SME Business Environment Report Presentation Minutes, May 29, 2007

May, 29, 2007 10:00 -11:30
Report: Business Environment in Tajikistan as Seen by Small and Medium Enterprises, 2006.

Andrea Dall'Olio started the presentation of the survey results to the working group.

The overview of the report included key findings, major challenges, and recommendations. The report focused on the areas of registration, access to finance, inspections, licensing, permits, taxation, and foreign trade.
The SME sector was developing at a relevant pace during the 2002-2005 period, with significant growth of individual entrepreneurs and dehkan farmers. At the same time the growth of small and medium companies, which represent the backbone of the SME sector, remained moderate. Though the overall contribution of the SME sector to economy is significant, there is still room for further development, both in terms of employment and the number of SMEs in the economy.
The first SME survey was conducted in 2003 and repeated in 2006 and included a representative sample of SMEs (2,500 respondents), covering all regions of Tajikistan.
Based on the two drivers (coverage and difficulty of procedures), a matrix of problems for each typology of business was elaborated. According to this approach, three key areas were identified:
Critical (red) - area with highest coverage and complicated procedures
Problematic (yellow) - area of high coverage or high complexity
Moderate (green) - area where both coverage and complexity are moderate or limited
According to the findings, small and medium companies are the ones that have most of the procedures in the critical area, confirming the hypothesis that business entities become more targeted by regulatory procedures as they grow.
3 out of 4 entrepreneurs prefer to solve issues unofficially, with implication for compliance, as well as for regulatory burden.
During the 2002-2005 period, some relevant steps toward improved business environment were undertaken, but these efforts need to be further consolidated. Some reforms require implementation (licensing, inspections) to achieve better effectiveness. In other areas improvement is still to be addressed.
One of the questions the report tried to answer was whether it is more difficult to start a business or to run it. According to the findings of the survey, running an existing business is more complicated, absorbing significant resources both in terms of money and time spent.
Registration: The problems were researched starting from the registration of a business. The survey showed that for individual entrepreneurs it is easier to register a business than for other types of SMEs. However, the fact that they need to register every year (even certificate holders), adds additional burden both in terms of time and cost. The registration time for dehkan farmers has increased due to very lasting, complex, and non-transparent land allocation. Situation with registration for small and medium companies did not improve significantly.
Access to Finance: In terms of access to finance the survey showed that there has been a big improvement. Some entrepreneurs get funding from micro-finance organizations while others refer to banks. However, there is still room for further improvement, as those who apply for funding to banks know they comply with requirements (self-selection). The critical reasons why many do NOT apply to banks are high interest rates, short terms of the loans, and collateral requirements, resulting from the lack of information banks have about their clients.

Licensing and Inspection: Positive changes have been made in the legislation of the country. Two laws have been adopted:
1) The new law on inspections
2) The new law on licensing.
However, these laws have to be properly implemented in order to be effective. In terms of licensing, some government officials have been making life harder for small and medium companies. It is easier for individual entrepreneurs to obtain a license than for a company, because some officials see the growing businesses as a bigger source for unofficial payments, as growing businesses are more ready to pay for obtaining necessary documents in order to continue running the business.
A critical issue is that even though a positive change has been made and a number of activities subject to licensing has been reduced, there is still room for improvement and the number of activities can be reduced even more.
Permits: For some activities there is an overlap between licensing and permits. A recommendation to improve this situation is to limit the number of permits by law and simplify the process of obtaining a permit. Additionally, permit requirements represent the basis for inspections. Therefore, complementary reform of permit system would allow to consolidate the licensing and inspections reforms.
Taxation: Taxation is yet another issue. The majority of individual entrepreneurs (90%) prefer to work under a patent (an efficient lump-sum system). At the same time, they also have to pay social and retail trade tax separately, which are subject to numerous inspections, which undermines the advantages of the patent system. The recommendation is to create some kind of a "super-patent" that would include various tax payments.
GTZ AFC Consultant International Project Manager Matthias Halder asked what would the driving point for tax officials be at this point and why would they be willing to change the system. Mr. Dall'Olio explained that the government is now strongly committed to the development of the SME sector. This way they can also use their budget more efficiently by reducing the number of officials overseeing the activity of individual entrepreneurs at bazaars.
Mr. Dall'Olio also explained that the reason why SMEs currently consist mostly of very small businesses is that the taxation system does not provide an incentive for growth and entrepreneurs prefer to run small businesses unnoticed by tax officials.
Simplified taxation does not really provide significant advantages for small and medium companies in comparison to the standard system, both in terms of the tax burden and tax administration.
Overall, existing taxation system does not provide an incentive for companies to grow. As the survey findings indicate, the bigger business becomes, the higher is the tax burden.
Foreign Trade and Technical Regulation: When asked about the complexity of the foreign trade procedures, most of the entrepreneurs rated it as difficult of very difficult.
One of the barriers slowing down the process is the certification procedure. Even though import is essential for the economy of Tajikistan, products imported from other countries and certified there have to be recertified by TajikStandart. Moreover, the certification period in Tajikistan has a very short duration and imported products certified by TajikStandart have to be re-certified in three months. The recommendation is to simplify the standardization and certification processes, simplify export and provide import with necessary facilities.
Comments, Questions and answers: A comment was made that there are regular meetings of the government bodies dealing with import and export issues. The working group will suggest simplification of the process and then, if the government accepts the suggestions, they will be implemented.

In terms of registration, Barbara Plinkert, EC Delegation, asked to give more detailed information about the necessity for entrepreneurs to go through many government bodies to obtain registration. Mr. Dall'Olio explained that entrepreneurs have to register at different government agencies, or, for instance, are required to have two separate registrations from different agencies. To simplify the process, it is recommended that each enterprise should have only one registration number that could be used by different agencies.
Luc Moers, IMF Dushanbe, asked whether or not there is a sense that the Government of Tajikistan is reduce pressure on SMEs and let them develop. Mr.Dall'Olio answered that the government is aware of the SME role in the development of the country. It was noted that there is a shift in Government's understanding that not only large projects bring money/investment, but that SMEs can also do the same. The government is also aware of the important role that the SME sector plays in the economic and political stability.
Mr. Halder from GTZ noted that there's a "lean-back" attitude towards investment and the government invites investors to come, find an appropriate area, and invest, whereas there should also be some clear suggestions, which an enterprise lobbying body should provide. Mr. Dall'Olio explained that according to the survey results, SMEs in Tajikistan have not yet grown to the level where they can lobby their interest for investment.
Mrs. Ismailova, country director of the Eurasia Foundation of Central Asia in Tajikistan, noted that for IFC as an institution it may be easier to approach the government, while it is businesses and small NGOs that face real problems when appealing to the government. She also noted that PRAGMA has been successfully creating business associations, but in practice these associations do not lobby the interest of enterprises.
Mr. Halder sees the explanation in the fact that it is easier for entrepreneurs to function in the form of an NGO, therefore the associations are beneficial for enterprises. However, they do not yet have the capacity to lobby their interests.
At the end of the discussion Mr.Dall'Olio announced that IFC Business Enabling Environment Project welcomes proposals to continue cooperation and coordination of activities in the sphere and welcomes further discussion.
LIST OF PARTICIPANTS

Minutes taken by Rukhshona Nazhmidinova, IFC Tajikistan BEE/SME Survey Project