. SHARE OF INDIRECT TAXES IN TAJIKISTAN IS HIGHER Chart 7.5. INDIRECT TAXES REPRESENT MORE THAN HALF OF THE TOTAL REVENUES3 THAN THAT OF PEERS

% OF TAXES PAID %, 2005 78%

54% 56% 51% 78%

22%

Indirect taxes Direct taxes Russia Belarus Tajikistan

Uzbekistan 1 These data do not include the tax revenues generated by the workforce employed in the sector. Source: Eurostat release 41/2007-20 March 2007, for 2 Three changes have been made to the Tax Code through Laws No. 144 dd. Tajikistan – State Statistical Committee (2006). December 26 2005, No. 193 dd. July 28, 2006 and No.219 dd. December 22, 2006. 3 Excluding social tax.

132 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

BOX 7.1. STRUCTURE OF THE TAX REVENUES Chart 7.6. TAX REVENUES IN 2005 BY TAX TYPES5

IN MILLION SOMONI Social The recent rise in tax revenues is caused Indirect taxes Direct taxes tax by economic growth,4 with a large share

due to increase of VAT on imported goods 152 1193 (see Chart 7.6). Overall, the tax system relies 47 38 22 5 11 85 45 mostly on indirect taxes (more than 70% of 26 1 54 48 99 total revenues) with distributional implica- 57 506 tions of the tax burden, particularly on low income households. VAT Total Excise Others Social tax Aluminum tax Custom duties Road users’ tax Retail trade tax Cotton fi ber tax Cotton fi Unifi ed profi t tax ed profi Unifi Personal income tax Profi t tax on legal entities Profi for agricultural producers Payment for patent/ certifi cate Payment for patent/ certifi Minimal tax for enterprise profi ts Minimal tax for enterprise profi

Source: Tax Committee Data 2006 Simplied taxation on legal entities

provisions which affected the taxation of the SME sector (see Box 7.2). BOX 7.2. NEWLY INTRODUCED PROVISIONS IN THE 2005 TAX CODE AFFECTING SME TAXATION The Tajik taxation system consists of 15 national taxes and 3 local taxes (see Attachment 7.3). • Profi t tax rate on legal entities reduced from 30% to 25%; National tax rates are set by the Tax Code (with the exception • VAT threshold increased from 96,000 to of the excise6 rates which are set by the government) and their 200,000 somoni; revenues are allocated to the central budget. Rates for the local • Introduction of the new “minimum tax on taxes are set by local authorities within the framework provided revenues of enterprises,” to be paid month- in the Tax Code, and revenues contribute to the budget of local ly on the basis of resulting revenues; authorities.7 • Public transport maintenance tax abolished; At the present time, tax legislation foresees two taxation regimes • Tax rate decreased from 5% to 4% under the 7 for each type of SME, with the exclusion of dehkan farmers, who simplifi ed system; face a unique simplifi ed system: • Real estate tax now collected from all entities, not just individuals; 1. A standard regime, characterized by detailed book-keeping • Local retail tax rate reduced from up to 5% and tax administration requirements, based on actual profi ts to up to 3%. achieved by the activity;

4 Category “Others” include: State duties, Real Estate tax, Land tax, Mineral resources tax. 5 The average GDP growth amounted to 7% in 2002-2005, State Statistical Commit- tee (2006). 6 In accordance with Clause 239 TC RT, “excise (excise tax) is an indirect tax, included to the sale price of sub-excise goods.” Sub-excise products are spirits, soft and strong drinks, processed tobacco, fuel, oil and processed oil, vehicles, jewelry, gold, platinum and silver. 7 Majlis of the people’s deputies of the oblast, city and rayon.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 133 TAXATION

Chart 7.7. FIVE DIFFERENT TAXATION REGIMES EXIST 2. A simplifi ed regime, characterized by simplifi ed book-keep- FOR SMES IN TAJIKISTAN ing, tax administration and tax calculations, based either on lump-sum regimes (for individual entrepreneurs and dehkan Individual Small and medium Dehkan entrepreneurs companies farmers farmers) or a revenue based one (for small and medium companies).

Simplifi ed Simplifi ed Tax Patent system for legal entities Unifi ed Tax for As a result, according to the legal form of business activity fi ve Agricultural Producers taxation regimes can be identifi ed (see Chart 7.7). Standard Personal Profi t Tax for legal system Income Tax entities 7.2 taxation of individual entrepreneurs

Individual entrepreneurs have a choice between the standard personal income taxation system and a simplifi ed, patent based one.

7.2.1 THE STANDARD TAXATION SYSTEM

Under the standard system, individual entrepreneurs are taxed according to the personal income tax system8 applied to their realized profi ts. As such they are subject to two direct taxes:

- Personal income tax: calculated based on the size of entrepreneurs’ profi ts at a rate between 8% and 13%9;

- Social tax: calculated on the basis of entrepreneurs’ income at a rate of 20%. Declared monthly revenue is taken into account as a basis for taxation. However, the revenue can not be less than an average monthly salary of employees as defi ned by the State Statistical Committee (declared monthly salary should be no less than 83 somoni and the social tax burden is 16.6 somoni10). If an individual entrepreneur hires external workers, he has to withhold their social tax, which is calculated as follows:

- Employer has to contribute 25% of the employee’s salary; - Employee has to contribute 1% of his own salary.

Additionally, individual entrepreneurs can also be subject to other indirect taxes depending on the type of activity and the size of turnover:

- Retail trade tax: up to 3% of cash sales11; - VAT: 20% of the net value added to turnover; - Road users’ tax: calculated as 2% of expenditures (until the

8 Individual entrepreneurs operate on the basis of a Certifi cate on state registration – see Chapter 2. 9 Incomes below monthly wage are not taxed, amounts above monthly wage and up to 100 somoni are taxed at 8%, and above 100 somoni taxed at 13%. 10 State Statistical Committee (2006). 11 Tax rate is established by the local authorities within the framework set by the Tax Code, i.e., up to 3%.

134 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

end of 2006 individual entrepreneurs were not subject to this tax).12

7.2.2 THE PATENT TAXATION SYSTEM

As an alternative, an individual entrepreneur with annual revenues below 200,000 somoni ($62,500) can apply for a patent, which offers simplifi ed taxation and registration system. The cost of a patent,13 paid on a monthly or biannual basis, includes the lump-sum payment of a personal income tax - entrepreneurs are exempted from payments of personal income tax. The patent system is applicable to certain activities14 only.

Within the framework of the patent system, individual entrepre- Chart 7.8. THE OVERWHELMING MAJORITY OF neurs are subject to: INDIVIDUAL ENTREPRENEURS IS WORKING UNDER THE PATENT SYSTEM - Patent payments: the monthly cost varies according to the % OF INDIVIDUAL ENTREPRENEURS type of activity, must be paid in advance, and ranges from 7 somoni ($2.20) (dry cleaning) to 60 somoni ($18.20) (taxi driv- 92% ers);

- Social tax: calculated on the basis of entrepreneurs’ revenues at a rate of 20%. However, the declared monthly revenue can not be less than 18 minimum monthly wages per calen- 8% dar year (therefore monthly taxable amount is 30 somoni and the social tax burden is at least 6 somoni).15 Patent system Standard System

Additionally they might be subject to retail trade tax up to 3% of cash sales.

The patent system is clearly preferred by individual entrepreneurs: in fact more than 90% of them choose it over the standard system (see Chart 7.8).

Table 7.1 compares two taxation regimes. 7 7.2.3 TAX ACCOUNTING AND REPORTING ARE QUITE PROBLEMATIC FOR INDIVIDUAL ENTREPRENEURS

Reluctance to pay taxes and propensity to hide revenues is universal. If the tax system is also hard to comply with, the probability of tax evasion increases. To address this issue, a transparent, simplifi ed system of accounting and reporting should be introduced.

12 According to the amendments to the Tax Code introduced by Law. No.219 dd. December 22, 2006. 13 For more details on the differences between the patent and certifi cate see Chapter 2. 14 Only 49 activities can be conducted under the patent (see Chapter 2). 15 Resolution of the Government of the RT No. 250, dd. June 6, 2003.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 135 TAXATION

Table 7.1. Comparison of the simplifi ed (patent) and standard (certifi cate) regimes for individual entrepreneurs

patent certificate=standard • Personal income tax; • Personal income tax; • Social tax; • Social tax; • Retail trade tax. • Retail trade tax; • VAT; • Road users’ tax. Advantages Disadvantages Advantages Disadvantages

1. Fixed rate for patent eliminates the 1. Patent system hinders economic 1. Certifi cate system does not hinder 1. Necessity to document transactions need to calculate the individual growth, since exceeding VAT economic growth, since it does and submit tax returns. income tax amount. threshold leads to switch from pat- not place threshold limits on the 2. Complexity of tax amount calculation. 2. Absence of advance (current) ent to standard taxation system. revenue value. 3. Commitment to pay advance (cur- payments. 2. Foreign trade operations are not 2. Foreign trade operations are al- rent) payments. 3. Absence of commitments on dec- allowed. lowed. 4. Necessity of regular visits to tax agen- laration submission. cies. 4. High threshold to retain simplifi ed taxation system.

Business case: calculation of profi t tax for legal entities

Certifi cate Patent Formula

A Revenues 50,000 50,000

B Profi tability 12% 12%

C Profi t before taxes 6,000 6,000 C=A*B

D Tax (on income) 775 - D=C*13%

Road users’ tax burden E Patent cost - 414 30 somoni*12months*1.1516

F Net profi t 5225 5586 For certifi cate: F=C-D; for patent: F=C-E

G Tax burden (as % of profi t) 13% 7% For certifi cate: G=D/C*100%; for patent: G=E/C*100%

In accordance with the Law of the RT “On Accounting,”17 rev- BOX 7.3. MINIMUM REQUIREMENTS FOR PRIMARY enues and expense accounting of individual entrepreneurs op- ACCOUNTING DOCUMENTS: erating without forming a legal entity are regulated by the Tax Code, although the Code provides only general provisions. - name of document;

- date the document was composed; For accounting purposes, an individual entrepreneur under the - name (offi cial name of a legal entity or a full standard system must record all transactions in a Book of Reve- name of individual on behalf of which the nues and Expenses (BRE),18 have a cash register and provide sup- document is drafted and issued); porting documents to confi rm expenses (e.g., invoices, receipts - name (offi cial name of a legal entity ora - see Box 7.3). full name of individual) for whom the docu-

ment is issued; There are two signifi cant problems with keeping BREs: - taxpayer identifi cation numbers of the party

issuing the documents and of the party for - Maintaining transaction records; whom the document is issued; - Confi rmation of expenses. - description of transaction;

- amount of transaction (in cash and in-kind) Not every entrepreneur is able to keep daily records in the BRE. In- - offi cial positions of individuals responsible suffi cient training, lack of time, and lack of a systematic approach for execution of the transaction, their signatures and seals, if required. 16 Highest regional coeffi cient according to Governmental Decree No. 140, dd. March 31, 2006. Article 68, TC of RT 17 Article 5, Law “On Accounting” No. 75, dd. May 14, 1999. 18 A specialized book registering trade operations (purchases, sales).

136 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION are obstacles to the use of the BRE as an accurate refl ection of the taxable base. “...Mainly, I am buying required goods at the market, where nobody will provide the receipt or some other document.” Due to their high cost, the majority of entrepreneurs do not have - Entrepreneur, focus-group participant the money to purchase and install cash registers (and frequently, the company which sells them imposes a maintenance contract, which raises the cost further and complicates the use of the machines). In addition, in a country with unstable power supply (usually from November until April), entrepreneurs who have pur- “...We have constant problems with these cash registers, as tax employees usually force us to buy them chased cash registers are also forced to keep handwritten BREs. from a certain fi rm. Moreover, when there is a limited supply of electricity, people can not use them - no end of trouble with tax offi cials...” Additionally, while maintaining the BRE, entrepreneurs have problems confi rming their expenses, as in some cases there is no pos- - Entrepreneur, focus-group participant sibility to get supporting documents (invoices, receipts, etc.).

Individual entrepreneurs working under the standard system calculate the following taxes, based on the BRE records:

Chart 7.9. EVERY THIRD INDIVIDUAL ENTREPRENEUR CONSIDERS - Personal income tax; TAXATION PROCEDURES COMPLICATED - Social tax; - Retail trade tax. % OF INDIVIDUAL ENTREPRENEURS

In addition, performance of structured accounting calculations is in some cases beyond the capacity of individual entrepreneurs 8% 58% 28% 6% (See Box 7.4).

75% 50% 25% 0% 25% 50% The complexity of taxation is confi rmed by the survey’s fi ndings: every third individual entrepreneur considers the calculation and payment Very. Rather. Rather. Very. of taxes as complicated or very complicated (see Chart 7.9). easy easy complicated complicated

BOX 7.4. EXAMPLE OF THE MONTHLY CALCULATION OF PERSONAL INCOME TAX FOR INDIVIDUAL ENTREPRENEURS

Income Income (100-(100*X)-MMW) * PTR = A (100-(100*1%)-20) * 8% = 6.32 A 7 500 somoni 500 somoni (400-(400*1%)) * 13% = 51.48 (400-(400*X)) * PTRB = B

A+B = C 6.32 + 51.48 = 57.8

Or 11.6% of income

X – social tax rate of 1% MMW – minimum monthly wage (20 somoni)

PTRA – personal income tax rate for income under 100 somoni (8%)

PTRB – personal income tax rate for income above 100 somoni (13%) A – sum of the personal income tax from 100 somoni B – sum of the personal income tax from 400 somoni C – total personal income tax

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 137 TAXATION

The patent system is an effi cient and convenient lump-sum taxation system as it sets limited requirements on entrepreneurs, both in terms of accounting requirements as well as interactions with the tax bodies. As mentioned above, entrepreneurs only need to pay the cost of the patent, which already includes payment of personal income tax, i.e. individual entrepreneur is exempted from separate personal income tax payment. The cost of payment varies according to the type of activity and ranges from 7 somoni ($2.20) to 60 somoni ($18.20).

However, individual entrepreneurs under the patent system are subject to social tax and retail trade tax (if their activity is connected with retail trade). These requirements partly undermine the advantages of a lump-sum patent based system and contradict the rationale for patents, exposing entrepreneurs to tax inspections (see 7.2.4)

7.2.4 RETAIL TRADE TAX: CUMBERSOME ACCOUNTING AND RE- PORTING RESULTS IN UNOFFICIAL PAYMENTS

Chart 7.10. ONLY ABOUT 40% OF RETAIL TRADE TAX IS Reporting of the retail trade tax (calculated based on gross rev- COLLECTED enues from retail trade) is complex, particularly for individual en-

SOMONI, ‘000S trepreneurs. For entrepreneurs under the standard system there are two methods of calculation: 60,000

1. Based on the records in BRE (trade logbook); 2. Based on cash register receipts.

25,600 All records in the BRE should be confi rmed by invoices and receipts.

The legislation does not require entrepreneurs under the patent Retail trade tax Calculated retail trade tax (offi cial data) according to survey data system to have a cash register. Thus, it is within the authority of a tax inspector to determine and confi rm the amount of revenues Source: State Statistical Committee (2006), Survey data and profi ts to be charged for taxes. This in turn opens the door for rent-seeking relationships between entrepreneurs and inspectors.

Retail trade tax administration is also ineffi cient for the state tax authorities, as it absorbs a signifi cant amount of resources while generating only 2% of the total tax revenues.19 It is estimated that collected retail trade tax represents only about 40% of what could potentially be collected (see Chart 7.10).

19 State Statistical Committee (2006).

138 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

7.2.5 INDIVIDUAL ENTREPRENEUR: ADDITIONAL PAYMENTS ARE BUR- DENSOME

Local governments illegally charge so-called “land improve- Chart 7.11. “LAND IMPROVEMENT” PAYMENTS ARE WIDE ment” payments, requiring individual entrepreneurs to contribute SPREAD AND BECOMING MORE COMMON in cash or in-kind for maintenance of nearby areas. The share of % OF INDIVIDUAL ENTREPRENEURS individual entrepreneurs making such payments increased in 2005 with respect to 2002 (see Chart 7.11). 49% 42% Noteworthy is the fact that individual entrepreneurs under the standard system paid more than those operating under patent (see Chart 7.12). This situation could be explained by the fact, that individual entrepreneurs under the standard system have higher turnover, and as such are an easier target. Hence, they avoid confrontation with authorities and are more willing to make these payments. 2002 2005

Chart 7.12. INDIVIDUAL ENTREPRENEURS UNDER THE STANDARD SYSTEM MADE HIGH ADDITIONAL PAYMENTS

SOMONI 160

Individual entrepreneurs Individual entrepreneurs under the patent system under the standard system

annual turnover, in somoni 7,000 90,600 Chart 7.13. TAX INSPECTORATES DISTRIBUTE THEIR RESOURCES IRRATIONALLY

7.2.6 TAX INSPECTIONS OF INDIVIDUAL ENTREPRENEURS ARE INEF- AVERAGE # OF INSPECTIONS FICIENT Production of 14 1 consumer goods Individual entrepreneurs were subject to very frequent tax inspec- Wholesale trade 7 4 Tax inspection 7 tions in 2005. The lack of a risk-based management system20 in planning tax inspections (see Chart 7.13), and limited qualifi ca- Retail trade 7 1 Tax police tions and low salaries of tax offi cials lead to inappropriate and ineffi cient allocation of the inspectorats’ resources. Inspections of Medical services 5 2 individual entrepreneurs can not be at the same time justifi ed by Main tax revenue from Catering 5 2 retail trade and catering the tax receipts (only 2% of the overall tax income of the state is generated from retail budget).21 While excessive tax inspections generate unnecessary trade tax and patent and Transport 5 1 certifi cate fees. In 2005 burden for individual entrepreneurs in the form of interruption of these taxes constituted business activities and unoffi cial payments. Communication 4 0 about 2% of State budget tax revenue.

20 For more details on risk-based approach see chapter “Inspections.” 21 State Statistical Committee (2006).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 139 TAXATION

Chart 7.14. INDIVIDUAL ENTREPRENEURS MADE UNOFFICIAL Correct assessment of the taxation base is one of the main rea- PAYMENTS DURING TAX INSPECTIONS sons for conducting chronometry surveys, which try to estimate possible revenues through observations. As individual entrepre- % OF INDIVIDUAL ENTREPRENEURS INSPECTED WHO MADE UNOFFICIAL PAYMENTS neurs trading in the bazaar generally do not use cash registers

21% (see 7.2.4), chronometry surveys are also tools to estimate the vol- 19% ume of trade. However, chronometry surveys are subject to an open confl ict of interests, because the inspector wants to overes- timate the volume of revenues, while the entrepreneur wants to underestimate it. The wide range of authority given to inspectors opens the door for rent-seeking opportunities. Inspection deci- Tax inspection Tax police sions are often arbitrary and lacking an obvious rationale, making chronometry surveys a legal “extortion tool.” In fact, individual entrepreneurs are very often forced to resort to unoffi cial payments during tax inspections (see Chart 7.14).

To address this issue, it is necessary to introduce objective mechanisms to assess the tax base or to rely on lump-sum assessments.

7.3 taxation of small and medium companies

Chart 7.15. OPTION OF TAXATION DEPENDS ON REVENUE According to the standard taxation system for legal entities, small and medium companies are subject to: Road Users Tax - Profi t tax from legal entities: calculated as 25% of profi ts; Option 1 VAT VAT Standard - Minimum tax on revenues of the enterprises: calculated as 1% system 25% profi t 25% profi t 25% profi t of turnover on a monthly basis to anticipate the annual profi t

Option 2 VAT tax and to represent the minimum amount; Simplifi ed - Social tax: calculated as 25% of employees’ salaries. system 4% revenues 4% revenues

Annual gross revenue 200,000 600,000 The company can additionally be subject to

SMEs can opt for SMEs stay under All SMEs are the simplifi ed or the the previously subject to the - Retail trade tax; standard system chosen system, standard taxation plus they pay system, VAT and - VAT; VAT road users tax - Road users’ tax.

For companies with an annual gross revenue below 600,000 somoni, the legislation foresees simplifi ed revenue based taxation system (4% of gross revenues). This unifi ed tax substitutes the corporate profi t tax and the minimum tax on revenues of the enterprises and road user’s tax (see Chart 7.15).

Small and medium companies operating under the simplifi ed system are subject to a simplifi ed accounting and tax reporting system based on the Book of Gross Revenue Records, which is used for:22

22 In the case that company is VAT payer, it needs also to keep special VAT logbook.

140 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

- Calculation of revenues; - Submission of tax returns.

Payment of other taxes remains the same under both systems.23 In particular small and medium companies under both taxation systems are subject to VAT if their turnover exceeds 200,000 somoni,24 VAT records are kept in a separate journal.

According to the survey, in 2005 about 96% of small and medium Chart 7.16. ONLY 49% OF SMALL AND MEDIUM COMPANIES companies achieved gross revenue of less than 600,000 somoni WITH TURNOVER UNDER 600,000 SOMONI PREFER SIMPLIFIED TAXATION SYSTEM and as such could opt for the simplifi ed taxation system. Never- theless, only about half of them applied for the simplifi ed taxation % OF SMALL AND MEDIUM COMPANIES WITH TURNOVER UNDER 600,000 SOMONI PER YEAR system (see Chart 7.16). 51% 49%

Indeed, as shown further in the chapter, the simplifi ed system can represent a higher tax burden for SMEs, partly explaining the reasons for its unpopularity.

7.3.1 DIFFICULTIES RELATED TO TAX REPORTING AND CALCULA- TIONS Standard system Simplifi ed system

One of the differences between the two taxation systems of small and medium companies is the frequency and number of tax payments and reporting requirements related to these payments. Un- der the simplifi ed taxation system, small and medium companies make at least 16 payments per year and submit respective reports to tax bodies. Companies under the standard system submit at least 25 payments along with the necessary reports (see Chart 7.17). However, this calculation does not include retail trade tax payments, VAT and road users’ tax.

The system is so complex that tax inspectors would need professional specialization to ensure proper compliance and cover all

Chart 7.17. SMALL AND MEDIUM COMPANIES UNDER THE STANDARD SYSTEM SHOULD SUBMIT AT LEAST 25 TAX PAYMENTS 7

TYPES OF TAXES AND THE FREQUENCY OF PAYMENTS AND REPORTING Minimal Total pay- Corporate Simplifi ed tax on Social tax ments per tax tax revenues year Standard Every Once a Every 25 system month year month Every Simplifi ed Quarterly 16 month

23 With the exclusion of road users’ tax, which is applicable for companies with annual revenues above 600,000 somoni and therefore is not applicable for the simplifi ed system. 24 Legislation gives right to become a VAT payer also for companies below the VAT threshold.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 141 TAXATION

Chart 7.18. TAJIK COMPANIES MAKE MORE THAN exceptions. The current lack of transparency in the system only 55 PAYMENTS PER YEAR encourages unoffi cial payments.

AVERAGE # OF TAX PAYMENTS PER YEAR

70 The excessive number of tax payments and reports in Tajikistan 55 34 is confi rmed by other studies as well. According to “Doing Busi- 16 3 4 13 ness 2007,” companies under the standard system of taxation in Tajikistan made up to 55 tax payments25 per year and spent 200 hours dealing with tax issues (see Chart 7.18 and Chart 7.19), rank- Russia China

Norway ing 154 out of 175 countries in terms of having the most time con- Tajikistan Singapore Switzerland Kazakhstan Hong Kong, suming tax system.26

Source: PWC/WB (2006) For the purposes of book-keeping within the simplifi ed system, legislation requires a book for revenues without clearly defi ning the Chart 7.19. TIME SPENT PER YEAR TO COMPLY WITH TAX unifi ed format. This in turn leads to a situation where tax offi cials OBLIGATIONS IN TAJIKISTAN IS AMONG THE HIGHEST IN ANY can fi nd fault with every small detail during the tax payment proc- COUNTRY ess.

HOURS PER YEAR 256 224 Calculations of the corporate profi t tax and minimum tax on en-

156 terprise revenues are complicated. Small and medium compa-

87 nies have to make monthly advance payments of the minimum 68 80 30 tax on enterprise revenues of 1% of gross revenue of the accounting month. In the case where monthly advance payments of minimum revenue tax are less than the monthly corporate profi t tax Russia China instalments multiplied by 1.1 for the previous year, the difference Norway Tajikistan Singapore Switzerland Kazakhstan should be paid as an advance payment for current payment of Hong Kong, corporate profi t tax.27 At the end of the accounting year the en- Source: PWC/WB (2006) trepreneurs calculate the actual amount of the minimum tax on enterprise revenues tax by calculating the difference between the corporate profi t tax due and the amount of 1% of revenue Chart 7.20. SMALL AND MEDIUM COMPANIES UNDER THE paid throughout the year. If the latter is higher than the corpo- STANDARD SYSTEM HAVE MORE DIFFICULTIES WITH TAX PAYMENTS rate profi t tax amount, there is no further payment required. If it is AND CALCULATIONS lower, the entrepreneur has to pay the difference.28

% OF RESPONDENTS CONSIDERING TAXATION COMPLICATED OR VERY COMPLICATED The complexity of tax calculations and payments is confi rmed by 43% the survey data. It is remarkable that every third company under 35% the simplifi ed taxation system considers payments and calculation of taxes to be complicated or very complicated (see Chart 7.20).

According to FIAS report,29 taxpayers spent an equivalent of about 20% of the taxes that they paid on record keeping, tax fi ling, and Companies under Companies under simplifi ed system standard system other tax related documents, as well as on attorney and account-

25 The difference between the two fi gures is explained by the fact that “Doing Busi- ness” also includes the Value added tax, Road tax, Social tax, Corporate income tax, Property tax, Vehicle tax, Interest tax and Land tax. 26 IFC/WB (2006). 27 Tax Code, Article 198. 28 The sum of monthly tax payment = 1% from gross revenue + (1/12 Profi t from Last Year*1.1 - 1% from GR of the current year). 29 Fias (2006).

142 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION ant fees. It should also be mentioned that there is no developed tax consultancy market in Tajikistan, and only larger companies “...Consultations of tax experts are expensive, my small company can not afford them…” can afford to hire tax consultants. Business associations could play a role in fi lling the gap by connecting entrepreneurs (members of - Entrepreneur, focus-group participant associations) and tax consultants: for example, tax consultation could be provided by the business association and the costs of consultations could be recovered by membership fees.

Taxpayers have a choice to fi le taxes:

- personally; - by registered mail with notifi cation; - electronically, in cases prescribed by the state authorities.

In practice, entrepreneurs deliver tax reports personally and have two options: “...I’d better pay my tax supervisor to complete submission of all tax returns rather than wait for a long time in queue, since there is no guarantee that 1. To spend a long time in queue: the majority of taxpayers usu- a tax offi cial will not fi nd some fault with my documents…” ally postpone fi ling taxes until the deadline, resulting in excessive overload of tax departments; - Entrepreneur, focus-group participant 2. Preparation, pick-up and acceptance of the report is done by a tax offi cial in return for certain remuneration.

Overall, prolonged and intensive contact between offi cials and entrepreneurs often results in informal relationships that result in rent seeking.

7.3.2 SMALL AND MEDIUM COMPANIES: THE SIMPLIFIED SYSTEM AND SOCIAL TAX IMPOSE A HEAVY BURDEN

The number of companies that opt for the standard system (about 50%) is not surprising considering that a comparison between the standard and simplifi ed systems shows that the tax burden under the simplifi ed taxation system is not radically different from that under the standard system, while no substantial simplifi cation is offered (see Table 7.2). 7

To some extent, we could expect the advantage of the simplifi ed system to be based on simpler requirements. Unfortunately, as our analysis shows, this is not the case, and the difference between the two systems does not provide an incentive to choose the simplifi ed one.

Table 7.3 also shows that a simplifi ed system based purely on rev-

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 143 TAXATION

Table 7.2. Taxation of small and medium companies under simplifi ed and standard systems Business case: calculation of profi t tax for legal entities

Company I Company II Formula

A Revenues 100,000 200,000

B Profi tability 16% 10%

Profi t C before taxes 16,000 20,000 C=A*B

D Profi t tax (on income) 4,000 8,000 D=A*4%

Road users’ tax burden E Net profi t 12,000 12,000 E=C-D

Tax burden (as % of profi t F 25% 40% F=D/C*100%

Business case: comparison of the tax burden between standard and simplifi ed systems of taxation

as % of profi t Company I Company II 40% Depending on profi tability level, under the 25% simplifi ed taxation system a company has an 25% 25% equal or even greater tax burden than under the standard system.

Simplifi ed system I Standard system Simplifi ed system II Standard system

Chart 7.21. COMPANIES WITH LOWER TURNOVER CHOOSE enues penalizes companies for growth, as it provides an incen- SIMPLIFIED TAXATION tive for entrepreneurs to remain small, but highly profi table, rather than expanding into larger companies with lower margins. This is AVERAGE TURNOVER, ‘000S SOMONI 120 also confi rmed by fi ndings of the survey: annual turnover of the companies under the simplifi ed system is signifi cantly lower than turnover of companies operating under the standard system (see 54 Chart 7.21).

Social tax is an additional burden for small and medium companies. The majority of entrepreneurs considers the social tax rate

Simplifi ed Standard (25% of wages) too high. The high rate of this tax increases companies’ labor costs, hindering the creation of additional jobs.30 The high tax also results in companies’ tax evasion and black labor market. Taking into account the qualitative package of social “...Social security payments are so high and do not allow me to introduce additional incentives to keep services provided in Tajikistan, the government could consider re- my workers.” ducing the level of social tax.

- Owner of a small company, focus-group participant 7.3.3 ADDITIONAL PAYMENTS ARE HIGH FOR SMALL AND MEDIUM COMPANIES

As in the case of individual entrepreneurs, small and medium companies (as well as larger companies) are subject to “land improvement” payments: almost 60% of companies reported making these payments (see Chart 7.22).

30 For more details see PCW/WB (2006).

144 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

7.3.4 TAX INSPECTIONS FOR SMALL AND MEDIUM COMPANIES ARE Chart 7.22. IN 2005, COMPANIES UNDER THE STANDARD NOT ALWAYS JUSTIFIED SYSTEM PAID MORE FOR “LAND IMPROVEMENT” THAN THOSE UNDER THE SIMPLIFIED SYSTEM

Small and medium companies were inspected on average al- SOMONI most 3 times by tax authorities in 2005. Also in this case Tax police 393 conducted inspections, although according to Article 128 of the 289 Tax Code, the tax police has the right to participate in the inspection only when it is conducted by tax inspectors.

The percentage of inspections concluded with unoffi cial payments testifi es to the ineffi ciency of the system (see Chart 7.23). Simplifi ed Standard

This situation can be improved by:

- Increasing awareness among entrepreneurs of main ac- “...Why should I keep records and pay all the taxes, counting principles; if I can pay less directly to the inspector.....” - Simplifying tax calculation and taxation procedures; - Entrepreneur, focus-group participant - Entrepreneurs taking advantage of the appeals mechanism for the tax authorities’ decisions.

Application of risk management principle in planning and conducting inspections according to the new amendments to the Tax Code (see Box 7.7) should bring signifi cant results in targeting entrepreneurs violating tax regulations. In addition, pre-selection Chart 7.23. UNOFFICIAL PAYMENTS ARE COM- of risky businesses would allow to reduce the waste of resources of MON DURING INSPECTIONS the tax inspectorate and increase its effectiveness. % OF SMALL AND MEDIUM COMPANIES

33% The next survey will be able to measure the results of the under- 29% taken efforts.

7.4 taxation of dehkan farmers

In 2005 the new Tax Code introduced a uniform tax for agricultural Tax inspection Tax police producers31 which includes all tax payments. The uniform tax is a lump-sum tax based on the plot size and type of crop which does not depend on profi tability of agricultural producers’ activities. As 7 such, it simplifi es tax calculations, as well as the collection proc- BOX 7.5. TAX INSPECTIONS AND THEIR ess. CONSEQUENCES

Dehkan farmers are subject to social insurance and members of “... In 2006, tax inspections were conducted a dehkan farm pay social tax like individual entrepreneurs who among 5,776 of the country’s companies, and operate based on the patent (at least 6 somoni). However, the 4,474 (77.5%) of them were found guilty of tax head of a dehkan farm pays social tax as a certifi cate holder (at violations. A total of 13,9 mln. somoni was issued least 17 somoni). In cases where dehkan farms hire external work- in fi nes ...” ers, social tax is calculated as follows: Asia Plus, January 31, 2007

31 Legal entities utilizing land as the main production mean also pay this uniform tax for agricultural manufacturer’s production.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 145 TAXATION

- 25% on employees’ salaries is the share of the employer; BOX 7.6. EXTRACT FROM THE TAX CODE - 1% from salaries of workers.

“In case of non-agricultural activity by agricul- Agricultural producers, taxed with the uniform tax, are exempt tural producers, taxation is conducted accord- from paying other taxes, such as: ing to the Tax Code. The incomes and costs of agricultural and non-agricultural activity consid- • Taxes paid under the simplifi ed system; ered separately.” • Individual income tax; Article 306, TC of RT • Corporate profi ts tax; • VAT; • Land tax; • Minimal tax on enterprise revenues; • Road users’ tax.

If dekhan farmers use their grown product for further processing, they are taxed under the standard regime (see Box 7.6).

7.4.1 DEHKAN FARMERS: LUMP-SUM TAXATION AS A POSITIVE SYS- TEM

Chart 7.24. MORE THEN HALF OF DEHKAN FARMERS NOTED The introduction of the unifi ed tax for agricultural producers an- POSITIVE EFFECTS FROM THE UNIFIED TAX FOR AGRICULTURAL ticipated simpler accounting procedures and a lighter tax burden PRODUCERS for dehkan farmers. In fact, more than 55% of surveyed dehkan % OF DEHKAN FARMERS farmers have noted a positive change from its introduction (see Chart 7.24). Nevertheless, a signifi cant amount of respondents 55.3% was not satisfi ed by the new system, noting the necessity to pay 42.1% taxes independent of generated income, without the possibility to prove the “worst case scenarios.”

Lump-sum taxation is benefi cial to dehkan farmers, given their 2.6% low tax literacy. Nevertheless, in cases of poor productivity, dehkan farmers are not exempt from tax obligations. As taxation is Positive Negative No infl uence independent from productivity, it would be advisable to create a mechanism under which dehkan farmers would be able to reduce their tax burden in cases of low profi tability (i.e., by introducing the possibility to prove low income). Chart 7.25. DEHKAN FARMERS WERE INSPECTED AT LEAST 1.6 TIMES In addition, it should be noted that the unifi ed tax for agricultural

AVERAGE # OF INSPECTIONS PER YEAR producers is applied only to their activity that relates to agricultural production: this system is problematic, as it does not stimu- 8.3 late development of agricultural products processing, especially in the case of limited size farms. If a dehkan farmer processes his own production, he must pay all taxes in accordance with the

2.8 standard tax system, rather than the unifi ed tax system. 1.6 7.4.2 TAX INSPECTIONS OF DEHKAN FARMS ARE LESS FREQUENT

Individual Small and medium Dehkan farmers entrepreneurs companies According to the fi ndings of the survey, dehkan farms were inspected less than twice a year, a frequency which is lower than

146 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

BOX 7.7. AMENDMENTS TO THE TAX CODE AFFECTING INSPECTIONS

In the framework of inspections reform, amendments to the Tax Code were adopted on July 28, 2006, regulating tax inspections (see section 6.1). Main changes (see Table 7.3) cover: • Frequency of inspections: - Frequency of document inspections depends on the volume of revenues; - Inspection raids are conducted once a year. • Duration of inspections: - Duration of document inspections varies depending on the revenues volume; - Duration of inspection raids for each taxpayer can not exceed 4 hours. • Risk management principle foresees selection based on past infringement records and taxpayer revenue volume; • Entrepreneurs’ access to taxation related information; • Legal justifi cation for tax inspections; • Detailed justifi cation of chronometry surveys; • First inspection to be conducted 30 months from the date of the state registration; • Limitation on repeated tax inspections. Table 7.3. Main changes to tax inspections procedures

Type of Inspection Inspection subject Frequency Duration Risk management principles inspection sub-type

Document Complex Tax obligation fulfi lment (all - Not more than once every 2 - General duration is 30 days; - Selection based on past taxes) years, if revenues of the business - 10 days for SME under simpli- infringement records; are less than 15 million somoni fi ed system; - Selection mechanisms Thematic Tax obligation fulfi lment (spe- per year; - Up to 60 days if revenues of based on the revenue vol- cifi c taxes) - Not less than once per year, the business exceed 15 million ume of businesses. if revenues of the business are somoni per year. Counter Inspection of third persons above 15 million somoni per year - First inspection for newly established businesses 30 months after start of activity.

Raid - Registration of taxpayer; - No more than once per year - Each raid inspection of a - Correct use of cash registers separate taxpayer does not - Observance of production exceed 4 hours, and total standards, packaging, stor- duration of each raid inspec- age and sale of goods with tion does not exceed one excise. working day. any other typology of SMEs (See Chart 7.25). This evidence, combined with the sharp decline in tax evasion, proves that a trans- “...The unifi ed tax is profi table for large farmers, as they have suffi cient resources to react to quickly parent and simple system is benefi cial not only for SMEs, but also changing business conditions...” for the government. - Entrepreneur, focus-group participant 7 7.5 tax evasion: a way to escape the system

A high tax burden and the complexity of taxation accounting Chart 7.26. 1 OUT OF 4 SMES MADE AN EFFORT TO HIDE and inspections force entrepreneurs to search for alternative solu- REVENUES tions, such as tax evasion. % OF RESPONDENTS

Respondents believe that every fourth business (24%) hides rev- 39% enues from taxation (see Chart 7.26). This fi gure has dropped sig- 24% nifi cantly from 2002, possibly due to:

• Introduction of a unifi ed tax for agricultural producers, which simplifi es tax administration and restricts tax evasion; • Entrepreneurs being less prone to revenue non-disclosure as a 2002 2005

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 147 TAXATION

result of increased tax authority control; • The fact that experienced businesses consider paying taxes cheaper than making unoffi cial payments.

Chart 7.27. 28% OF INDIVIDUAL ENTREPRENEURS MADE AN Individual entrepreneurs seem to hide revenues more often than EFFORT TO CONCEAL REVENUES any other type of business (see Chart 7.27). On the one hand, in-

% OF RESPONDENTS dividual entrepreneurs consider retail tax, the largest part of their tax, as burdensome, and try to underreport the sales volumes. On 28% 26% the other hand, their low accounting literacy prevents them from proper bookkeeping.

12% Additionally, every fourth small and medium company is thought to conceal revenues in an effort to ease their tax burden.

It must be pointed out that, among dehkan farmers who are sub- Individual Small and medium Dehkan farmers ject to a simple lump-sum system independent from their profi t- entrepreneurs companies ability, the share of entrepreneurs hiding revenues is much lower.

7.6 taxation system hinders Business Growth

Chart 7.28. TAX BURDEN AS % OF PROFIT The current taxation system is one of the barriers hindering the

% OF PROFIT 40%32 development of business, because the tax liability, and consequently the tax burden of SMEs, increases as the business grows (see Chart 7.28). 25% There is an imbalance between the growing number of SMEs 20% and the relatively insignifi cant growth of their revenues (i.e., the 13% number of individual entrepreneurs is increasing, while few of 7%32 them make the switch to become larger businesses), which is due 5% to an irrational taxation system that does not stimulate revenue growth. A typical example of a tax that hinders business growth is the road users’ tax (see Table 7.4), which is calculated based on costs, and as a result, larger scale companies with low profi tabil-

neurs (Patent) ity bear a higher tax burden than smaller companies with higher

neurs (Certifi cate) neurs (Certifi profi tability. Small and medium Small and medium Individual entrepre- Individual entrepre- companies (Standard) companies (Simplifi ed) companies (Simplifi As a result of the analysis performed, it is important to draw the implications of the SME taxation system on the different types of companies. Taxation is the most pervasive administrative procedure as well as the most burdensome, both in terms of direct costs (tax burden) and indirect costs (tax administration). By comparing the different implicit tax rates for each typology of businesses, a clear message emerges. The current taxation system is skewed toward mid-size businesses. It should also be noted, that while the Tajik taxation system presents highly differentiated rates, the most recent trend in taxation in most CIS countries is toward a fl at tax rate, considerably lower than the one in Tajikistan (see Box 7.8).

32 In the case of simplifi ed systems, implicit tax burden is calculated based on survey data.

148 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

Table 7.4. Differences in the road users’ tax before and after introducing amendments into Tax Code

Road users’ tax: main provisions Before amendments After amendments (before January 1, 2007) (after January 1, 2007) All entrepreneurs with gross All SMEs Tax payers revenues above 600,000 (except patent holders) somoni per year Delivery of goods Tax base Total expenses (work, services)

Road users’ tax: main provisions

Company X Company Y According to amendments in the Tax Code, road users’ Revenues 700.000 2.000.000 tax is charged based on the total amount of expenses of the enterprise (2% of total Expenses 300.000 1.600.000 expenses). Thus, companies with higher expenses bear a Profi t 400.000 400.000 before taxes higher burden. This situation prevents companies from in- Somoni vesting. The previous provision with gross income excluding 32.000 Road users’ VAT and retail trade tax as tax burden tax base could have generated more tax revenues. 6.000

Company X Company Y

BOX 7.8. THE CASE FOR FLAT TAXES33

In 1994, Estonia became the fi rst country in Europe to introduce a so-called “fl at Table 7.5. Flat tax rates tax“, replacing three tax rates on personal income, and another on corporate on personal income, % profi ts, with one uniform rate of 26%. In 2001, Russia too moved to a fl at tax on per- Country Rate Year in- sonal income. Since 2001, Russia has imposed a single 13% tax rate on all personal troduced income. In the year before the fl at tax, Russians in the two higher tax brackets re- Estonia 26 1994 ported only 52% of their income to the taxman. In 2001, after falling into the new, Lithuania 33 1994 all-encompassing 13% bracket, these same households reported 68%. Latvia 25 1995 7 Russia 13 2001 The fl at tax sharpens the incentive to work. A progressive income tax deters extra Serbia 14 2003 effort from society’s best-paid (and therefore most productive) members. Russia’s Ukraine 13 2004 experience, however, suggests that the principal virtue of the fl at tax is its simplicity. Slovakia 19 2004 The government’s revenues did not surge because Russians suddenly squared their Georgia 12 2005 shoulders and straightened their backs. Rather, Russia’s tax system became easier Romania 16 2005 to administer and easier to comply with. Macedonia 10 2006

33 From The Economist print edition, dd. April 14, 2005

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 149 TAXATION

recommendations

1. Further simplify the taxation system for individual entrepreneurs working under patents, by introducing a comprehensive lump-sum system: 1.1 Consolidating into the patent costs both retail tax and social tax payments; 1.2 Revising the patent payments on a regular basis by consultations with others stakeholders, e.g., within a framework of an annual workshop.

Expected impact

By consolidating all taxes to be paid by individual entrepreneurs into a patent, the benefi ts would be two-fold: • On the entrepreneurs’ side, the amount of payment would be clearly defi ned and would eliminate the costs of unneeded inspections and unoffi cial payments. Increased certainty would in turn increase the forecast ca- pacities of entrepreneurs and improve their business management opportunities. Additionally, simple payment would increase the number of patent holders through increase in registration; • On the government side, it would drastically reduce the number of inspectors, as tax audits could be simply performed by verifi cation of a valid patent. Fewer inspections would allow the tax authorities to redirect their resources, resulting in more value added work. Additionally, lump sum patent payments would facilitate forecasting tax revenues.

2. Introduce systematic and simplifi ed tax accounting for: • Individual entrepreneurs working under certifi cate; • Small and medium companies taxable under simplifi ed system.

This could be achieved by: • Introducing unifi ed tax accounting and reporting which would allow to submit one single tax return; • Book-keeping for purposes of taxation, based on simplifi ed unifi ed Book of Revenues; • Clearly defi ning tax accounting procedures in Tax Code.

Expected impact

The introduced measures will increase the attractiveness of these systems, increasing the number of tax payers and consequently the amount of tax revenues going into the state budget. In addition, this would have a positive impact on employment level in the country.

3. Strengthen the advantages of simplifi ed taxation for legal entities, by either streamlining tax administration procedures (e.g., quarterly payment and unifi ed reporting for all taxes) or considering a tax rate reduction. As it is now, the simplifi ed tax is neither simple, nor economically effi cient;

Expected impact

Further strengthening the advantages of simplifi ed taxation for legal entities, by either streamlining tax administration procedures (e.g., quarterly payments and unifi ed reporting for all taxes) or consider a reduction of the tax rate. Indeed, as it is now, the simplifi ed tax is neither really simple, nor economically convenient.

150 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

4. Consider the possibility to eliminate taxes which represent an obstacle to business growth. A typical example of these taxes is the newly reformed road users’ tax, which is calculated based on costs, implicitly representing a disincentive for companies which invest and generate long-term growth.

Expected impact

Abolishing these kinds of taxes would create additional incentive for companies to invest in business development and reduce the drive towards “shadowing” of revenues and expenses.

5. Further improve the taxation regime for dehkan farmers by introducing the option to reduce the tax burden for smaller sized farms in cases of low profi tability, which should be proved by the farmer and subject to a tax audit. The decision to reduce the tax burden should be made by a special commission of representatives from tax authorities, local governments, and local self-governments, in order to prevent unfair decision-making and corruption.

Expected impact

Introduction of this measure would reduce the tax and debt burden of the dehkan farms. Elimination of unnecessary pressure would motivate farmers to improve their performance.

6. Evaluate the opportunity to reduce social tax payments which represent a disincentive to hire employees and push labor into the shadow market.34

Expected Impact

Reduced social tax rate would reduce the labour cost and increase employment level by creating additional jobs.

7. Streamline the tax administration. This can be achieved by: 7.1 Simplifying tax payments by consolidating them (i.e., providing the option to pay more frequently on voluntary basis) and wherever possible reduce the number of tax forms; 7.2 Simplifying the taxation forms, reducing the number of pages and redundant information; 7.3 Introducing risk management principles in planning and conducting inspections, focusing the verifi cations on the businesses where higher returns are expected; 7 7.4 Reducing the scope for tax inspections and clearly limit the arbitrary powers of tax inspectors;

Expected Impact

Effective tax administration system would require: • Reduction of corruption; • Redirecting government resources from unnecessary tax procedures to more effi cient use; • Reduced costs to businesses due to consolidated number of necessary payments, as well as cost and time of interaction with tax offi cials.

34 For more details see FIAS (2006).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 151 TAXATION

8. Abolish the practice of charging additional payments not foreseen by the legislation (“land improvement payments”). This can be achieved by: 8.1 Providing an opportunity to report illegal payments issues to higher authorities; 8.2 Declaring “land improvement payments“ illegal and sanctioning offi cials that require them.

Expected Impact

Abolishing illegal payments would lead to: • An increase in profi tability of entrepreneurs, resulting in increased tax revenues to the state; • Reduction of corruption, resulting in an improved business environment.

9. Provide tax consultation within business associations to allow access to tax consultations for smaller member-businesses.

Expected impact

Access to tax and accounting consultations would facilitate tax fi ling and accounting of smaller sized businesses.

10. Increase the legal awareness of entrepreneurs through state and non-governmental structures to improve entrepreneurs’ access to information on taxation.

Expected Impact

The benefi ts of increasing the legal awareness of entrepreneurs would include: • Reduction of unoffi cial payments; • Reduction of time required to deal with tax payment and tax inspection procedures, positively affecting entrepreneurs’ profi ts and state tax revenues.

152 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

annexes 8. Abolish the practice of charging additional payments not foreseen by the legislation (“land improvement payments”). This can be achieved by: attachment 7.1. calculation of smes’ tax revenues 8.1 Providing an opportunity to report illegal payments issues to higher authorities; Individual entre- Small and medium 8.2 Declaring “land improvement payments“ illegal and sanctioning offi cials that require them. Dehkan farmers Source Formula preneurs companies Amount of taxes paid per one busi- A 1,161 17,561 2,026 Survey data Expected Impact ness in 2005, somoni State Statistical B Number of business 88,589 6,974 25,877 Committee Abolishing illegal payments would lead to: Estimated tax revenues from SMEs, C 102,851,829 122,470,414 52,426,802 Estimation A*B • An increase in profi tability of entrepreneurs, resulting in increased tax revenues to the state; somoni • Reduction of corruption, resulting in an improved business environment. D As % of total tax revenues 8.6 10.3 4.4 Estimation C/E*100% State Statistical E Total tax receipts in the country 1,194,000,000 9. Provide tax consultation within business associations to allow access to tax consultations for smaller member-busi- Committee nesses. attachment 7.2. taxes paid by smes Expected impact taxes taxpayers object of taxation tax rate tax frequency Access to tax and accounting consultations would facilitate tax fi ling and accounting of smaller sized businesses. Patent Individuals Fixed sum Beginning of the month 8% - if taxable income is less Individual income tax/for than 100 somoni; Individuals Income End of month 10. Increase the legal awareness of entrepreneurs through state and non-governmental structures to improve entre- certifi cate holders 13% - if taxable income is over 100 somoni preneurs’ access to information on taxation. Amount paid to physical Legal entities 25% End of month Social tax persons Expected Impact Lndividual entrepreneurs Revenue 20% End of month Legal entities and individu- Retail trade tax Retail sale of goods Up to 3% End of month The benefi ts of increasing the legal awareness of entrepreneurs would include: als • Reduction of unoffi cial payments; Legal entities and indi- Road users tax viduals, whose revenues Amount of expenditures 2% End of month • Reduction of time required to deal with tax payment and tax inspection procedures, positively affecting entre- exceed 600,000 somoni preneurs’ profi ts and state tax revenues. Unifi ed tax for agricultural Legal entities and dehkan From 4 to 164 somoni per Anticipated on Land area products producers farms hectare35 quarterly basis36 Legal entities, whose Tax paid under the simpli- revenues exceed 600,000 Gross revenue 4% End of quarter fi ed system somoni Minimum tax on profi t of Advance payment every Legal entities Gross revenue 1% the enterprises month Profi t tax from legal entities Legal entities Profi t 25% End of year Legal entities and individu- Taxable operations and Value added tax 20% End of month als import Legal entities and individu- Taxable operations with Excise als, manufacturing excis- End of month 7 excisable goods able goods

35 This provision has come into force after adopting changes into Tax Code, dd. December 22, 2006. Before introducing amendments, the object of the taxation was gross revenue. 36 Should be paid not later than February 15, May 15, August 15, November 15.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 153 TAXATION

attachment 7.3. current taxes of tajikistan

National taxes: Local taxes: 1) individual income tax; 1) real estate tax; 2) profi t tax from legal entities; 2) tax from owners of transport means 3) value added tax; 3) retail trade tax. 4) excise; 5) social tax; 6) land tax; 7) sub-soil users tax; 8) road users tax; 9) tax paid under the simplifi ed system; 10) unifi ed tax for agricultural products users; 11) custom duty or other custom payments; 12) state duty; 13) sales tax (cotton-fi ber and premium aluminum); 14) minimum tax on profi t of the enterprises; 15) goods processing tax.

According to the Tax Code of Tajikistan, the taxes can be classifi ed as follows: 1. Depending on the entity, imposed by taxation are: - taxes paid by the legal entities (tax on legal entities income); - taxes paid by the individuals (income-tax); - combined taxes (tax from the sale of ginned cotton and primary aluminium, tax for the real estate).

2. Depending on formation mechanism, the taxes are divided into: - Direct, i.e., if the fi nal payer is the owner of the taxed property or recipient of the taxed income (income tax from the individuals, tax for the legal entities income); - Indirect, i.e., If the fi nal payer is the goods consumer (excise, VAT).

3. Depending on the way tax revenues are allocated to budgets, the taxes are divided into: - 15 state; - 3 local.

attachment 7.4. social tax rates social tax rates

Individual Entrepreneurs Small and medium companies Dehkan farmers

For hired personnel

For themselves 20% For hired personnel For themselves 20% For hired personal 25% 1% 38 from total sum from employees 25%37 1% 25% 1% of employees’ salary paid by from total sum from employees from total sum from employees salary paid by employee of employees’ salary paid by of employees’ salary paid by employer salary paid by employee salary paid by employee employer employer

37 A sum total of employees’ salaries subject to 25% tax, paid by employer. 38 Each employee’s salary subject to 1% tax, withheld and paid by employer.

154 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 8. FOREIGN TRADE AND TECHNICAL REGULATION FOREIGN TRADE AND TECHNICAL REGULATION

8. foreiGn trade and technical reGulation

The volume of foreign trade in Tajikistan has been increasing every main findinGs year and reached 8.1 billion somoni ($2.5 billion) in 2005, equal to 116% of GDP. It was accompanied by an increased defi cit in the • Almost 80% of entrepreneurs consider balance of trade. While import is a necessity for a small economy foreign trade procedures complicated or lacking industrial capabilities, export should represent the nec- very complicated. essary complement to avoid macroeconomic imbalances. The role of SMEs in foreign trade has decreased dramatically over the • The percentage of SMEs participating in observed period: SMEs have almost withdrawn from export, and exports dropped dramatically from 8% in halved their participation in import. 2002 to 0.4% in 2005. Complicated and time-consuming import/export procedures are • The number of entrepreneurs involved in a burden for entrepreneurs, further worsening Tajikistan’s already import operations decreased consider- low position in world trade due to its unfavorable geographic lo- ably, from 19% in 2002 to 11% in 2005. cation. Foreign trade also suffers from a lack of institutional support to develop links with the global markets, as well as from outdated • Only larger companies are engaged in standardization and certifi cation procedures. These represent foreign trade. additional obstacles to foreign goods reaching the Tajik market and for Tajik goods to be sold abroad. It would be very important • Almost 40% of SMEs consider the certifi - to address the effectiveness of these procedures in the WTO ac- cation procedures complicated or very cession process of Tajikistan. complicated. Technical regulation and certifi cation is aimed at protecting con- • 18% of SMEs were required to certify their sumers’ health and guaranteeing basic safety levels, and is very goods. In particular: closely linked to foreign trade. In particular the need to certify - 20% of individual entrepreneurs; almost all the goods entering the country, even if subject to inter- - 36% of small and medium companies; nationally recognized standards, adds to import costs, while the - 5% of dehkan farmers. misalignment of Tajik standards with international ones makes export almost impossible for companies lacking the scale to engage • 36% of SMEs used unoffi cial ways to solve in complex procedures. Nevertheless, certifi cation and standardi- certifi cation issues. zation also affects businesses operating in the local markets: extensive coverage, repetitive procedures and the absence of a • Small and medium companies spend one risk-based approach to the application of technical standards month obtaining a certifi cate. make the existing regulations a very complicated and ineffi cient procedure.

156 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

8.1 tajikistan foreiGn trade: the context

In the past decade, world trade has grown more than twice as Chart 8.1. TRADE DEFICIT AS A SHARE fast as world GDP. Countries which are able to create an envi- OF GDP IS INCREASING ronment conducive to direct foreign investment and are able to 2002 2003 2004 2005 trade most effectively can attain the highest levels of growth and development. While both developed and developing economies have increased trade through lowered tariffs, nevertheless open -7% -7% trade regimes are only effective when there are complementary -11% policies in place: removal of non-tariff barriers and implementation -14% of facilitation and customs reform programs are equally important objectives for promoting economic development.1 The Republic Source: State Statistical Committee (2006) of Tajikistan, given its natural size constraints, lack of natural resources and geographical location also must address the effectiveness and effi ciency of its foreign trade operations in order to facilitate necessary imports and foster export growth. Tajikistan is trying to join the WTO, and this membership is expected to further foster the development of foreign trade.

The trade balance of the country is increasingly negative (see Table 8.1). As the Tajik economy grows, demand for goods unavailable on the local market will grow in parallel, and so will the imports. On the other hand, a certain export potential, which is needed to avoid macroeconomic imbalance, has yet to be fully exploited.

TABLE 8.1. TRADE BALANCE DEVELOPMENT IN PERIOD 2002-2005 2002 2003 2004 2005 Import, million somoni 2,469 3,036 3,747 4,565 ($823) ($1,026) ($1,232) ($1,431) Export, million somoni 2,097 2,682 3,335 3,535 ($699) ($906) ($1,097) ($1,108) Trade balance, million somoni -371 -354 -412 -1,030 (-$124) (-$120) (-$135) (-$323)

Source: NBT (2006) Chart 8.2. RAW MATERIALS PREVAIL IN EXPORT STRUC- Trade balance defi cit as a share of GDP has remarkably increased TURE OF THE GOODS IN TAJIKISTAN in 2005 (see Chart 8.1).

16% Cotton fi ber The export structure of Tajikistan is characterized by three major 62% Primary observations: aluminum 6% Electricity 1. raw materials orientation (see Chart 8.2): Tajikistan’s industrial 8 sector is underdeveloped and as such cannot fully exploit the availability of raw materials. As a consequence, exports are 16% mostly focused on raw materials (more than 84% of the total) Other and it is not value adding; 2. Low diversiﬁ cation: electricity, cotton and aluminum consti- tute the bulk of exports, exposing the economy to the risks of

1 For more details see World Bank (2006b). Source: NBT (2006)

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 157 FOREIGN TRADE AND TECHNICAL REGULATION

fl uctuating prices; BOX 8.1. RAW MATERIALS ORIENTATION OF EX- 3. concentration among few large scale companies: specifi c PORT structure of export does not facilitate the involvement of Although in the last years several production smaller companies (i.e. electricity or aluminum are by their facilities for cotton processing were created, al- nature precluded to SMEs), and cotton export is still heavily most 90% of cotton is still exported without further concentrated among a few players and focused on a large processing. In 2005 cotton export consisted of: scale export of raw materials (see Box 8.1). 1) cotton fi ber ($148 million); 2) cotton yarn ($7.5 million); 3) textile ($11 million). SMEs could support exports diversifi cation as well as increase the share of other exports: their potential contribution is considered Source: State Statistical Committee (2006) benefi cial also from the government viewpoint (seeBox 8.2).

BOX 8.2. EXPORT DEVELOPMENT STRATEGY OF As a landlocked country with limited natural resources and lim- FRUIT AND VEGETABLE PROCESSING SECTOR FOR ited size, Tajikistan is forced to import goods unavailable on the 2006-20102 domestic market. The structure of imports clearly refl ects this: food products (e.g., sugar, fl our, wheat), car parts, and timber are im- To better address the diversifi cation of exports, portant commodities needed by the Tajik market. In this context, the government of Tajikistan elaborated a strat- import facilitation for SMEs will be essential in order to avoid: egy to develop the export potential of the fruit • Product shortages on the local market; and vegetable processing sector. Since domes- • Artifi cial price increases of imported goods with negative im- tic demand for fruits and vegetables does not pact on economic growth. exceed 10-15% of the produced volume, it is

necessary to market the remaining 85-90% to ex- 8.2 role of smeS in foreiGn trade operations ternal markets. Development of the processing industry should then increase the export poten- Participation of small and medium businesses in foreign trade tial of the sector from $20 million to $45 million by should be fostered, since on the export side it might facilitate the 2010. This in turn could contribute to about 2.8% transformation of the export structure from raw materials to proc- of GDP and 6% of export volumes of the country. essed goods (see Chart 8.3), while on the import side it might re- The strategy consists of two stages: duce entry constraints into the Tajik markets of goods otherwise • stage i is a short-term strategy that includes unavailable, or available in limited quantity/quality. For example, measures addressing consumer requirements SMEs could actively participate in the value chain of textile pro- on quality, raw materials and necessary vol- duction illustrated in Box 8.3. umes of delivery; • stage ii is a mid-term strategy that addresses SME sector participation in foreign trade is strongly declining (see the measures for improving processing tech- Chart 8.4) and only larger-sized SMEs got involved in foreign trade nologies, packaging methods and diversifi ca- operations in 2005 (see Chart 8.6): tion of products. • Average turnover of companies involved in export is about 700,000 somoni, which is 22 times higher than the turnover of SMEs not involved in export operations; • Average turnover of companies involved in import is about 100,000 somoni, which is 4 times higher than that of SMEs not involved in import operations.

The share of SMEs involved in export operations declined by about six times from 2002 to 2005. While the non-participation of individual entrepreneurs and dehkan farmers can be explained with the use of larger scale intermediaries, the relevant drop in the

2 Ministry of Economy and Trade (2005).

158 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

Chart 8.3. EXPORT POTENTIAL OF SMES CAN BE DEVELOPED Chart 8.4. PARTICIPATION OF SMES IN TRADE IS SHARPLY DECLINING

. High potential % OF RESPONDENTS ENGAGED IN FOREIGN TRADE . Low potential EXPORT

STRUCTURE OF EXPORT (%) POTENTIAL FOR SMES 8 6 4 1 6% Electricity 0,1 0,4

16% Cotton fi ber IMPORT

21 62% Primary aluminum 19

1 Other (agricultural products, 16% textiles, mineral products) Individual Small and Dehkan farm- entrepreneurs medium com- ers Source: NBT (2006), Experts’ Interviews panies . 2002 . 2005

BOX 8.3. TEXTILE INDUSTRY VALUE CHAIN The value chain in the textile industry can be broken down into fi ve independent steps, culminating in production of ready made garments (see fi gure below).3 The process starts with the labor intensive harvesting of raw cotton and ends with the equally labor intensive fi nishing of the ready made garments (cutting, sewing). In between there are several capital intensive processing steps that include treatment of raw cotton (ginning, spinning), as well as production of fabric (weaving or knitting) and coloration (and printing) of fabric.

Most of Tajik export

Cotton Fiber & yarn Fabric Coloration & harvest & prepara- formation formation printing Finishing tion

Input • Raw cotton • Ginned cotton • Yarn • Grey • Colored fabric

Description • Picking • Spinning • Knitting • Scouring • Ready made gar- • Ginning (for soft fabrics) • Bleaching ment production • Weaving (for tough - hydroperoxide - Simple technol- fabrics) - hydrochloride ogy • Dyeing - Inexpensive - Operable on small premises

Characteristic • Labor intensive • Capital intensive • Capital intensive • Capital intensive • Labor intensive 8 End product • Ginned cotton • Yarn • Grey • Colored fabric • Sellable good - Carded - Combed - Streched

3 The fi nishing of the ready made garments can be done in small independent sewing shops. In Bangladesh, for instance, one of the leading countries of garment production, more than 50 percent of fi rms in the textile industry employ less than 300 workers.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 159 FOREIGN TRADE AND TECHNICAL REGULATION

Chart 8.5. POTENTIAL OF SMES IN IMPORT IS HIGH number of small and medium companies involved in export (from 8% to 4%) is a worrisome signal. It might testify to higher market concentration due to economies of scale, but it might also refl ect . High potential . Low potential the fact that only a limited number of selected exporters, those who developed a good knowledge of administrative procedures STRUCTURE OF IMPORT (%) POTENTIAL FOR SMES and relevant connections, are involved. This is further illustrated by the fact that even among SMEs actively involved in trade, pro- Food products 15% cedures are considered among the most complicated (almost 3% Timber 80% of SMEs consider foreign trade procedures complicated or 9% Cars and spares very complicated) and by the high frequency of unoffi cial ways used to resolve procedure-related issues (about 50% for small and 17% Petroleum, natural gas medium companies, the larger and most signifi cant sample of re-

18% Electricity spondents).

Although participation of SMEs in import operations is higher than in export, it also shows a remarkable decrease (see Chart 8.4). The

48% Alumina analysis of the current import structure shows a high potential for SMEs in some categories (see Chart 8.5), which to a certain extent explains the higher share of participating SMEs. Higher participation of SMEs in import is to a large extent demand driven. Accom-

Source: State Statistical Committee (2006), Experts’ Interviews panying economic growth, there is a high unfulfi lled demand for imported goods in the country, which obviously can not be satisfi ed by the small number of large importers.

Chart 8.6. ONLY LARGE COMPANIES ARE INVOLVED The same considerations as in export apply to import. Higher con- IN FOREIGN TRADE OPERATIONS centration could be effi cient if purely driven by economic consid-

ANNUAL REVENUE IN SOMONI, ‘000S PER SME erations, while it might also be a signal of increased complexity of the procedures which implicitly select the number of market EXPORT IMPORT participants.

702 The following set of issues related to foreign trade operations for SMEs will be analysed in the rest of the chapter: • High transportation costs; 92 • Absence of institutional support to facilitate foreign trade operations; 28 24 • Complicated regulatory procedures;

SMEs conduct- SMEs not in- SMEs conduct- SMEs not in- • Internationally unrecognized technical standards. ing trade volved in trade ing trade volved in trade

8.2.1 ACCESS TO INTERNATIONAL MARKETS: HIGH COST OF TRANS- PORTATION

Transportation plays a signifi cant role in the development of foreign trade. Transportation in Tajikistan is a very complex issue, constrained by various factors: • Mountainous terrain and harsh weather conditions make it very diffi cult to transport goods within the country, especially during the winter; • High unoffi cial payments extracted by police at internal checkpoints are a major contributor to transport costs;

160 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

• Major transit route for Tajik trade runs through neighboring Uz- bekistan and is complicated due to a strict visa régime. Fur- BOX 8.4. POSSIBLE EFFECT FROM REDUCTION OF thermore, informal payments for road transport are also com- LOGISTICAL COSTS mon practice during transit through Uzbekistan4; • Attractive transport opportunities to the south are limited by A substantial reduction in logistical costs will re- continuous instability in neighboring Afghanistan. quire both improved domestic policies and improved regional cooperation. Currently, border It should be noted, that the Government of Tajikistan is making delays typically add 2 to 3 days to total tran- an effort to improve the transport infrastructure. There are several sit time. Bringing this time down to the offi cial projects underway, aimed at improving transportation within the Government target of 3 hours would save an country (e.g., completion of Anzob tunnel construction, which estimated $10 million per year in waiting time would connect the north and the south of the country for the en- alone. More effi cient operations and increased tire year), but also to enable access to international markets (e.g., competition in road and air services could lower completion of the Dushanbe-Kulyab-Kalaikhumb-Khorog route, the annual transport costs by a further estimated which would connect Tajikistan to Karakorum route and provide 20 percent, or $22 million per year. By streamlin- access to countries of the Asian-Pacifi c region). ing documentation requirements and customs processing, logistical costs of importers and ex- Changes in domestic transport regulations could improve access porters could potentially be reduced by an ad- to international markets and signifi cantly reduce export transpor- ditional estimated $30 million per year. More sig- tation costs as well (see Box 8.4). Finally, the main transit route of nifi cant savings would be possible once transit Tajik export goods through Uzbekistan is dependent on collabora- through Uzbekistan improves and transit through tion between the two countries. Afghanistan becomes possible and safe. A survey of traders commissioned by the World Bank 8.2.2 INSTITUTIONAL SUPPORT OF SME EXPORT IS NEEDED confi rmed that the top three problems for traders in Tajikistan are (i) burdensome customs pro- Obtaining access to export markets is crucial for fostering SME cedures and paperwork; (ii) corruption; and (iii) growth and productivity, especially in light of increased globali- poor transport services. zation and market liberalization. However, SMEs face many constraints, preventing them from competing effectively in these Source: World Bank (2005) markets: lack of necessary knowledge and fi nancing, inability to meet foreign regulatory requirements, or inadequate quantity and quality of products for foreign buyers. Chart 8.7. MEMBERS OF EXPORT CONSORTIUM IN ITALY ACHIEVE BETTER PERFORMANCE THAN NON-MEMBERS

This problem is emphasized by the Tajik institutional context (i.e., % OF TURNOVER ACHIEVED % OF COMPANIES OPERATING IN no consulting on foreign trade operations) and the absence of THROUGH EXPORT MORE THAN SIX COUNTRIES established long-term practices and relationships with foreign 49 counterparts. 46

33 34 One effective way of addressing these problems is through the development of export consortia.5 By participating to an export consortium, SMEs can signifi cantly improve their export potential and reduce the costs and risks involved in entering foreign mar- 8 kets (see Box 8.5). So, for instance, in Italy, members of a consorti- SMEs, members SMEs, non- SMEs, members SMEs, non- of a consortium members of a of a consortium members of a um export a higher share of their turnover than non-member fi rms. consortium consortium Additionally, members of the consortium are operating in more Source: UNIDO (2005) countries than non-members (see Chart 8.7).

4 For more details see World Bank (2005). 5 Export consortia are voluntary groupings of enterprises, usually in the same or similar business or subsector, with the objective of improving the export readiness and increasing the export volumes of the participants.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 161 FOREIGN TRADE AND TECHNICAL REGULATION

BOX 8.5. BRAZILIAN TEXTILE CONSORTIUM FLOR BRASIL

In 1998, Brazilian SME support institutions organized a training course in Italy for 15 enterprises from Brasilia that produced knit- wear, work clothes and beachwear. All fi rms were producing for the domestic market, but were fi nding it diffi cult to compete with the traditional brands of Rio de Janeiro (the city that dictates fashion trends in Brazil) and, consequently, to grow.

During the training course, the participating fi rms learned everything related to the commercialization of their products. Be- cause Italian SMEs had good access to information on markets, trends, consumer demands and distribution channels, they were able to commercialize their products in many countries. The 15 Brazilian fi rms noted that the Italian SMEs were in fact very similar to them. In addition to the similarity in size, the level of production technology was comparable. The main distinguishing features were the differences in design and the fi rms’ access to information. The Brazilian fi rms thus decided to prioritize these two aspects in their future operations.

Upon their return to Brazil, the 15 fi rms tried to implement what they had learned in the training course and from their Italian counterparts. They began to plan ahead, to involve their clients in the development of collections and to give more importance to their joint catalogues. The entrepreneurs became aware of the wide range of assistance provided by APEX, the Brazilian Agency for the Promotion of Exports. Since the group’s products had been well received among local clients, they considered the possibility of exporting them.

After having conducted research on the possibility of penetrating foreign markets, the fi rms created the consortium Flor Brasil and began their export activities. They improved the quality of their products and attempted to make their designs more uniform. Jointly, they participated in trade fairs in Italy and France, which served as a valuable learning experience. Today, Flor Brasil exports to Europe and the United States and had an estimated export turnover of $1 million for 2003.

Source: UNIDO (2005)

Most consortia are non-profi t entities, and members retain their fi nancial, legal, managerial, and commercial autonomy. So, despite their participation in the export consortia, member fi rms do not give up any control over their business to others. This is the main difference between consortia and other types of strategic alliances.

Chart 8.8. FOREIGN TRADE PROCEDURES ARE COMPLICATED With the support of international organizations in some regions of FOR MOST ENTREPRENEURS6 the country, Tajikistan’s small and medium enterprises have al-

% OF RESPONDENTS CONDUCTING EXPORT ready shown some promising developments. Remarkable in this context, is the creation of business support services organizations 21 65 14 (see Box 8.6).

% OF RESPONDENTS CONDUCTING IMPORT 8.2.3 COMPLICATED PROCEDURES LEAD TO LOW INVOLVEMENT 2 20 56 22 OF SMES

25% 0% 25% 50% 75% 100% According to the survey, about 80% of entrepreneurs consider export and import procedures in Tajikistan as complicated or very Very Rather Very Rather easy easy complicated complicated complicated (see Chart 8.8).7

6 Due to limited size of the sample no division into typologies of SMEs is possible. 7 None of the respondents conducting export assessed the process as very easy.

162 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

BOX 8.6. INTERNATIONAL ORGANIZATIONS IN TAJIKISTAN THAT SUPPORT THE DEVELOPMENT OF EXPORT POTENTIAL OF SMES

msdsp - cross-border trade between tajikistan and afghanistan With the fi nancial support of GTZ, MSDSP facilitates cross-border trade between Tajik and Afghan Darwaz. Activities include support of entrepreneurs (small-sized businesses), who are involved in cross border trade. There are some potential Tajik export sectors which need further development in terms of product quality and marketing: craft businesses (mainly wood and metal processing), and processing of fruits and vegetables. There are several border markets situated in GBAO, where mainly basic food products are sold, which are originally produced neither in Tajikistan nor in Afghanistan. The program is aiming to use these markets as trade facilities for potential Tajik export goods.

In 2006-2007, working with its AKF partners on the Afghan side, MSDSP begun to support entrepreneurs in border zones. A business incubator has been established in Darwaz in order to foster development of small enterprises in the area. Combination of business infrastructure, services and training will assist benefi ciaries by the end of the program period.

In 2007, MSDSP will begin preparations to facilitate 2 cross-border youth artisan’s workshops and 2 women’s handicraft exhibitions. The exhibitions will take place in partnership with AKF Afghanistan and will capitalize on the improved access across borders to include the involvement of 120 entrepreneurs, youth and artisans.

itc - trade promotion program The objective of the project funded by SECO is to strengthen the sustainable expansion and diversifi cation of SME exports in Tajikistan. It aims to develop national capacity for trade development by focusing on business services providers while also addressing institutional issues.

Since the start of the project in 2004, it has worked on three levels: • Direct enterprise level assistance Pilot enterprises received direct hands-on assistance in developing their export competitiveness. International experts, while coaching local experts, provide individual consultancy services to the pilot enterprises, helping the enterprises to implement their action plans. Training, marketing missions and other services are extended to a larger group of enterprises to help them modify their export approach. • Assistance in developing business support services organizations NTDC as a trade promotion organization was established in April 2005 and provides market information to enterprises, analyzes external trade, establishes contacts with trade representatives abroad and creates an information database on SMEs. • Association of Exporters of Agro Industrial Complex was created in April 2005 With the support of the program, capacity building seminars were conducted for SQAM bodies, some regulations were reviewed and recommendation for further improvements were provided. • Assistance in the sector and national trade strategy development ITC supported the Government in the elaboration of the “Export Development Strategy of the Fruit and Vegetable Process- ing Sector of Tajikistan.”

Indeed, in order to conduct a foreign trade operation, a business 8 needs to go through a very complicated process of gathering multiple documents and dealing with various state agencies.

For example, a cotton exporter needs to obtain about 12 different permits from different agencies, each requiring a fee, before

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 163 FOREIGN TRADE AND TECHNICAL REGULATION

being able to export goods.8 The procedure, laid out in Chart 8.9, BOX 8.7. MAJOR PROBLEMS DURING IMPORT OP- is complicated due to: ERATIONS • The necessity to visit the same agency more than once during different stages of the application process (e.g., applicant The key problems reported with import procedures are: goes through customs authorities 3 times during the process); • Duplication of the steps (e.g., National Bank checks the 100% • Under-invoicing in double-entry book keep- prepayment confi rmation, even though this confi rmation has ing is reportedly high, leading to Customs already been done by the seller’s bank). authorities using other valuation methods. Valuation disputes are frequent and are As a result, it is estimated that exporters spend at least 18 man- handled through the High Economic Court days preparing one shipment of cotton fi ber, and that the total under the Administrative Violation Code’s regulatory costs amount to nearly 5% of the shipment value. Ex- Customs Chapter (Tajikistan has no Valu- pert estimates indicate that this cost is 3 times higher than a stand- ation Dispute Resolution Administrative Tri- ard administrative cost, which ranges from 1% to 1.5%. bunal as of yet, and, without WTO membership, is under no obligation to establish one). 6 different valuation options remain Chart 8.9. NECESSARY STEPS FOR EXPORT OF COTTON available to Customs offi cials under the step aGency document/permission new Code, and there are doubts among the business community about the consist- Tajik Universal Commodity STEP 1 Conclusion of TUCE ency in their application. Exchange

• TajikStandart certifi cations are required for STEP 2 TajikStandart Certifi cate of Conformity import, even for import of certifi ed prod-

Passport of transaction/Confi rmation ucts. STEP 3 Bank of Seller on 100% prepayment by the buyer

Confi rmation of 100% prepayment/ • Customs authorities require original letters STEP 4 National Bank of Tajikistan Confi rmation that sales tax has been of credit and other important documents, paid

and do not accept faxed documents (as is Confi rmation that sales tax has been STEP 5 Tax Department internationally practiced) or e-mails. paid

Directorate for Customs STEP 6 Registration of export documentation • Customs authorities reportedly still require a Supervision

Foreign Exchange Certifi cate of the trans- actional bank, despite the 2003, 2004 and STEP 7 Tajik Rail Way Permission for shipment of the goods 2005 reforms on current account transac-

tions. STEP 8 Chamber of Commerce Certifi cate of Origin

Sanitary Inspection (Minis- Phyto-Sanitary Certifi cate (organic Source: FIAS (2006) STEP 9 try of Agriculture) products)

STEP 10 Regional customs offi ce Final customs clearance of shipments

Issue railway bill plus register the set of STEP 11 Tajik Rail Way export document which accompany the goods

Customs Services of the STEP 12 Final approval of the shipments rail way station Source: Experts’ interviews

8 ADB (2004).

164 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

A number of procedures represent a key burden for SMEs, deter- BOX 8.8. EXPORT PROCEDURES IN TAJIKISTAN ARE ring export activities, adding to administrative barriers and export- AMONG THE MOST COMPLICATED IN THE WORLD ers’ costs. A few examples: time (days) 1. advance payment on export goods. New exporters would least most Estonia 3 Iraq 105 certainly have problems fi nding customers willing to prepay 100% before obtaining a product. Denmark 5 Kazakhstan 93

2. There are 19 commodities which are required by legislation to Germany 6 Chad 87 be traded at the tajik universal commodity exchange (tuce) Hong Kong, China 6 Burundi 80 in order to be eligible for export. In practice, however, this Lithuania 6 Angola 74 rule is applied to other categories of goods as well, i.e., the Singapore 6 Tajikistan 72 customs offi ces require a TUCE valuation or permit on goods Sweden 6 Eritrea 69 not included in that list. However the TUCE authorization can Canada 7 Burkina Faso 69 only be obtained in Dushanbe. Finland 7 Azerbaijan 69 Norway) 7 Lao PDR 66 Import procedures are also very complicated, involving several documents (number) state agencies in the overall process, which is further delayed fewest most by excessive paperwork (see Attachment 8.1 in the Annex). The Hong Kong 2 Zambia 16 main problems occurring during import procedures are described Canada 3 Djibouti 15 in Box 8.7. Denmark 3 Lao PDR 12 Kiribati 3 Kazakhstan 14 Tajikistan ranks among the lowest for foreign trade operations in Tanzania 3 Rwanda 14 Doing Business 2007 (163 out of 175 countries), since procedures Austria 4 Tajikistan 14 are complicated in terms of time, cost and paperwork involved Finland 4 Ecuador 12 Congo, Dem. (see Box 8.8). In order to import goods, a Tajik importer spends France 4 12 Rep 44 days, $3,550 and fi lls out 10 documents, while a Tajik exporter Germany 4 Uganda 12 spends 72 days, $4,300 and fi lls out 14 documents during export Norway 4 Sudan 12 procedures.9 cost (US$ per container) least most 8.2.4 UNOFFICIAL SOLUTIONS DURING FOREIGN TRADE PROCE- Tonga 265 Tajikistan 4,300 DURES ARE COMMON China 335 Gabon 4,000 Israel 340 Rwanda. 3,840 The complicated foreign trade procedures in Tajikistan are very New Zealand 355 Mauritania 3,733 often the reason entrepreneurs try to solve issues unoffi cially. In Singapore 382 Burundi 3,606 fact, almost 50% of small and medium companies used unoffi cial United Arab Emirates 392 Guyana 3,625 solutions during foreign trade operations (see Chart 8.10). Fiji 418 Zimbabwe 3,177 Congo, Dem. Finland 420 3,120 8.3 technical reGulation: standardiZation and certifica- Rep tion Gambia 422 Mongolia 3,007 Hong Kong, China 422 Kazakhstan 2,780

The current system of standardization and certifi cation used in Source: IFC/World Bank (2006) Tajikistan represents a serious constraint to foreign trade opera- Chart 8.10. SMALL AND MEDIUM COMPANIES VERY tions. 8 OFTEN SOLVE ISSUES WITH FOREIGN TRADE UNOFFICIALLY

% OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS On the one hand, exported goods need to meet international 47 standards to be marketed abroad, while standards used in

Individual Small and medium 9 IFC/World Bank (2006). entrepreneurs companies

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 165 FOREIGN TRADE AND TECHNICAL REGULATION

Tajikistan are typically not recognized in international markets, BOX 8.9. DEFINITION OF STANDARDIZATION AND and as such require double certifi cation, which increases time CERTIFICATION and cost spent.

Standardization and certifi cation are two proc- On the other hand, imports that are subject to recognized stand- esses within a system aimed at ensuring prod- ards are in most cases also subject to certifi cation requirements, uct quality and consumer safety. They should adding an additional burden to the already complex foreign be clearly divided and each process should be trade procedures. considered separately.

Technical regulation, including development, control and issu- standardization is an activity to establish norms, ance of standards and certifi cates for products and services, is rules and characteristics (further – requirements) closely connected to foreign trade, but involves products pro- to secure: duced and sold in the domestic market as well. • Products and services compliance with life, health, property, and environmental protec- Although regulations are necessary to protect the health and tion safety regulations; safety of its citizens, regulations in Tajikistan are a serious constraint • Requirements on compliance and inter- to the development of the SME sector and the economy in gen- changeability of products; eral. • Products and services quality to comply with their intended functional use, in accord- 8.3.1 STANDARDS AND CERTIFICATES IN TAJIKISTAN: THE BACK- ance with scientifi c and technological develop- GROUND ments; • Protection of consumers’ interests and Standardization and certifi cation are two processes within a sys- rights.10 tem aimed at ensuring both product quality and consumer safety. They should be clearly divided, and each process should be con- Certiﬁ cation of products is an activity to confi rm sidered separately. While standardization refers to the establish- the compliance of the products with established ment of a range of norms and requirements for products, services requirements.11 and methods of production which are likely to be replicated on a large-scale or long-term basis, certifi cation is a process of verifi cation for product and service compliance with the established norms, rules and established characteristics, i.e., standards (see Box 8.9).

8.3.2 STANDARDS: OUTDATED

Government regulation of standardization process is carried out by the Agency for Standardization, Metrology, Certifi cation, and Trade Inspections under the Government of RT (hereafter, “Tajik- Standart”). The standardization system also includes other government agencies as mandated by the law (see Box 8.10).

The very comprehensive system of mandatory standards dating back to the Soviet Union has been largely retained in Tajikistan. Unfortunately the current system is extremely costly to administer and maintain up-to-date, and represents a serious obstacle to foreign trade as it is not always recognized by other countries. For

10 Law of RT No. 333 “On Standardization,” dd. December 14, 1996, Article 1. 11 Law of RT No. 313 “On Certifi cation of Products and Services,” dd. December 13, 1996, Article 1.

166 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION instance, due to unrecognized Tajik standards, exported cotton BOX 8.10. GOVERNMENT AGENCIES INVOLVED IN is certifi ed according to Uzbek standards. Tajikistan bears remark- STANDARDIZATION ACTIVITIES12 able profi t losses due to lower prices set by Uzbek standards: Tajik cotton is mainly gathered manually and is of higher quality than In addition to TajikStandart, the following state the Uzbek cotton gathered by combiners.15 With the support of bodies develop standards in specifi c areas: the World Bank, Tajikistan started addressing this issue in 2007. Part of the plan is to create a joint venture for grading cotton in ac- 1. State Committee for Construction and Archi- cordance with international standards. tecture – for the construction industry. 2. Ministry of Environmental Protection – for the In addition, as a country of limited size, Tajikistan is currently unable use of natural resources and environmental pro- to properly administer the complex and demanding standards tection. system that requires well-equipped laboratories, a highly qualifi ed 3. Ministry of Public Health – for the medical sup- staff, and effective enforcement capacity. Although the present plies industry, pharmaceuticals industry, etc. system of standards is applicable indiscriminately to domestic and 4. Ministry of Education – for curriculum guide- foreign producers, the concern might be raised that the present lines.13 system fails the WTO requirement of being “least trade restrictive.” 5. Ministry of Finance – for accounting stand- Against this background, it is recommended that Tajikistan replac- ards.14 es its vast mandatory standards system with a more compact and simple system of mandatory technical regulations for potentially dangerous products, while making other standards voluntary. BOX 8.11. GOVERNMENT AGENCIES INVOLVED IN 8.3.3 CERTIFICATION: EXCESSIVE FOR PRODUCERS AND TRADERS CERTIFICATION ACTIVITIES

TajikStandart is the principal government agency that issues cer- In addition to TajikStandart the following state tifi cates of compliance for products, processes, and services, as bodies issue certifi cates in specifi c areas: well as certifi cates authorizing the use of marks of conformity.16 It remains questionable whether authorities of standardization 1. Ministry of Transportation – issues vehicle qual- and certifi cation process should be under the same authority, as ity certifi cates17; it may lead to a confl ict of interests. As the practices of devel- 2. Ministry of Health – issues certifi cates of com- oped countries show, these two functions are usually separated pliance and quality certifi cates for medications, and delegated to different bodies: while standards are issued by cosmetics, medical nutrition products, medical special state bodies, certifi cation is conducted by independent products and equipment, and food additives18; authorized institutions. 3. Ministry of Communications – issues certifi - cates for the right to use communication tech- Besides TajikStandart, there is a number of other government nologies19; agencies responsible for certifi cation (see Box 8.11). 4. Chamber of Commerce and Industry – issues certifi cates of origin in the Republic of Tajikistan20; 12 Law of RT “On Standardization,” Article 6. 13 Law of RT No. 34 “On Education,” dd. May 17, 2004, Article 7. 5. Ministry of Agriculture – issues phyto-sanitary 14 Resolution of the Government of RT No. 428 “On International Accounting certifi cates and pedigree livestock breeding Standards,” dd. November 4, 2002. 21 15 “No-name cotton,” Asia-plus, dd. February 22, 2007. certifi cates. 16 Resolution of the Cabinet of Ministers dd. June 2, 1994, No. 249 “On the National 8 System of Certifi cation of Products, Work, and Services in the Republic of Tajikistan,” section 2. 17 Resolution No. 93 “On the Procedure for Issuing Vehicle Quality Certifi cates,” dd. March 4, 2002. 18 Resolution No. 382 “On Establishment of a Government Research Center for Expert Analysis and Certifi cation of Pharmaceutical Products, Medical Equipment, Medical and Sanitary and Hygienic Products, Medical Nutrition Products, and Cosmetics,” dd. August 29, 2003. 19 Law of RT No. 39, “On Mail Service,” dd. August 1, 2003. 20 Resolution No 35 “On the Agency Authorized to Issue Certifi cates of Origin in the Republic of Tajikistan,” dd. January 28, 1994. 21 Law of RT No. 985 “On Pedigree Breeding,” dd. July 20, 1994.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 167 FOREIGN TRADE AND TECHNICAL REGULATION

Chart 8.11. EXAMPLE OF CERTIFICATION PROCEDURE

1 4 CERTIFYING AGENCY CERTIFICATE OR LETTER OF CERTIFICATION ENTREPRENEUR DENIAL IS FORWARDED TO APPLICATION AND ANALYSIS OF ENTREPRENEUR PRODUCTS SAMPLE SAMPLE IS SENT THE RESULTS ARE SUBMITTED TO TO TESTING OBTAINED AND LABORATORY DECISION-MAK- ING 5

2 3a CERTIFIED PRODUCTS ARE EN- Product Product test TERED IN THE STATE REGISTER samples statement

Copy of product test statement 3b TESTING LABORATORY Testing of product sample

Source: IFC (2004b)

Chart 8.12. SHARE OF RESPONDENTS WHO UNDERWENT THE The existing system of compliance confi rmation of goods and CERTIFICATION PROCEDURE services in Tajikistan is excessive, requiring certifi cation of a large % OF RESPONDENTS WHO OBTAINED A CERTIFICATE share of products. Chart 8.11 provides an example of certifi cation procedure. 62

31 According to the survey, 18% of SMEs were required to certify their 36 goods in 2005 (see Chart 8.12). Although there is an improvement

20 in the share of businesses who underwent certifi cation, the coverage is still high, in particular for individual entrepreneurs and small and medium companies. In comparison, the European Union re- 5 quires compulsory certifi cation of just 4% of the commodity list.23

Individual Small and Dehkan farm- entrepreneurs medium ers22 In a market economy, it is usually in the producers’ self-interest to companies comply with set standards, even not mandatory ones. Certifi cation . 2002 . 2005 becomes a matter of marketing, and gives them an opportunity to do business with larger companies requiring minimum standard levels. Discerning consumers then have a choice between certifi ed and non-certifi ed products, automatically leading producers to self-certifi cation of their products.

It is also important to make a shift from end-product certifi cation to process certifi cation, which would allow identifi cation of risky components at the early stages of product development.

There also appears to be a serious gap between the strictness and a number of certifi cation requirements on paper and the im-

22 In 2002, dehkan farmers also considered a land use certifi cate as a procedure of certifi cation. However, technical regulation covers only certifi cation of products. 23 See EU (1999).

168 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION plementation capacity of certifi cation agencies. The limited implementation capacity of certifi cation bodies is described in Box BOX 8.12. IS CERTIFICATION A RESPONSIBILITY OF 8.12. CONSUMERS?

Realistically, the gap needs to be closed at both ends. Implemen- It is impossible to fi nd in the Dushanbe markets tation capacity of the relevant services and their labs needs to a fi re extinguisher with the certifi cate of quality. be strengthened, while requirements need to be reduced and When approached in this regard, TajikStandart focused on areas with serious health and safety concerns. Even in commented that it is the responsibility of the these cases, the compliance with technical requirements is based customers to make sure that the products they less on possible control of products than on the current control of buy in the market meet the quality standards. It is production process. Additionally, a risk-based approach, which is therefore also the responsibility of the customers widely used in the European Union, could be applied in Tajikistan to approach the Agency for certifi cation of the (see Box 8.13). fi re extinguishers they bought.

Another issue entrepreneurs face is repetitive certifi cation of the certifi ed imported goods. Focus groups indicated that entrepreneurs have trouble importing goods in Tajikistan even with certifi - BOX 8.13. EXAMPLE OF RISK-BASED TECHNICAL cates of conformity from the country of origin and are required to REGULATION ADOPTED IN THE EUROPEAN UN- recertify goods with domestic certifi cation bodies. Thoughde-jure ION24 Tajikistan accepts certifi cates of some countries (mostly CIS), in practice goods are required to be recertifi ed through authorized The system of technical regulation of the Euro- domestic agencies. Certifi cates of conformity with a wide range pean Union is closely linked to risk assessment, of national and international standards and regulations (e.g., EU, where the state develops necessary manufac- US, and Japan) should be accepted as equivalent to a certifi cate turing standards based on the risk level. An ex- of conformity with Tajik regulations. ample for such regulation is a Directive 89/109/ EEC, which sets basic safety requirements for 8.3.4 CERTIFICATION PROCEDURE: COMPLICATED FOR SMES equipment manufacture. All safety requirements in this document are grouped accord- The certifi cation procedure remains very complicated for entre- ing to risk level. According to this document, preneurs: 37% of entrepreneurs think that the process of certifi ca- manufacturer should conduct risk assessment tion is either complicated or very complicated (see Chart 8.13). of equipment application to identify all possible A possible reason for that could be the fact that the compulsory risk factors, and introduce the necessary manu- requirements are set in numerous legislative documents. The pro- facture changes accordingly. This directive also cedure of development and adoption of these requirements was provides risk reduction guidelines. and still remains non-transparent. Entrepreneurs are not involved

Chart 8.13. ASSESSMENT OF THE CERTIFICATION PROCEDURE

% OF RESPONDENTS WHO OBTAINED A CERTIFICATE

Individual entrepreneurs 17 48 27 9

Small and 8 53 32 8 8 medium companies

Dehkan farmers 3 38 45 14

75% 50% 25% 0% 25% 50% 75%

. Very easy . Rather easy . Rather complicated . Very complicated

24 Shestoperov O./Belov A./Stepanyuk K. (2005).

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 169 FOREIGN TRADE AND TECHNICAL REGULATION

Chart 8.14. ACCESS TO INFORMATION ON CERTIFICATION IS VERY in the process of elaboration and discussion of requirements. In COMPLICATED this context, Tajikistan needs to adopt a unifi ed law on technical % OF ENTREPRENEURS CONSIDERING INFORMATION ACCESS COMPLICATED OR VERY regulations, especially due to the ongoing WTO accession proc- COMPLICATED ess. Ministry of Agriculture 56

Ministry of Transpor- tation 52 8.3.5 DIFFICULT ACCESS TO INFORMATION LEADING TO UNOFFI- CIAL WAYS OF SOLVING ISSUES TajikStandart 33 State Scientifi c Centre of the Medicine Examina- 32 tion (Ministry of Health) The certifi cation process is made even more complicated by the fact that entrepreneurs have a diffi cult time obtaining information on new or existing requirements from the state agencies (see Chart 8.15. MORE ENTREPRENEURS PREFER TO SOLVE Chart 8.14). ISSUES UNOFFICIALLY

% OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS DURING CERTIFICATION As a result of the numerous compulsory requirements, 36% of entrepreneurs used unoffi cial ways to obtain a certifi cate. 19%of 17 36 entrepreneurs resorted to unoffi cial payments to solve certifi ca-

19 tion-related issues (see Chart 8.15).

It is also remarkable that dehkan farmers undergoing certifi cation used unoffi cial solutions most often (seeChart 8.16). They applied

Unoffi cial Other Overall unof- mostly to the Ministry of Agriculture to obtain a phyto-sanitary cer- payments unoffi cial ways fi cial ways of tifi cate or a pedigree livestock breeding certifi cate. This high fi g- solving issues ure could be due to:

Chart 8.16. UNOFFICIAL WAYS OF SOLVING ISSUES DURING • Limited access to information about procedures; CERTIFICATION ARE COMMON • Low literacy of dehkan farmers in specifi cs of phyto-sanitary

% OF RESPONDENTS WHO USED UNOFFICIAL SOLUTIONS DURING CERTIFICATION and livestock breeding requirements. 56 51 8.3.6 COST OF CERTIFICATION: UNEVEN DISTRIBUTION

24 Legislation does not stipulate a unifi ed cost of certifi cation; it is set individually by TajikStandart with approval from the Ministry of Finance.25 According to the survey fi ndings, entrepreneurs spent Small and Individual Dehkan on average 172 somoni ($54) to obtain one certifi cate. However, medium entrepreneurs farmers companies the absence of unifi ed regulation of these costs shows a high variance of the expenses to obtain a certifi cate even within the same Chart 8.17. AVERAGE AMOUNT SPENT TO OBTAIN ONE sector of the economy. Individual entrepreneurs working in retail CERTIFICATE trade in Sughd spent about twice as much to obtain a certifi cate

SOMONI from TajikStandart than retail traders in Dushanbe, confi rming the use of unoffi cial payments involved in dealing with the state bod- Sughd province 218 ies (see Chart 8.17).

Kurgan-Tube distirct 154 (Khatlon province) 8.3.7 LONG DURATION OF OBTAINING CERTIFICATES: BURDENSOME Kulyab distirct 118 FOR COMPANIES (Khatlon province)

Districts of Republican The process of certifi cation seems to be very protracted, espe- Subordination 91 cially for small and medium companies (see Chart 8.18). This can Dushanbe 89

25 Law of RT “On Certifi cation of Products and Services,” dd. May 3, 2002, Article 15.

170 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

be explained by the fact that companies are involved in business Chart 8.18. COMPANIES SPEND ONE MONTH TO GET A activities with complicated technical requirements (i.e., construc- CERTIFICATE BUSINESS DAYS ON AVERAGE tion, production of consumer goods, pharmaceuticals). On the other hand, it could indicate that state bodies deliberately drag Individual out the process to force companies into making unoffi cial pay- entrepreneurs 6 ments.

Small and medium 8.3.8 DURATION OF CERTIFICATES: UNCLEAR SITUATION companies 21

Depending on their type and purpose, certifi cates may be valid for a different period of time set by respective legislative acts reg- Dehkan farmers 18 ulating the issuance of certain certifi cates. However, in practice even the certifi cate for the same activity can vary regionally, confi rming that the existing system of technical regulation does not work appropriately (see Chart 8.19). Chart 8.19. VALIDITY OF A CERTIFICATE FOR INDIVIDUAL ENTREPRENEURS WORKING IN PUBLIC CATERING VARIES REGIONALLY MONTHS ON AVERAGE

Kulyab distirct (Khatlon 14 province)

Kurgan-Tube distirct (Khatlon province) 13

Sughd province 8

Districts of Republican Subordination 7

Dushanbe 3

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 171 FOREIGN TRADE AND TECHNICAL REGULATION

recommendations

1. Simplify the export trade procedure by: 1.1 Eliminating advance payment requirement for export; 1.2 Reducing the number of state bodies involved in processing of documents to avoid unnecessary duplication. For instance: - National Bank of Tajikistan confi rms the presence of necessary documents for export, even though the procedure has already been completed by the seller’s bank; - custom procedures are repeated by the directorate for custom supervision and regional customs offi ce; 1.3 Elimination of mandatory requirements for certain categories of export goods at Tajik Universal Commodity Exchange (TUCE). At the very least, enforce that the products not listed in the government resolution not be subject to TUCE approval or conclusion.

Expected impact:

Simplifi ed procedures would increase the number of SMEs involved in foreign trade operations, generating additional income for the national economy and increasing the foreign trade turnover.

2. Facilitate processing of imported goods by: 2.1 Creating a Valuation Dispute Resolution Administrative Tribunal to handle disputes on valuation methods during import; 2.2 Introducing acceptance of faxed import documents (e.g. letters of credit) in accordance with international practices.

Expected impact:

The possibility to handle disputes in a tribunal would limit the intervention of customs offi cials into the valuation of imported goods and reduce the possibility of unoffi cial solutions. Acceptance of faxed documents would allow simplifi cation of the overall export processing and reduce the burden for entrepreneurs.

3. Facilitate transportation of goods. This can be achieved by: 3.1 Improving the domestic transport and customs regulations towards more transparency and simplifi cation; 3.2 Continuing the dialogue with neighboring countries to simplify and increase the transit volumes of goods.

Expected impact:

Improved regulations could reduce the overall expenses of trade operations. In addition, improved transit could have mutual benefi ts for participating countries, resulting in increased export volumes on the one hand, and additional transit receipts on the other hand.

4. Development and dissemination by customs authorities of a binding summary of export/import procedures, the required paperwork, costs, and timeframes for each step.

Expected impact:

Availability of uniform requirements for foreign trade procedures would reduce the overall burden for entrepreneurs in terms of time and costs.

172 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

recommendations 5. Apply the risk-based approach by determining which goods and services need to be certifi ed in order to exclude non-risky categories from mandatory certifi cation and by abolishing the mandatory certifi cation requirement for 1. Simplify the export trade procedure by: services; 1.1 Eliminating advance payment requirement for export; 1.2 Reducing the number of state bodies involved in processing of documents to avoid unnecessary duplication. Expected impact: For instance: - National Bank of Tajikistan confi rms the presence of necessary documents for export, even though the Reduction of the coverage of certifi cation would result in additional cost savings for entrepreneurs. procedure has already been completed by the seller’s bank; - custom procedures are repeated by the directorate for custom supervision and regional customs offi ce; 6. Update the standard system by: 1.3 Elimination of mandatory requirements for certain categories of export goods at Tajik Universal Commodity 6.1 Reviewing the list of standards and abolish the ones not necessary on the grounds of health and safety in a Exchange (TUCE). At the very least, enforce that the products not listed in the government resolution not be market economy; subject to TUCE approval or conclusion. 6.2 Considering the possibility to adopt international standards to avoid the “maintenance cost” of the system.

Expected impact: Expected impact:

Simplifi ed procedures would increase the number of SMEs involved in foreign trade operations, generating ad- Possibility for entrepreneurs to market their products in compliance with international standards. At the same time ditional income for the national economy and increasing the foreign trade turnover. the “maintenance cost” for the bodies responsible for elaboration of standards would be reduced.

2. Facilitate processing of imported goods by: 7. Reduce the need for double certifi cation of import/export by: 2.1 Creating a Valuation Dispute Resolution Administrative Tribunal to handle disputes on valuation methods dur- 7.1 Accepting the certifi cates of conformity from countries of EU, USA, Japan to avoid double certifi cation of im- ing import; ported goods; 2.2 Introducing acceptance of faxed import documents (e.g. letters of credit) in accordance with international 7.2 Creating internationally required laboratory facilities to certify Tajik commodities according to internationally practices. adopted standards to facilitate their export.

Expected impact: Expected impact:

The possibility to handle disputes in a tribunal would limit the intervention of customs offi cials into the valuation of On the one hand, avoidance of double certifi cation during import would reduce the overall burden for importers. imported goods and reduce the possibility of unoffi cial solutions. Acceptance of faxed documents would allow On the other hand the possibility to certify Tajik commodities with internationally accepted standards would allow simplifi cation of the overall export processing and reduce the burden for entrepreneurs. Tajik exporters easier access to international markets.

3. Facilitate transportation of goods. This can be achieved by: 8. Accelerate WTO accession of Tajikistan by bringing the legislation in line with requirements and institutionalization 3.1 Improving the domestic transport and customs regulations towards more transparency and simplifi cation; of business participation in the WTO accession process. 3.2 Continuing the dialogue with neighboring countries to simplify and increase the transit volumes of goods. Expected impact: Expected impact: WTO accession would have a positive impact on the development of foreign trade in the country. Improved regulations could reduce the overall expenses of trade operations. In addition, improved transit could have mutual benefi ts for participating countries, resulting in increased export volumes on the one hand, and additional transit receipts on the other hand.

4. Development and dissemination by customs authorities of a binding summary of export/import procedures, the 8 required paperwork, costs, and timeframes for each step.

Expected impact:

Availability of uniform requirements for foreign trade procedures would reduce the overall burden for entrepreneurs in terms of time and costs.

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 173 FOREIGN TRADE AND TECHNICAL REGULATION

annex attachment 8.1. import process map (products - sausages, shoes)26 Costs According to agreement Custom processing fees depend on custom cost (Resolu- tion of Government of RT No. 472 dd. December 2, 2005), cially $200-300 unoffi processing Duration of 1-4 days 2 days after submission of Cargo Cus- tom Declaration tures Number of signa- 1 Steps Signing of agreement with custom broker For movement of goods and transport means via custom border the following documents should be submitted: 1. Documents con- rming custom cost fi of the good 2. Consignment documents 3. Documents con- rming the origin of fi goods 4. Documents con- rming payments fi between transaction’s participants 5. Documents con- rming payments fi of custom duties or payment guarantee (custom fees, VAT, excises, fees for custom processing, cargo accompani- ment, seasonal fees, c kinds of specifi fees) ments, forms Examples of docu- Statue, Taxpay- cation er’s Identifi Number, Contract, other documents used be could which by custom process- lment ing and fulfi of the agreements between importer and broker cate Waybills, certifi of compliance, quality, phyto-vet- cate, erinary certifi Invoice of seller, Conclusion from SES, sale contract, Cargo Customs Declaration of exporter, arrival notice of cargo Procedure Agreement on provision of services Obtaining of documents package from custom bodies for imported good Agency Custom brokers (in case one applies to them) Custom service of RT To conduct foreign trade operations a person should be registered as legal entity or individual entrepreneur (see more details in “Registration” chapter) Stage Based on the results of Mapping Seminar Import/Export administration, July 3-4, 2006, Dushanbe, Ministry for Economic Development and Trade. 1. Customs procedures 2. Customs procedures (following) 26

174 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION Costs According to rent agreement (150 somoni ($47) per 1 wagon) (Resolution of Government RT No. 472 dd. Decem- ber 2, 2005) Depends on the volumes cially $100 -150 Unoffi processing Duration of 1-2 days 2-3 days tures Number of signa- 1 1 Steps Submission of application cial 1. Custom offi makes sampling for examination to check the cases of in authentic declaration of the goods, provision of appropriate fee charge. 2. Processing of the statement on sampling of the goods 3. Samples are sent for examination to custom lab or other respective state bodies; 4. After examination samples and documents are packed, stamped and sent to custom body 1. Submission of application; 2. Submission of the documents package; 3. Sampling of goods from temporary storage warehouse or warehouse of the enterprise; 4. Issuance of the cate of compli- certifi ance. ments, forms Examples of docu- Application Conclusion of custom lab, Statement on sampling of the goods Application Cargo Customs Dec- laration, invoices, agreement on delivery Protocol of research and act of examination Procedure Placement of the cargo in temporary storage warehouse Sampling for conduction of examination Issue or acceptance of conformity cate certifi Examination Acceptance of the cate from CIS certifi countries without examination

Agency 8 Agency for standardization, metrol- cation ogy, certifi and trade inspection “TajikStandart” Stage 3. Obtaining a conformity cate certifi

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 175 FOREIGN TRADE AND TECHNICAL REGULATION Costs 400-500 somoni ($125-126) Cost depends on product type processing Duration of from 2 days up to weeks 3 days from 2 hours to 3 days tures Number of signa- 1 1 1 Steps 1. Submission of application; 2. Visit of the storehouse where products are stored (done once); 3. Conduction of ra- diometric measure- ments; 4. Provision of the samples of the good (every time); 5. Preparation of ed conclusion unifi for product and premises. 1. When crossing the border the necessary documents are checked. If needed a sampling is conducted 2. Based on submitted documents and conducted inspection and examination veterinary cate is issued certifi 3. After that products can be released to market. 1. Submission of application 2. Submission of necessary documents 3. Submission of the copy of phyto- cate (if sanitary certifi required) 4. Examination 5. Issuance of import quarantine permits ments, forms Examples of docu- Conclusion of SES cate certifi Veterinary 1. Application 2. Contract Procedure Conduction of ra- diometric measure- ments Issuance of vet- cates erinary certifi instead of veterinary cates of export certifi country Import quarantine permits Agency SES Ministry of Agricul- ture Central administrative board of veterinary State agency of veterinary surveillance on the state border and transport Ministry of Agri- culture , Central state inspection on quarantine of plants or district agency on quarantine of plants Stage 4. Obtaining a sanitary- epidemiological conclusion 5. For products with animal origin: a) Obtaining of vet- cate erinary certifi b) Obtaining of import quarantine permits

176 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 9. METHODOLOGY OF THE SURVEy METHODOLOGY OF THE SURVEY

9. methodoloGy of the survey

The survey was conducted by an independent research company in May 2006. Interviewers of the company personally conducted interviews via a questionnaire consisting of 178 questions. Interviews in the provinces (oblasts) were conducted in province centers and surrounding rural areas.

9.1 sample selection

The selection of the respondents was random, based on established quotas for each region, sector of business activity, and small and medium business category. The survey sample includes 700 dehkan farmers, 1,000 individual entrepreneurs, and 800 small and medium companies located in Sughd province, Khatlon province (Kurgan-Tube and Kulyab districts), Gorno-Badahkshan Autonomous Province (GBAO), Districts of Republican Subordination, and the capital city of Dushanbe.

The respondents were owners or managers of enterprises, fi rms, or farms, responsible for decision-making.

In an effort to include all sectors of the economy and all regions of the country, sample selection was based on offi cial data made available by the State Statistics Committee of the Republic of Tajikistan, as of January 1, 2006.1

Sampling was based on the following criteria:

1. Sectors of business activity in which small and medium businesses operate; 2. Regions of Tajikistan where small and medium businesses operate; and 3. Number of businesses, by category: • Number of individual entrepreneurs and dehkan farmers, by region; • Number of small and medium companies, by region, sector of business activity, and number of employees.

The total sample includes representatives of small and medium businesses engaged in the following lines of business and located in the following regions of the Republic of Tajikistan:

1. DEHKAN FARMERS Region Offi cial number of dehkan farmers % of dehkan farmers Number of questionnaires Dushanbe city 9 0 0 Districts of Republican Subordina- 10,126 39 269 tion (DRS) Gorno-Badakhshan Autonomous 175 1 30 Province (GBAO) Kulyab district (Khatlon province) 4,229 16 110 Kurgan-Tube district (Khatlon 6,119 24 155 province) Sughd province 5,219 20 136 Total 25,877 100 700

1 For reconstruction of the sample representativeness, a weighting procedure was used in analysis. 2 Firms with 50 or fewer employees are classed as small enterprises, while fi rms between 51-200 employees are classed as medium enterprises.

178 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 METHODOLOGY OF THE SURVEY

2. INDIVIDUAL ENTREPRENEURS Region Offi cial number of individual entre- % of individual entrepreneurs Number of questionnaires preneurs Dushanbe city 21,452 25 250 Districts of Republican Subordina- 16,066 19 187 tion (DRS) Gorno-Badakhshan Autonomous 2,265 3 26 Province (GBAO) Kulyab district (Khatlon province) 5,460 6 63 Kurgan-Tube district (Khatlon 13,247 15 155 province) Sughd province 27,365 32 319 Total 85,855 100 1000

3. SMALL AND MEDIUM COMPANIES Enterprises with 50 or fewer employ- Enterprises with 51 -200 employees Total ees Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing (Industry) 795 12 94 83 37 9 878 13 103 Construction 890 13 104 34 15 3 924 13 108 Agriculture 394 6 48 62 28 6 456 7 54 Trade and public catering 1,240 18 147 9 4 1 1,249 18 147 Health 116 2 14 2 1 0 118 2 14 Transport and communication 156 2 20 8 4 1 164 2 20 Other 3,161 47 350 24 11 3 3,185 46 353 Total 6,752 97 777 222 3 23 6,974 100 800

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 179 METHODOLOGY OF THE SURVEY

Distribution of the small and medium companies by regions is as follows:

Dushanbe city Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the city Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 195 7 20 11 32 1 206 7 21 (Industry) Construction 275 10 30 11 32 1 286 10 31 Agriculture 25 1 3 1 3 0 26 1 3 Trade and pub- 511 19 55 3 9 0 514 18 55 lic catering Health 59 2 6 0 0 0 59 2 6 Transport and 57 2 6 2 6 0 59 2 6 communication Other 1626 59 173 6 18 1 1632 59 174 total 2748 99 293 34 1 3 2782 40 296

Districts of Republican Subordination (DRS)3 Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the DRS Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 152 13 18 13 34 1 165 14 19 (Industry) Construction 245 21 29 10 26 1 255 21 30 Agriculture 94 8 11 7 18 0 101 8 11 Trade and pub- 285 24 33 2 5 0 287 23 33 lic catering Health 17 1 3 0 0 0 17 1 3 Transport and 15 1 3 1 3 0 16 1 3 communication Other 376 32 42 5 13 1 381 31 43 total 1184 97 139 38 3 3 1222 18 142

Gorno-Badakhshan Autonomous Province (GBAO) Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the Province Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 11 15 6 1 33 0 12 16 6 (Industry) Construction 11 15 4 0 0 0 11 15 4 Agriculture 6 8 3 1 33 0 7 9 3 Trade and pub- 29 41 11 0 0 0 29 39 11 lic catering Health 2 3 1 0 0 0 2 3 1 Transport and 1 1 1 0 0 0 1 1 1 communication Other 11 15 4 1 33 0 12 16 4 total 71 96 30 3 4 0 74 1 30

3 In an effort to better address uneven development of economy and business enabling environment in Districts of Republican Subordination due to geographical differences, we divided them into two parts: i) DRS A (Hissar valley) – representing more developed part of DRS with existence of some industry and availability of irrigated land plots; ii) DRS B (Rasht valley) - more mountainous regions with low economical development.

180 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 METHODOLOGY OF THE SURVEY

Kulyab District of Khatlon Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the District Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 35 10 4 7 37 1 42 11 5 (Industry) Construction 97 27 11 4 21 0 101 27 12 Agriculture 36 10 4 6 32 1 42 11 5 Trade and pub- 45 13 5 0 0 0 45 12 5 lic catering Health 3 1 0 0 0 0 3 1 0 Transport and 3 1 0 0 0 0 3 1 0 communication Other 140 39 16 2 11 0 142 38 16 total 359 95 41 19 5 2 378 5 43

Kurgan-Tube District of Khatlon Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the District Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 49 12 6 8 35 1 57 13 7 (Industry) Construction 70 16 8 1 4 0 71 16 8 Agriculture 60 14 7 11 48 1 71 16 8 Trade and pub- 69 16 8 1 4 0 70 16 8 lic catering Health 4 1 0 0 0 0 4 1 0 Transport and 7 2 1 0 0 0 7 2 1 communication Other 167 39 19 2 9 0 169 38 19 total 426 95 49 23 5 3 449 6 52

Sughd Province Enterprises with 50 or fewer employees Enterprises with 51 -200 employees Total for the Province Offi cial % of total Number of Offi cial % of total Number of Offi cial % of total Number of number of number question- number of number question- number of number question- enterprises enterprises naires enterprises enterprises naires enterprises enterprises naires Manufacturing 353 18 40 43 41 5 396 19 45 (Industry) Construction 192 10 22 8 8 1 200 10 23 Agriculture 173 9 20 36 34 4 209 10 24 Trade and pub- 301 15 35 3 3 0 304 15 35 lic catering Health 31 2 3 2 2 0 33 2 4 Transport and 73 4 8 5 5 1 78 4 9 communication Other 841 43 96 8 8 1 849 41 97 total 1964 95 225 105 5 12 2069 30 237

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 181 METHODOLOGY OF THE SURVEY

9.2 additional survey on unofficial solutions

To better address the changing relationships between offi cials and entrepreneurs, IFC together with the survey company elaborated a special questionnaire which was rolled-out in a separate survey conducted among 1,000 entrepreneurs in June 2006. This survey studied in particular the issues with unoffi cial solutions during select procedures. Therefore it should be distinguished between: • Unoffi cial payments, i.e., use of payments during procedures not foreseen by legislation to solve issues positively; • Unoffi cial solutions, i.e., a broader defi nition of methods to solve issues positively like presents, lunches, unoffi cial payments and other services. According to these defi nitions unoffi cial payments are assumed to be an integral part of unoffi cial solutions.

9.3 indexes and definitions used in the report

CAGR (Compound Annual Growth Rate) - presents the average annual growth over a period. It is calculated as follows:

1/N W(t) CAGR (t , t) = - 1 0 [ W(t )] 0

where: W(t) – Final value;

W(t0) – Initial value; N – Number of years.

In our survey we distinguish between start-up and existing businesses based on a year a company started its activity:

• start-ups – entities which started their activity after 2005; • existing businesses – entities which started their activity prior to 2005.

4 Even if in some cases start-up sampling does not fully refl ect the statistical signifi - cance, it is supposed to show the general trend.

182 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 a. statistical APPENDIXES SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

184 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.1. SMES, BY TYPOLOGY OF BUSINESS Chart A1.2. SMES: START-UPS VS. EXISTING BUSINESSES1

% OF RESPONDENTS % OF RESPONDENTS

73% Individual a1 entrepreneurs

Existing 87% businesses 91% 93% 6% Small and medium companies

Start-ups 13% 9% 7%

Individual Small and medium Dehkan farmers 21% Dehkan farmers entrepreneurs companies

Chart A1.3. INDIVIDUAL ENTREPRENEURS, BY SECTORS OF ACTIVITY Chart A1. 4. SMALL AND MEDIUM COMPANIES, BY SECTORS OF ACTIVITY

% OF RESPONDENTS % OF RESPONDENTS

Retail trade 66% Consumer services 17%

Catering 11% Retail trade 16%

Wholesale trade 7% Construction 13%

Consumer services 6% Production of consumer goods 11%

Transport 6% Catering 7%

Production 2% Wholesale trade 6% of consumer goods

Communication 0.7% Tourism, hotel business 4%

Processing of 0.3% Consulting services 3% agriculture production

Medical services 0.2% Agriculture 3%

Construction 0.2% Processing of agriculture production 3%

Tourism, hotel business 0.1% Transport 2%

Other 0.8% Communication 1%

Medical services 1%

Pharmaceutics 0.7%

Other 11%

1 Start-ups and existing businesses are considered by year of starting of the activity. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 185 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.5. AVERAGE TURNOVER, BY TYPOLOGY OF BUSINESS Chart A1.6. AVERAGE PROFITABILITY, BY TYPOLOGY OF BUSINESS % SOMONI

216,000 32%

28%

15%

30,900 17,090

Individual Small and medium Dehkan farmers Individual Small and medium entrepreneurs companies Dehkan farmers entrepreneurs companies

Chart A1.7. DISTRIBUTION OF TURNOVER Chart A1.8. AVERAGE TURNOVER, BY SECTORS OF ACTIVITY2 % OF RESPONDENTS SOMONI INDIVIDUAL ENTREPRENEURS Processing 157,633 39 % of agriculture production 29% 21% Construction 121,429

5% 3% 1% 2% Wholesale trade 59,578

Communication 54,844 SMALL AND MEDIUM COMPANIES Production 50,208 36 % of consumer goods

Agriculture 34,135 16% 13% 11% 10% 9% 5% Retail trade 27,033

Consumer services 16,250 DEHKAN FARMERS

53 % Catering 11,668

Transport 10,253 28%

Other 139,715 9% 4% 3% 3% somoni somoni somoni somoni somoni somoni 100,000 to more than 1,000 to 3,000 less than 1,000 3,000 to 15,000 500,000 somoni 15,000 to 30,000 30,000 to 50,000 5,000,000 somoni 50,000 to 100,000

2 Category “other” includes Pharmaceutics, Medical services, Tourism, Hotel business and Consulting services. 186 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.9. AVERAGE PROFIT, BY TYPOLOGY OF BUSINESS Chart A1.10. SMALL AND MEDIUM COMPANIES’ GAINED PROFIT, SOMONI BY SECTORS OF ACTIVITY3

SOMONI

19,690 a1

Retail trade 20,420

Construction 13,442

Catering 9,430 Production 8,370 of consumer goods Consumer services 6,250 5,790 4,000 Communication 5,532

Other 34,950

Individual Small and medium Dehkan farmers entrepreneurs companies

Chart A1.11. AVERAGE PROFIT GAINED BY INDIVIDUAL ENTREPRENEURS, BY Chart A1.12. AVERAGE PROFIT GAINED BY INDIVIDUAL ENTREPRENEURS, SECTORS OF ACTIVITY4 BY REGIONS

SOMONI SOMONI

Dushanbe 6,395 Retail trade 4,940 Sughd province 5,960 Catering 2,305 Kurgan-Tube district Whole sale trade 2,130 3,362 (Khatlon province)

Consumer services 1,990 Kulyab district 2,524 (Khatlon province) Other 2,220 Gorno-Badakshan 2,439 Autonomous Province

Districts of Republican 1,693 Subordination A

Districts of Republican 1,327 Subordination B

Chart A1.13. AVERAGE PROFIT GAINED BY DEHKAN FARMERS, BY REGIONS

SOMONI

Kurgan-Tube district 15,105 (Khatlon province)

Kulyab district 8,123 (Khatlon province)

Sughd province 4,567

Districts of Republican 2,009 Subordination A

Districts of Republican 1,750 Subordination B

3 Category “other” includes Pharmaceutics, Medical services, Tourism, Hotel business, Agriculture, Transportation, Wholesale Trade, and Consulting services. 4 Category “other” includes Pharmaceutics, Medical services, Tourism, Hotel business, Agriculture, Transportation, Construction, Production of Consumer Goods, and Consulting services. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 187 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.14. PROFIT IN RANGES Chart A1.15. EMPLOYMENT IN SME SECTOR, BY TYPOLOGY OF BUSINESS

% OF RESPONDENTS AVERAGE # OF EMPLOYEES

INDIVIDUAL ENTREPRENEURS 2 Individual entrepreneurs 43% 0.2

34% Small and 15 medium companies 6 11% 7% 2% 3% 13 Dehkan farmers 13 SMALL AND MEDIUM COMPANIES

42% . Permanent . Seasonal

15% 16% 12% 10% Chart A1.16. EMPLOYMENT IN SME SECTOR, BY SECTORS OF ECONOMY5 4%

AVERAGE # OF EMPLOYEES

DEHKAN FARMERS

Processing of agriculture 18 46% production 5

17 Construction 17 32%

13 Agriculture 13 8% 5% 4% 4% Production 6 of consumer goods 0.7

5 Communication 5 somoni somoni somoni somoni somoni more than

200 to 1,000 4 less than 200

1,000 to 5,000 Consumer services 20,000 somoni

5,000 to 10,000 1 10,000 to 20,000

3 Catering 0.4

3 Wholesale trade 0.6

2 Transport 0.2

2 Retail trade 0.2

8 Others 3

. Permanent . Seasonal

5 Category “other” includes Pharmaceutics, Medical services, Tourism, Hotel business and Consulting services. 188 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.17. AVERAGE MONTHLY SALARY OF EMPLOYEES, BY SECTORS OF ACTIVITY6 Chart A1.18. AVERAGE MONTHLY SALARY OF EMPLOYEES, BY SOMONI TYPOLOGY OF BUSINESS

Construction 150 SOMONI Production 141 122 a1 of consumer goods 120 Retail trade 130

Transport 112

Communication 104

Catering 100

Consumer services 100 46

Wholesale trade 88 Processing 64 of agriculture production Agriculture 46

Other 145 Individual Small and medium Dehkan farmers entrepreneurs companies

Chart A1.19. AVERAGE MONTHLY SALARY, BY REGIONS

SOMONI INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Districts of Republican 164 109 45 Subordination A

Gorno-Badakshan 152 143 Autonomous Province

Dushanbe 149 143

Districts of Republican 119 114 Subordination B

Sughd province 94 101 40

Kulyab district 93 85 35 (Khatlon province)

Kurgan-Tube district 79 105 36 (Khatlon province)

6 Category “others” includes Pharmaceutics, Medical services, Tourism, hotel business and consulting services. Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 189 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.20. KNOWLEDGE OF THE LEGISLATION REGULATING BUSINESS ACTIVITY

% OF RESPONDENTS

Individual 15% 51% 21% 12% entrepreneurs

Small and medium 34% 59% 6% 0.7 companies

Dehkan farmers 26% 59% 13% 3%

Have fairly Have cursory Have poor Have no good knowl- knowledge knowledge knowledge edge

Chart A1.21. KNOWLEDGE OF THE LEGISLATION REGULATING BUSINESS ACTIVITY

% OF RESPONDENTS

Existing businesses 19% 52% 19% 10%

Start-ups 16% 6 2% 14% 9%

Have fairly Have cursory Have poor Have no good knowl- knowledge knowledge knowledge edge

Chart A1.22. MAIN SOURCES TO FOLLOW THE CHANGES IN THE CURRENT LEGISLATION

% OF RESPONDENTS7

Mass media 71%

Friends and colleagues 70%

State bodies 17%

Lawyers 6%

Professional association 3%

Other 2%

IT software “Adlia” 0.6%

IT software “Right” 0.6%

7 Respondents could select more than one answer. 190 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.23. AWARENESS OF INTRODUCED LEGISLATIVE NORMS DURING 2004-2005

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS a1

Tax Code dd. January 1, 2005 41% 84% 76%

Law “On Licensing” dd. May 17, 2004 16% 51% 22%

Custom Code dd. January 1, 2005 14% 48% 19%

Law “ On Collateral of Movable Property” 11% 38% 18% dd. March 1, 2005

Chart A1.24. INFLUENCE OF THE INTRODUCED NORMS OF THE DAILY ACTIVITY BY TYPOLOGY OF BUSINESS

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS

Law “ On Collateral of Movable Property” 34% 48% 13% dd. March 1, 2005

Law “On Licensing” dd. May 17, 2004 50% 45% 5%

Custom Code dd. January 1, 2005 41% 50% 10%

Tax Code dd. January 1, 2005 51% 36% 14%

SMALL AND MEDIUM COMPANIES

Law “ On Collateral of Movable Property” 48% 45% 7% dd. March 1, 2005

Law “On Licensing” dd. May 17, 2004 54% 39% 7%

Custom Code dd. January 1, 2005 47% 47% 7%

Tax Code dd. January 1, 2005 57% 33% 10%

DEHKAN FARMERS

Law “ On Collateral of Movable Property” 50% 44% 6% dd. March 1, 2005

Law “On Licensing” dd. May 17, 2004 64% 29% 3%

Custom Code dd. January 1, 2005 50% 45% 5%

Tax Code dd. January 1, 2005 77% 18% 5%

. Positive infl uence . No infl uence . Negative infl uence

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 191 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.25. AWARENESS ABOUT ANTIMONOPOLY AGENCY Chart A1.26. MEMBERSHIP IN ANY BUSINESS/PROFESSIONAL ASSOCIATION

% OF RESPONDENTS % OF RESPONDENTS

no answer 6% 96% 51% 61% no 98% no 87,4 no 74% no no 20% no

20% under consideration

54%

39% 49%

2% 26% yes yes yes 4% yes yes yes

Do you know about Have you ever ap- Did you succeed Individual Small and Dehkan the Agency for plied for assistance by applying to the entrepreneurs medium farmers Anti-Monopoly Policy from the Agency? Agency? companies and Support of the Entrepreneurship?

Chart A1.27. ASSOCIATIONS SMES BELONG TO

% OF RESPONDENTS

INDIVIDUAL SMALL AND DEHKAN FARMERS ENTREPRENEURS MEDIUM COMPANIES

Association of SMB 2% 10% 1%

Centre for support and devel- 0.7% 9% 0.7% opment of entrepreneurship

Professional association 0.7% 5% 0.1%

Union of 0.3% 0.2% 0.3% exporters

Association of DFH 0.2% 0.5% 44%

Association of water users 0.1% 0.1% 7%

Branch association 0.1% 3%

Other 0.4% 3% 0.8%

192 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.28. REASONS PROVIDED BY SMES FOR NOT BEING A MEMBER IN ANY BUSINESS/PROFESSIONAL ASSOCIATION

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS a1 I don’t know about 61% 34% 33% their existence

No practical use 22% 42% 37%

Too little time 16% 22% 22%

Diffi cult to answer 8% 7% 14%

Unoffi cial fees 1% 2% 3%

High membership fees 1% 4% 4%

Other 4% 2% 3%

Chart A1.29. FREQUENCY OF REPORTING

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS

Fund for social protection of population 56% 8% 16% 20% 1%

Statistical report 85% 3% 7% 4% 1%

Statement on fi nancial results 43% 17% 18% 21% 2%

Balance sheet 65% 14% 11% 10% 0.5%

SMALL AND MEDIUM COMPANIES

Fund for social protection of population 27% 64% 2 % 3% 4%

Statistical report 47% 37% 2% 6% 8%

Statement on fi nancial results 26% 36% 2% 18% 18%

Balance sheet 23% 38% 1% 26% 13%

DEHKAN FARMERS

9% 62% 18% 5% Fund for social protection of population 5%

Statistical report 22% 45% 20% 9% 4%

Statement on fi nancial results 3% 24% 4% 15% 54%

Balance sheet 7% 50% 4% 12% 27%

. Monthly . Quarterly . Every six months . Annually . Never

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 193 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.30. REPORTING TO DIFFERENT AGENCIES

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS

Tax Department 82% 18%

Fund for Social Protection of Population 40% 60%

State Statistics Committee 9% 91%

Khukumat 3% 97%

Commercial Bank 1% 99%

Ministry of Agriculture 100%

Ministry of Justice 100%

SMALL AND MEDIUM COMPANIES

Tax Department 91% 9%

Fund for Social Protection of Population 92% 8%

State Statistics Committee 90% 10%

Khukumat 10% 90%

Commercial Bank 8% 92%

Ministry of Agriculture 1% 99%

Ministry of Justice 4% 96%

DEHKAN FARMERS

State Statistics Committee 96% 4%

Fund for Social Protection of Population 92% 8%

Tax Department 92% 8%

Ministry of Agriculture 15% 85%

Khukumat 15% 85%

Ministry of Justice 1% 99%

Commercial Bank 0.3% 99.7%

. No . Yes

194 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.31. OVERALL BURDEN FOR REPORTING IN MONETARY TERMS INCLUDING SALARY, UNOFFICIAL PAYMENTS, OVERHEADS PER ONE REPORT

SOMONI

39 a1

Individual entrepreneurs Small and medium companies Dehkan farmers

Chart A1.32. RENT OF PREMISES

% OF RESPONDENTS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Market location 49% 6% 3%

Shop location 9% 3% 1%

Trade center location 4% 4% 0.7%

Part of private house 3% 6% 0.3%

Part of production 1% 6% 2% facility Offi ce in administrative 1% 20% building 0.8%

Apartment 0.8% 4%

Other 4% 3% 0.1%

Chart A1.33. Average AMOUNT SPENT PER YEAR FOR RENTING Chart A1.34. AVERAGE AMOUNT SPENT PER YEAR FOR RENTING THE PREMISES THE PREMISES (INCLUDING UNOFFICIAL PAYMENTS, PUBLIC SERVICES) BY INDIVIDUAL ENTREPRENEURS (INCLUDING UNOFFICIAL PAYMENTS, PUBLIC SERV-

SOMONI ICES), BY REGIONS 2,934 3000 SOMONI

Gorno-Badakshan Au- 2,259 tonomous Province

Dushanbe 919

1500 Kurgan-Tube district 859 (Khatlon province)

811 Sughd province 697 621

Districts of Republican 590 Subordination A

0 Districts of Republican 532 Subordination B Individual entrepre- Small and medium Dehkan farmers Kulyab district (Khatlon 370 neurs companies province)

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 195 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.35. DISTRIBUTION OF THE EXPENSES FOR RENTING THE PREMISES

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS

31% 29% 24%

15%

600 to 1,200 more than 1,200 up to 300 somoni 300 to 600 somoni somoni somoni

SMALL AND MEDIUM COMPANIES

48%

25%

16% 11%

600 to 1,200 above 1,200 up to 300 somoni 300 to 600 somoni somoni somoni

DEHKAN FARMERS

58%

21%

12% 9%

600 to 1,200 above 1,200 up to 300 somoni 300 to 600 somoni somoni somoni

196 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

Chart A1.36. BASED ON YOUR EXPERIENCE, WOULD YOU START YOUR ACTIVITY AGAIN

% OF RESPONDENTS

a1 Individual entrepreneurs 65% 25% 10%

Small and medium companies 63% 24% 13%

Dehkan farmers 66 26% 8%

. Yes . No . I don’t know

Chart A1.37. ENTREPRENEURS’ EXPECTATIONS FOR CHANGE IN BUSINESS ENVIRONMENT OVER THE NEXT 12 MONTHS IN THE REGION OF ACTIVITY

% OF RESPONDENTS

2005 62% 18% 20%

2002 52% 37% 11%

. Improve . Worsen . Remain same

Chart A1.38. ENTREPRENEURS’ EXPECTATIONS FOR CHANGE IN BUSINESS ENVIRONMENT OVER THE NEXT 12 MONTHS, BY REGIONS

% OF RESPONDENTS

Dushanbe 54% 29% 17%

Districts of Republican Subordination B 92% 1% 7%

Districts of Republican Subordination A 73% 12% 15%

Sughd province 62% 16% 23%

Kurgan-Tube district (Khatlon province) 51% 24% 25%

Kulyab district (Khatlon province) 69% 12% 19%

Gorno-Badakshan Autonomous Province 57% 16% 28%

. Improve . Worsen . Remain same

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 197 SME IN TAJIKISTAN: OVERVIEW OF THE SECTOR, MAIN TRENDS AND BUSINESS EXPECTATIONS

198 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 REGISTRATION

Chart A2.1. ENTREPRENEURS REGISTERED IN 2005 Chart A2.2. DISTRIBUTION OF THE REGISTRATION DURATION

% OF RESPONDENTS % OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS 100%

48%

20% 20%

9% 3% 0.3% a2

22% 24% SMALL AND MEDIUM COMPANIES

41%

24% 24% Individual Small and Dehkan farmers entrepreneurs medium companies 10%

Chart A2.3. AVERAGE DURATION OF THE REGISTRATION FOR INDIVIDUAL ENTREPRENEURS, BY REGIONS DEHKAN FARMERS BUSINESS DAYS

37% Kulyab district 7 27% (Khatlon province) 24%

Dushanbe 6 7% 5% Gorno-Badakshan 5 Autonomous Province up to 1 1 to 5 5 to 10 10 to 25 25 to 50 50 to 100 more than Districts of Republican 5 day days days days days days 100 days Subordination A

Sughd province 5

Kurgan-Tube district 5 (Khatlon province)

Districts of Republican 3 Subordination B

Chart A2.4. AVERAGE COST FOR REGISTRATION FOR INDIVIDUAL ENTREPRENEURS, BY REGIONS

SOMONI

Dushanbe 181

Gorno-Badakshan 132 Autonomous Province

Kurgan-Tube district 114 (Khatlon province)

Kulyab district 108 (Khatlon province)

Districts of republican 105 subordination B

Sughd province 93

Districts of republican 58 subordination A

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 199 REGISTRATION

Chart A2.5. DISTRIBUTION OF THE REGISTRATION COST Chart A2.6. DEHKAN FARMERS WHO RECEIVED A SHARE OF DEBTS % OF RESPONDENTS BY THE RESTRUCTURING OF STATE FARMS

% OF RESPONDENTS INDIVIDUAL ENTREPRENEURS

44% Yes No 73% 27% 23% 24%

7% 2% 0.4%

SMALL AND MEDIUM COMPANIES

60% Average amount of restructured debt 34,400 somoni

20% 17%

DEHKAN FARMERS

44%

23% 16% 8% 9%

up to 50 50 to 100 100 to 250 250 to 500 500 to 1000 more than somoni somoni somoni somoni somoni 1000 somoni

Chart A2.7. THREE MAJOR PROBLEMS OCCURRED DURING REGISTRATION

% OF RESPONDENTS UNDERGOING REGISTRATION

Lack of access to information Non-transparent requirements Large number of required documents

Individual entrepreneurs 16% 6% 12%

Small and medium companies 18% 14% 28%

Dehkan farmers 19% 8% 23%

200 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 LICENSING

Chart A3.1. THREE MAJOR OBSTACLES TO OBTAINING A LICENSE

% OF RESPONDENTS UNDERGOING LICENSING

Necessity to make unoffi cial payment High cost of licenses Necessity to obtain several licenses

Individual entrepreneurs 7% 19% 16%

Small and medium 4% 26% 8% companies

Dehkan farmers 6% 13% 27%

Chart A3.2. DISTRIBUTION OF COSTS FOR OBTAINING LICENSES

% OF RESPONDENTS UNDERGOING LICENSING

INDIVIDUAL ENTREPRENEURS a3 39%

25% 17% 12% 7%

SMALL AND MEDIUM COMPANIES

27% 25% 17% 20% 11%

DEHKAN FARMERS

39%

25% 17%

less than 100 100 to 200 200 to 400 400 to 800 more than somoni somoni somoni somoni 800 somoni

Chart A3.3. APPLICANTS WHO OBTAINED LICENSES Chart A3.4. AVERAGE VALIDITY PERIOD OF LICENSES,

BY OVERNMENTAL GENCY % OF RESPONDENTS UNDERGOING LICENSING G A MONTHS Individual entrepreneurs 92% Ministry of Health 18 Small and medium companies 95% Ministry of Agriculture 12 Dehkan farmers 75% Ministry of Economy 9 and Trade

Ministry of Energy 9

Ministry of Transportation 9 State Scientifi c Centre of the Medicine Examination 5 (Ministry of Health) Transport Inspection 4

Others 3

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 201 LICENSING

202 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

Chart A4.1. AVERAGE NUMBER OF PERMITS, BY REGION

# OF PERMITS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Gorno-Badakshan 6 4 5 Autonomous Province

Districts of Republican 4 5 1 Subordination A

Kulyab district 3 6 2 (Khatlon province)

Districts of Republican 2 4 1 Subordination B

2 5 Sughd province 1

Kurgan-Tube district 1 4 2 (Khatlon province)

2 3 Dushanbe

Chart A4.2. DISTRIBUTION OF THE NUMBER OF PERMITS Chart A4.3. AVERAGE NUMBER OF PERMITS

% OF RESPONDENTS # OF PERMITS START-UPS INDIVIDUAL ENTREPRENEURS a4

62% 4 4

20%

10% 9%

SMALL AND MEDIUM COMPANIES EXISTING BUSINESSES

4 32% 27% 20% 20%

DEHKAN FARMERS

61% Individual Small and medium Dehkan entrepreneurs companies farmers

20%

10% 8%

more than 5 1 permit 2 to 3 permits 4 to 5 permits permits

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 203 PERMITS

Chart A4.4. AVERAGE COST OF OBTAINING ALL PERMITS, BY REGIONS

SOMONI INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Gorno-Badakshan 182 Autonomous Province

Kulyab district 118 476 208 (Khatlon province)

Districts of Republican 72 21 Subordination B

Districts of Republican 69 291 2 Subordination A

64 372 Dushanbe

56 396 Sughd province 16

Kurgan-Tube district 51 286 28 (Khatlon province)

Chart A4.5. AVERAGE COST OF OBTAINING ALL PERMITS Chart A4.6. DISTRIBUTION OF COSTS FOR OBTAINING ALL PERMITS

SOMONI % OF RESPONDENTS

451 INDIVIDUAL ENTREPRENEURS 365 58% 252

163 16% 71 12% 14% 44

Individual Small and medium Dehkan entrepreneurs companies farmers SMALL AND MEDIUM COMPANIES

2002 2005 34% 35%

18% 13%

Chart A4.7. TIME REQUIRED TO OBTAIN ONE PERMIT DEHKAN FARMERS

business days, on average 74%

8 7 7 7

4 4 11% 6% 9%

up to 50 50 to 100 100 to 200 more than 200 somoni somoni somoni somoni

Individual Small and medium Dehkan entrepreneurs companies farmers

2002 2005

204 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 PERMITS

Chart A4.8. TIME REQUIRED TO OBTAIN ALL PERMITS, BY REGIONS

BUSINESS DAYS, ON AVERAGE INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Gorno-Badakshan 25 Autonomous Province

Districts of Republican 9 10 6 Subordination A

Kulyab district 8 8 7 (Khatlon province)

7 8 6 Sughd province

6 8 Dushanbe

Districts of Republican 6 2 Subordination B

Kurgan-Tube district 5 5 3 (Khatlon province)

Chart A4.9. TIME NEEDED TO OBTAIN ALL PERMITS

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS a4

66%

21% 6% 7%

SMALL AND MEDIUM COMPANIES

34% 30% 16% 20%

DEHKAN FARMERS

60%

31%

7% 3%

up to 3 3 to 7 7 to 12 more than 12 days days days days

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 205 PERMITS

Chart A4.10. THREE MAJOR OBSTACLES TO OBTAINING PERMITS

% OF RESPONDENTS WHO OBTAINED PERMITS

Lack of access to information Non-transparent requirements Large number of required documents

Individual entrepreneurs 17% 9% 10%

Small and medium companies 19% 12% 20%

Dehkan farmers 18% 9% 16%

Chart A4.11. UNOFFICIAL PAYMENTS MADE WHILE OBTAINING PERMITS, BY GOVERNMENTAL AGENCIES

% OF RESPONDENTS WHO OBTAINED PERMITS

State Scientifi c Centre of 44% the Medicine Examination Committee for Architecture 38% and Construction

Road police (GAI) 30%

Gas supply authority 28%

State Industrial safety en- 22% forcement agency

Ministry of Internal Affairs 22%

Energy safety authority 22%

Sanitary-Epidemiological 19% Service

Energy distribution/Barki Tojik 19%

Regional department of 19% Internal affairs

Fire safety authority 19%

Khukumat 18%

Ministry of communication 16%

Water supply authority 11%

Environmental safety 11% authority

Other 10%

Labor and social protection 10% authority Trade inspection 10% (Ministry of Economy and Trade)

Antimonopoly agency 9%

National Bank of Tajikistan 3%

Ministry of Finance 1%

206 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

Chart A5.1. MAIN REASONS FOR NOT HAVING A BANK ACCOUNT

% OF RESPONDENTS HAVING NO BANK ACCOUNT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No need/ 96% 86% 95% no practical benefi ts

Diffi culty 6% 13% 7% withdrawing cash

High commission fees 5% 8% 2%

Bank bureaucracy 4% 6% 4%

Avoiding taxation 2% 6% 1%

Other 1% 0.2% 1%

Chart A5.2. PROBLEMS ENTREPRENEURS FACED WHEN USING THEIR BANK ACCOUNT

% OF RESPONDENTS HAVING BANK ACCOUNT INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS No problems 66% 74% 49%

Long duration of the 19% 8% 17% payment transactions

Multiple requirements 18% 8% 15%

Diffi culty 13% 11% 23% withdrawing cash a5 Bank bureaucracy 6% 11% 13%

High commission fees 4% 7% 7%

Need for 4% 4% 12% unoffi cial payment Length of time to convert 2% 3% somonis to hard currency Usage of the information of my 3% 6% account by state bodies

Others 0.5% 5%

Chart A5.3. ENTREPRENEURS WHO BELIEVE THAT THEIR BANK DISCLOSES INFORMATION TO STATE AGENCIES WITHOUT APPROVAL

% OF RESPONDENTS HAVING BANK ACCOUNT

Individual entrepreneurs 16%

Small and medium companies 22%

Dehkan farmers 36%

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 207 ENTREPRENEURS AND FINANCE

Chart A5.4. AGENCIES ENTREPRENEURS BELIEVE BANK DISCLOSES INFORMATION TO

% OF RESPONDENTS HAVING BANK ACCOUNT

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS National Bank 43% 12% 15% of Tajikistan

Tax inspection 28% 37% 33%

Tax police 13% 20%

Prosecutor’s offi ce 16% 9%

Ministry of internal 2% 2% affairs

Khukumat 14% 16%

Other 29% 6% 5%

Chart A5.5. TYPES OF INVESTMENTS SMES MADE IN 2005

% OF RESPONDENTS MAKING INVESTMENTS

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Major building repairs 18% 26% 4%

New equipment 6% 22% 2%

New construction 4% 10% 2%

Major equipment 3% 12% 6% repairs

Transportation 2% 7% 5%

Other 2% 2% 1%

Chart A5.6. SOURCE OF FUNDING FOR INVESTMENT

% OF RESPONDENTS CONDUCTING INVESTMENT

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Personal savings 87% 83% 85%

Non-bank loan (friends, 11% 12% 8% relatives)

Banking loan 4% 12% 5%

Loan from MFOs 4% 3%

Other 3% 5% 3%

Direct investment 3% 5% (local or foreign investor)

Future companies 0.6% 16%

State funds 0.6% 0.1%

208 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

Chart A5.7. ACCESS TO BANK LOANS BY SMES Chart A5.8. ACCESS TO MFO LOANS BY SMES

% OF RESPONDENTS % OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS INDIVIDUAL ENTREPRENEURS

no no 9% no no no no 66% 83% 66% 87% 4

34% 91% 17% yes yes yes 34% yes 13% yes 96 yes

SMALL AND MEDIUM COMPANIES SMALL AND MEDIUM COMPANIES

no no no no no no 56% 64% 33% 56% 98%

44% 67% 36% yes yes yes 44% yes 2% yes 100% yes

DEHKAN FARMERS DEHKAN FARMERS

no no no no no 9% no 87% 48% 62% 62% 94% a5

38% yes 13% yes 52% yes 38% yes 6% yes 91% yes

Did your company Did you apply for a Did you get a bank Did your company Did you apply for an Did you get an MFO need external bank loan? loan? need external MFO loan? loan? funding in 2005? funding in 2005?

Chart A5.9. REASONS FOR NOT APPLYING FOR LOAN

% OF RESPONDENTS WHO DID NOT APPLY FOR BANK LOAN INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

High fees 44% 44% 39%

No need (found 38% 38% 33% another source of funding)

Collateral requirement 18% 19% 20%

Banking bureaucracy 6% 12% 6%

Necessity for 6% 8% 7% unoffi cial payment Lack of long 5% 10% 19% term loans Long procedure 2% 2% 3% of pledge Insuffi cient 2% 8% 4% loan amount

Lack of a business plan 2% 3% 4%

Other 2% 0.5%

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 209 ENTREPRENEURS AND FINANCE

Chart A5.10. AVERAGE TIME REQUIRED TO OBTAIN LOANS Chart A5.11. DISTRIBUTION OF TIME REQUIRED TO OBTAIN LOANS

BUSINESS DAYS BY INDIVIDUAL ENTREPRENEURS

% OF INDIVIDUAL ENTREPRENEURS WHO OBTAINED A LOAN 25

22 81% 19 77% 14 16

14% 12% 4% 5% 5%

Individual Small and more than 80 Dehkan farmers 1-20 days 20 to 40 days 40 to 80 days entrepreneurs medium companies days

. Bank loan . MFO loan . Bank loan . MFO loan Chart A5.12. LOAN MATURITY, ON AVERAGE Chart A5.13. INTEREST RATES ON LOANS , ON AVERAGE

MONTHS % PER ANNUM 54%

11 11 11 10 10

39% 38% 8 36% 35% 35%

Individual Small and Individual Small and Dehkan farmers Dehkan farmers entrepreneurs medium companies entrepreneurs medium companies

. Bank loan . MFO loan . Bank loan . MFO loan Chart A5.14. CORRELATION OF LOAN MATURITY AND INTEREST RATE ON BANK Chart A5.15. ENTREPRENEURS PROVIDING COLLATERAL FOR LOANS

LOANS PROVIDED TO INDIVIDUAL ENTREPRENEURS % RESPONDENTS WHO OBTAINED A LOAN

INTEREST RATE P.A. 84%

44%

36% 35% 48% 28% 41%

17%

2% 3%

Individual Small and Dehkan farmers entrepreneurs medium companies

up to 3 3 to 6 6 to 12 12 to 24 months months months months . Bank loan . MFO loan 210 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 ENTREPRENEURS AND FINANCE

Chart A5.16. COLLATERAL TO TOTAL AMOUNT OF THE LOAN AMONG Chart A5.17. DISTRIBUTION OF THE LOAN COLLATERAL PROVIDED ENTREPRENEURS WHO PROVIDED COLLATERAL TO INDIVIDUAL ENTREPRENEURS

% OF COLLATERAL % OF INDIVIDUAL ENTREPRENEURS

158% 144% 53%

123%

94%

60% 20% 13% 44% 10% 5%

No collateral up to 50% 50 to 100% 100 to 150% more than Individual Small and Dehkan farmers 150% entrepreneurs medium companies

. Bank loan . MFO loan

Chart A5.18. SHARE OF UNOFFICIAL PAYMENTS IN THE TOTAL BANK LOAN AMOUNT

% RESPONDENTS WHO MADE UNOFFICIAL PAYMENTS WHEN OBTAINING LOAN

18%

6% 5%

Individual Small and Dehkan farmers entrepreneurs medium companies

Chart A5.19. PROBLEMS WITH UNTIMELY PAYOFF OF THE LOAN

% RESPONDENTS WHO OBTAINED A LOAN

PRESENCE OF PROBLEMS WITH PAYOFF MAIN REASONS FOR UNTIMELY PAYOFF

no Changes of the market 53% 73% situation (prices)

Long procedure to convert 19% somonis to hard currency

State regulations 4% (limitations, quotes, license)

Tax and customs regu- 4% lation changes

27% yes Other 20%

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 211 ENTREPRENEURS AND FINANCE

212 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

Chart A6.1. ENTREPRENEURS WHO UNDERWENT AT LEAST ONE INSPECTION, BY Chart A6.2. ENTREPRENEURS WHO UNDERWENT AT LEAST SECTORS OF ECONOMY ONE INSPECTION, BY REGIONS

% OF RESPONDENTS % OF RESPONDENTS

Gorno-Badakshan Transport 100% 100% Autonomous Province

Districts of Republican Medical services 100% 99% Subordination B

Kulyab district Pharmaceuticals 100% 98% (Khatlon province)

Wholesale trade 100% Dushanbe 98%

Districts of Republican Construction 100% 97% Subordination A

Processing 100% Sughd province 96% of agriculture production

Kurgan-Tube district Retail trade 99% 91% (Khatlon province)

Production 98% of consumer goods

Catering 97%

Consumer services 96%

Others 93%

Agriculture 88%

Communication 86%

Consulting services 80% a6

Tourism, hotel business 75%

Chart A6.3. AVERAGE NUMBER OF INSPECTIONS PER BUSINESS IN ONE YEAR, BY REGION

# OF INSPECTIONS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Dushanbe 25 12

Gorno-Badakhshan 19 22 Autonomous Oblast

District of Republican 18 4 Subordination B

Kulyab district 15 17 7 (Khatlon province)

District of Republican 14 14 3 Subordination A

Kurgan-Tube district 14 9 4 (Khatlon province)

Sughd province 8 8 4

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 213 INSPECTIONS

Chart A6.4. DISTRIBUTION OF THE NUMBER OF INSPECTIONS Chart A6.5. DISTRIBUTION OF THE DURATION OF ALL INSPECTIONS

% OF RESPONDENTS WHO WERE INSPECTED % OF RESPONDENTS WHO WERE INSPECTED INDIVIDUAL ENTREPRENEURS 52% INDIVIDUAL ENTREPRENEURS

83% 20% 16% 12%

SMALL AND MEDIUM COMPANIES

11% 35% 32% 4% 2%

16% 18% SMALL AND MEDIUM COMPANIES 57% DEHKAN FARMERS

62% 18% 19% 5%

17% DEHKAN FARMERS 14% 7% 90%

up to 3 4 to 6 7 to 10 more than 10 inspections inspections inspections inspections

7% 2% 2%

up to 3 3 to 6 6 to 8 more than days days days 8 days

Chart A6.6. AVERAGE TIME SPENT FOR ALL INSPECTIONS, BY REGION

BUSINESS DAYS INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Dushanbe 16 29

Kulyab district 6 12 5 (Khatlon province)

District of Republican 6 1 Subordination B

District of republican 4 9 1 subordination A

Kurgan-Tube district 3 15 3 (Khatlon province)

Sughd province 3 14 3

Gorno-Badakhshan 2 13 Autonomous Oblast

214 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 INSPECTIONS

Chart A6.7. AVERAGE COST OF INSPECTIONS (INCLUDING UNOFFICIAL PAYMENTS), BY REGIONS

SOMONI INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

Dushanbe 456 1378

Districts of Republican 156 276 19 Subordination A

Gorno-Badakhshan 346 184 Autonomous Oblast

Sughd province 165 940 93

Kulyab district 149 315 112 (Khatlon province)

Kurgan-Tube district 205 1392 103 (Khatlon province)

Districts of Republican 103 14 Subordination B

Chart A6.8. DISTRIBUTION OF INSPECTION COSTS (INCLUDING UNOFFICIAL Chart A6.9. DISTRIBUTION CHANNELS FOR INSPECTION REGISTRATION BOOK PAYMENTS)

OF RESPONDENTS % OF RESPONDENTS WHO WERE INSPECTED %

INDIVIDUAL ENTREPRENEURS 73% 69%

12% 12% 8% 18%

SMALL AND MEDIUM COMPANIES 4% 3% 2%

64% a6 Other Other

17% 10% 9% Tax inspection Other state bodies Associations/NGOs

DEHKAN FARMERS Antimonopoly agency

87%

8% 3% 2%

up to 100 100 to 300 300 to 600 more than somoni somoni somoni 600 somoni

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 215 INSPECTIONS

Chart A6.10. KNOWLEDGE OF THE LEGISLATION REGULATING INSPECTION PROCEDURE

% OF RESPONDENTS

Have suffi ciently good knowledge Have cursory knowledge Have poor knowledge Have No knowledge

Individual 18% 51% 22% 8% entrepreneurs

Small and medium 40% 52% 8% 0.2% companies

Dehkan farmers 32% 47% 18% 3%

Chart A6.11. THREE MAJOR PROBLEMS OCCURRED DURING INSPECTIONS

% OF RESPONDENTS WHO WERE INSPECTED

Lack of access to information Non-transparent requirements Duplicate inspections by several bodies

Individual 20% 12% 10% entrepreneurs

Small and medium 21% 10% 13% companies

Dehkan farmers 20% 9% 4%

Chart A6.12. ASSESSMENT OF THE OVERALL INSPECTION PROCEDURE

% OF RESPONDENTS WHO WERE INSPECTED . Very easy . Rather easy . Rather complicated . Very complicated Individual 8% 51% 37% 5% entrepreneurs

Small and medium 4% 48% 44% 5% companies

Dehkan farmers 8% 54% 35% 3%

75% 50% 25% 0% 25% 50%

216 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

Chart A7.1. ASSESSMENT OF THE TAX PAYMENT COMPLEXITY BY INDIVIDUAL ENTREPRENEURS IN 2005

% OF RESPONDENTS

Sales tax (on cotton fi ber and 100% primary aliminium)

Vehicle tax 54% 46%

Minimal tax on profi t of enterprise 50% 50%

Real estate tax 45% 55%

Customs fees 44% 56%

State duty 39% 61%

Land tax 36% 64%

Retail tax 34% 66%

Road users’ tax 30% 70%

Income tax for individuals 26% 74%

Social tax (Fund for Social 25% 75% Security of the Population)

Patent payment 23% 77%

Value Added Tax (VAT) 20% 80%

. Complicated . Not Complicated

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 217 TAXATION

Chart A7.2. ASSESSMENT OF THE TAX PAYMENT COMPLEXITY BY SMALL AND MEDIUM COMPANIES IN 2005

% of respondents

Custom fees 20% 80%

Retail sale tax 18% 82%

Land tax 18% 82%

Real estate tax 18% 82%

Tax for sub soil users 16% 84%

Excise 16% 84%

Vehicle tax 15% 85%

State duty 15% 85%

Tax paid via simplifi ed system 14% 86%

Minimal tax on enterprise rev- 14% 86% enues

Value Added Tax (VAT) 13% 87%

Social tax (Fund for Social 12% 88% Security of the Population)

Income tax for individuals 10% 90%

Corporate profi t tax 10% 90%

Road users’ tax 9% 91%

Sales tax (on cotton fi ber and 4% 96% primary aliminium)

. Complicated . Not Complicated

218 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 TAXATION

Chart A7.3. ASSESSMENT OF THE COMPLEXITY OF THE PAID TAXES BY DEHKAN FARMERS IN 2005

% OF RESPONDENTS

Sales tax (on cotton fi ber and 48% 52% primary aliminium)

Real estate tax 32% 68%

State duty 30% 70%

Tax for sub soil users 24% 76%

Income tax for individuals 23% 77%

Retail sale tax 22% 78%

Unifi ed tax for farmers/producers 17% 83% of agriculture products

Social tax (Fund for Social 16% 84% Security of the Population)

Vehicle tax 11% 89%

. Complicated . Not Complicated

Chart A7.4. AVERAGE AMOUNT OF THE TAXES PAID (EXCLUDING INCOME TAX) Chart A7.5. AVERAGE AMOUNT OF THE TAXES PAID BY SME, BY REGION

SOMONI SOMONI a7 Gorno-Badakhshan 20,000 4,730 Autonomous Oblast 17,561 Dushanbe 3,845

10,000

Sughd province 2,558 1,161 2,026 Kulyab district 00 (Khatlon province) 2,100 Individual Small and Dehkan farmers Kurgan-Tube entrepreneurs medium companies district 1,477 (Khatlon province) District of Republican 828 Subordination B District of Republican 639 Subordination A

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 219 TAXATION

Chart A7.6. REPORTED SHARE OF BUSINESSES HIDING SALES Chart A7.7. REPORTED SHARE OF SALES CONCEALED FROM FROM TAXATION TAXATION

% OF RESPONDENTS % OF RESPONDENTS

65% 60% 10% 59% 9% 8% 8% 7%

28% 26% 3% 12%

Individual Small and Individual Small and Dehkan farmers Dehkan farmers entrepreneurs medium entrepreneurs medium companies companies . 2002 . 2005 . 2002 . 2005

Chart A7.8. MAIN REASONS FOR HIDING SALES Chart A7.9. PAYMENTS FOR “LANDSCAPING AND PROPERTY MAINTENANCE”

% OF RESPONDENTS HIDING SALES % OF RESPONDENTS

64% Avoiding taxation 68% 60%

I don’t want to pay taxes, since i don’t know how 35% Government uses them 50%

Unwilling to draw the attention of authorities 30%

Unwilling to sell production to 6% state Impossible to obtain cash legally from 2% an account in bank

Individual Other 6% Small and Dehkan farmers entrepreneurs medium companies

Chart A7.10. PAYMENTS FOR “LANDSCAPING AND PROPERTY MAINTENANCE”, ON AVERAGE

SOMONI

340

141

Individual Small and Dehkan farmers entrepreneurs medium companies

220 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

Chart A8.1. REASONS FOR NOT GETTING INVOLVED IN EXPORT TRADE

% OF RESPONDENTS

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

No need- production is demanded on domestic 89% 91% 85% market

Absence of information 4% 4% 7% about foreign market

Complicated export 2% 3% 6% procedures

Product is not competitive 2% 2% 4% on the foreign market

Cost of procedures 2% 2% 3%

Complicated custom 2% 2% 3% regulation

Necessity of unoffi cial 0.9% 1% 3% payment

Companies are not 0.6% 0.6% 3% enjoying equal rights

100% advance payment 0.3% 0.1% 2%

Other 5 4 46

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 221 FOREIGN TRADE AND TECHNICAL REGULATION

Chart A8.2. REASONS FOR NOT HAVING IMPORTED GOODS/SERVICES

% OF RESPONDENTS NOT INVOLVED IN IMPORT

INDIVIDUAL ENTREPRENEURS SMALL AND MEDIUM COMPANIES DEHKAN FARMERS

No need 83% 87% 86%

Complicated import 8% 7% 5% procedures

Absence of information 6% 3% 5% about foreign market

Complicated custom 4% 5% 6% regulation

Cost of procedures 4% 4% 3%

Necessity of unoffi cial 4% 1% 5% payment

Restrictions on import 0.6% 2% 1% procedures

Companies are not enjoy- 0.5% 0.9% ing equal rights

Other 3% 3% 2%

Chart A8.3. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE FOR Chart A8. 4. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE, BY GOVERN- INDIVIDUAL ENTREPRENEURS, BY REGIONS MENTAL AGENCY

BUSINESS DAYS BUSINESS DAYS

Districts of Republican 9 Subordination Ministry of Health 18

Sughd province 8 Ministry of agriculture 13 Kulyab district 6 (Khatlon province)

Gorno-Badakhshan Tajikstandard 7 6 Autonomous Oblast

Chamber of Dushanbe 5 6 Commerce and Industry

Kurgan-Tube district 4 (Khatlon province) Ministry of transportation 3

222 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

Chart A8.5. AVERAGE TIME REQUIRED TO OBTAIN A CERTIFICATE BY Chart A8.6. DISTRIBUTION OF THE TIME REQUIRED TO OBTAIN ONE CERTIFI- TAJIKSTANDART, BY REGIONS CATE

BUSINESS DAYS % OF RESPONDENTS WHO OBTAINED A CERTIFICATE

INDIVIDUAL ENTREPRENEURS Sughd province 10 77% Districts of Republican 10 Subordination

Kulyab district 6 (Khatlon province)

11% 8% 4% Dushanbe 5

SMALL AND MEDIUM COMPANIES Kurgan-Tube district 3 (Khatlon province) 56%

22% 14% 8%

DEHKAN FARMERS

60%

28%

8% 4%

more than 21 up to 7 days 7 to 14 days 14 to 21 days days

Chart A8.7. VALIDITY PERIOD OF ONE CERTIFICATE, ON AVERAGE Chart A8.8. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE OBTAINED BY INDIVIDUAL ENTREPRENEURS, BY REGIONS MONTHS

MONTH 18 Kurgan-Tube district 16 27 (Khatlon province)

Kulyab district 11 17 (Khatlon province)

Sughd province 10 a8 Districts of Republican 8 Subordination A

Individual Small and medium Dehkan farmers Dushanbe 7 entrepreneurs companies

Gorno-Badakhshan 6 Autonomous Oblast

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 223 FOREIGN TRADE AND TECHNICAL REGULATION

Chart A8.9. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE, Chart A8.10. DISTRIBUTION OF THE VALIDITY PERIOD OF ISSUED CERTIFICATE BY GOVERNMENTAL AGENCIES % OF RESPONDENTS WHO OBTAINED A CERTIFICATE MONTHS INDIVIDUAL ENTREPRENEURS Chamber of 44 Commerce and Industry 37%

Ministry of Health 16 29% 23%

Ministry of Agriculture 15 11%

Tajikstandart 8 SMALL AND MEDIUM COMPANIES

Ministry of Transportation 6 52%

16% 18% 14%

DEHKAN FARMERS 41%

24% 21% 14%

more than 1 to 3 months 3 to 6 months 6 to 12 months 12 months

Chart A8.11. AVERAGE VALIDITY PERIOD OF THE CERTIFICATE ISSUED Chart A8.12. AVERAGE COST OF OBTAINING ONE CERTIFICATE BY BY TAJIKSTANDART, BY REGION INDIVIDUAL ENTREPRENEURS, BY REGION

MONTHS SOMONI

Kulyab district 12 Sughd province 245 (Khatlon province) Kurgan-Tube district 187 Kurgan-Tube district (Khatlon province) 11 (Khatlon province) Dushanbe 146

Sughd province 9 Kulyab district 127 (Khatlon province)

Districts of Districts of Republican 7 126 Republican Subordination Subordination

Gorno-Badakhshan 76 Dushanbe 6 Autonomous Oblast

224 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 FOREIGN TRADE AND TECHNICAL REGULATION

Chart A8.13. DISTRIBUTION OF COST FOR ONE CERTIFICATE Chart A8.14. AVERAGE COST FOR OBTAINING OF ONE TAJIK-

% OF RESPONDENTS WHO OBTAINED A CERTIFICATE STANDARD CERTIFICATE, BY REGIONS

INDIVIDUAL ENTREPRENEURS SOMONI

36% 36% Sughd province 286

15% Kurgan-Tube district 14% 210 (Khatlon province)

Districts of Republican 134 Subordination SMALL AND MEDIUM COMPANIES 50% Dushanbe 122

25% Kulyab district 121 14% (Khatlon province) 11%

DEHKAN FARMERS Chart A8.15. AVERAGE COST OF OBTAINING ONE CERTIFICATE,

35% 35% BY GOVERNMENTAL AGENCY

SOMONI 18% 12% Ministry of Health 265

up to 50 to 100 100 to 200 more than 200 50 somoni somoni somoni somoni Ministry of Agriculture 252

Tajikstandart 175

Chamber of 134 Commerce and Industry

Ministry of Transportation 23

Chart A8.16. THREE MAJOR PROBLEMS DURING CERTIFICATION PROCESS

% OF RESPONDENTS WHO OBTAINED CERTIFICATE

Necessity to obtain several certifi cates High cost of certifi cates Too many required documents

Individual entrepreneurs 10% 23% 6%

Small and medium companies 8% 23% 8% a8

Dehkan farmers 3% 37% 25%

Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 225 REFERENCES

references

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226 Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006 International Finance Corporation, the private sector arm of the World Bank Group, promotes open and competitive markets in developing countries. IFC supports sustainable private sector companies and other partners in generating productive jobs and delivering basic services, so that people have opportunities to escape poverty and improve their lives.

Through Financial Year 2006, IFC Financial Products has committed more than $56 billion in funding for private sector investments and mobilized an additional $25 billion in syndications for 3,531 companies in 140 developing countries.

IFC Advisory Services and donor partners have provided more than $1 billion in program support to build small enterprises, to accelerate private participation in infrastructure, to improve the business enabling environment, to increase access to finance, and to strengthen environmental and social sustainability. For more information, please visit www.ifc.org.

The State Secretariat for Economic Affairs (SECO) is the Swiss Confederation’s competence center for all the core issues related to the economic policy. SECO’s aim is to create the basic regulatory and economic policy conditions to enable business to flourish for the benefit of all. SECO represents Switzerland in the large multilateral trade organizations as well as in international negotiations. SECO is also involved in efforts to reduce poverty and help developing countries with transition economies build sustainable democratic society and viable market economy. Each year Switzerland spends ap- proximately 1.9 bln. Swiss francs on development cooperation and transition assistance to countries. Tajikistan Business Enabling Environment - SME Policy Project

7 Abdullo Komandir Str. Dushanbe, Tajikistan 734 001 Tel.: (992 48) 701 14 40 Fax: (992 48) 701 14 48 www.ifc.org/tajikistan/sme