IQC Contract PCE-I-00-98-00016-00 Submitted to: USAID - Baku, Azerbaijan By: David H. Holt, David T. King, Eduard Hoflnianii. and David Haimoii Nathan-MSI Consortium 2101 Wilson Boulevard, Suite 1200 Arlington, VA 22201 November 15,1999 TABLE OF CONTENTS I. EXECUTIVE SUMMARY ......................................................................................... ......................... 1 A . MAJOR FINDINGS.............................................................................................................................. 1 1. Private Enterprise Activities and Opportunities...................................................................... 1 2 . Finance and Banking ................................................................ ........................................... 2 3 . Legal and Regulatory Environment ........................................................................................ 2 4 . Edueation and Human Resources ............................................................................................ 2 5 . Assistance Programs Related to Business Development ........ ................................. 3 B . BUSINESS ENVIRONMENTAL CONSTRAINTS ON PRIVATE SECTOR DEVELOPMENT .... 3 C . PROGRAMMATIC RECOMMENDATIONS ..................................................................................... 4 I1 . AZERBAIJAN -INTRODUCTION TO THE STUDY ........ ............................................................ 6 A . COUNTRY BACKGROUND .............................................................................................................. 6 ... 1. Transition in Perspective ............................................................ ..................... 6 2. Progress on the Eve of the Millennium ............................ .................................................. 1 B . INFRASTRUCTURE ................................. ....................................................................... 8 C . SOCIAL AND HUMAN RESOURCE ISSUES .................. .................................... 10 D . FOCUS OF THE STUDY................................................................................................................... 13 III . ECONOMICS & THE PRIVATE SECTOR IN AZERBAIJAN .................................. 14 A . MACROECONOMIC PROFILE ................................................................................ :....................... 14 1. Overall Growth Trends ......................................................................................................... 14 2 . Employment Characteristics and Human Capital ................................................................. 16 B . SECTOR AND COMPANY SURVEY ............................ ...................................... 20 1 . Conditions Common to A11 Sectors ...................................................................................... 20 2 . Sectoral Taxonomy ............................................................................................................... 24 3 . Agriculture and Food Products ....................................................... ........................ 25 4 . The Oil Sector ....................................................................................................................... 27 5 . Other Manufacturing ............................................................................................................. 28 6. Construction ................................ ........................................................................ 31 7 . Services ................................................................................................................................. 32 C . THE SME SECTOR AND ENTERPRISE DEVELOPMENT .......................................................... 33 i IV . FINANCE AND TKE ENABLING ENVIRONhENT .......................................................................... 37 A . Banking and Finance ........................................................................................................................... 37 1 . The Banking System ............................................................................................................. 37 2 . Bank Equity Base .................................................................................................................. 38 3 . Bank Lending and Deposits .................................................................................................. 38_. 4 . Major Players in the Banking Sector .................................................................................... 40 5 . Constraints on the Development ofthe Banking Sector ....................................................... II 6 . Summary of Needs in the henBanking Sector .................................................................. 45 B . ENABLING E"MENT .......................................................................................................... 47 ... 1. Pnvatizabon .......................................................................................................................... 47 2 . The Legal and Regulatory System ............ ..................................................................... 45 3. Taxation and Fiscal Policies Relevant to Private Sector Development ................................ 50 V . ASSISTANCE TO THE PRIVATE SECTOR.................................... ................................................ 55 A . OVERVIEW OF FOREIGN ASSISTANCE ...................................................................................... 55 -_ 1. Micro-credit........................................................................................................................... 33 2 . Technical Assistance ............................................................................................................. 57 3 . Grants .................................................................................................................................... 57 4 . Income Generation ................................................................................................................ 57 .. ... 5 . TrammuD Actmhes ................................................................................................................ 55 6 . NGO & Association Development........................................................................................ 59 B . BANKING AND FINANCIAL SUPPORT FOR THE PRIVATE SECTOR .................................... 59 1. European Bank for Reconstruction and Development (EBRD) ............................................ 59 2 . The World Bank and the LFC ................................................................................................ 60 3 . KFW Credit Program ............................................................................................................ 62 4 . EU-TACIS ............. ........................................................................................................... 62 5. Micro-Credit Suppliers.......................................................................................................... 62 6 . GTZ and KfW ...................................................................................................................... 64 C . TECHNICAL, ASSISTANCE FOR PFWATE SECTOR DEVELOPMENT.................................... 64 D . BUSINESS SUPPORT & ASSOCIATIONS IN THE PRIVATE SECTOR ..................................... 66 .. .. 1. Profile of Associations in Azerbaijan ................................................................................... 66 .. 2 . Business Association Effectiveness ...................................................................................... 68 3 . Opportunities for Assistance ................................................................................................. 69 .. 11 VI . OPPORTUNITIES AND CONSTRAINTS FOR AZERI BUSINESS ................................................... 71 A . COMPARATIVE & COMPETITIVE ADVANTAGES .. 1. Comparative and Competitive Advantages ........................................................................... 71 .. 2 . Competitive Disadvantages ................................................................................................... 73 B . HIGH-POTENTIAL BUSINESS OPPORTUNITIES .................................................. C . CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT ........................................................... 76 1. Corruption ............................................................................................................................. 77 2. Burdensome and Incoherent Taxes and Arbitrary Collection Procedures ............................ 79 3 . Insufficient Business Finance ....... ............................................................................... 80 ... 4 . Weak Management Capabilities ............................................................................................ 80 5 . Weak Purchasing Power .................................................... .................................. 80 6 . Delayed Privatization of Major Enterprises .......................................................................... 81 7. Underdeveloped Infrastructure .... ............................. .......................... 81 8. Inappropriate Technology and Intellectual Property ........... ............................................. 81 9 . Weakened Systems of Training & Education .................................................................
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