Report No. 25818-AZ Azerbaijan Building Competitiveness An Integrated Non-Oil Trade and Investment Strategy (INOTIS) (In Two Volumes) Volume I: Summary Report November 20, 2003 Poverty Reduction and Economic Management Unit (ECSPE) Europe and Central Asia Region Document of the World Bank CURRENCY EQUIVALENTS (As of April 15,2003) Currency Unit = Manat (AZM) US$1 = AZM4,898 FISCAL YEAR January 1 to December 31 ACRONYMS AND ABBREVIATIONS ADB Asian Development Bank MOA Ministry of Agriculture ADDY StateRailway Company MOC Ministry of Communications ADR AlternativeDisputeResolution MOEd Ministry of Education AZERPRO Trade and TransportFacilitation Committee MOF Ministry of Finance AZPLAC AzerbaijanPolicy and Legal Advice Center MOFA Ministry of Foreign Affairs BEEPS BusinessEnvironmentand Enterprise MOH Ministry of Health PerformanceSurvey MOJ Ministry of Justice CIS Commonwealth of IndependentStates MOT Ministry of Transport EBRD EuropeanBank for Reconstructionand MOTax Ministry of Taxes Development MRA Mutual RecognitionAgreement EU EuropeanUnion NBA National Bank of Azerbaijan EU TACIS EuropeanUnion Technical Assistanceto NGO Non-Governmental Organization Commonwealth of IndependentStates OECD Organization for EconomicCooperationand FDI ForeignDirect Investment Development FIAS ForeignInvestmentAdvisory Services PRSP PovertyReductionStrategyPaper FTA Free Trade Agreement SCAC StateConstruction and Architecture Committee GDP GrossDomestic Product SCC StateCustoms Committee GOA Government of Azerbaijan scs State Committee for Securities GOST Gosstandart(State Committee of the SFD StateFire Department RussianFederationfor Standardizationand SME Smalland Medium Enterprises Metrology) SMME Small, Medium and MicroEnterprises GSP GeneralSystemof Preferences SPPRED StateProgramme for Poverty Reduction and GTZ German Agency for Technical Cooperation Economic Development IAS InternationalAccounting Standards ssc StateSecuritiesCommittee ICT Information and Communication SSMA State Standardsand Metrology Agency Technologies STATCOM State StatisticalCommittee IDPs InternallyDisplacedPeople svc StateVeterinary Committee INOTIS Integrated Non-Oil Trade and Investment TBT Technical Barriers to Trade Strategy TRACECA TransportCorridor-Europe,Caucasus, Asia IPR IntellectualPropertyRights TRIPS TradeRelated IntellectualProperty Rights IsDB Islamic DevelopmentFund UNDP United Nations DevelopmentProgram IS0 InternationalStandardsOrganization USAID United StatesAgency for International MED Ministryof EconomicDevelopment Development MENR Ministry of Ecology and Natural Resources USTDA United StatesTrade Development Agency - MFBA MicroFinanceBank of Azerbaijan WB World Bank MFN Most Favored Nation Status WTO World Trade Organization MLSPP Ministry of Labor and SocialProtection of Population Vice President: Shigeo Katsu Country Director: Donna M. Dowsett-Coirolo Sector Director: CherylW. Gray TeamLeader: Christian E. Petersen CHAPTER1 INTRODUCTION . ............................................................................................................................. Table of Contents 1 1.1 Background................................................................................................................................... 1 1.2 This Study ..................................................................................................................................... 4 CHAPTER2-OVERVIEW: INTEGRATEDNON-OILSECTOR TRADEAND INVESTMENT STRATEGY ................................................................................................................................................................. 6 2.1 Recent Trends inNon-Oil Sector Trade and Investment .............................................................. 6 2.2 Key Challenges to Increasing Non-Oil Exports and Inward Investment .................................... Defining the FuturePotential........................................................................................................ 7 2.3 10 2.4 Ongoing and Planned Technical Support Activities inthe Non-Oil Sector................................ 11 2.5 Achieving the Vision: Strategy Overview................................................................................... 14 2.6 Key SuccessFactors.................................................................................................................... 14 CHAPTER3-IMPROVING THE TRADEPOLICYREGIMEAND MARKETACCESS ........................... 16 3.1 Introduction................................................................................................................................. 16 3.2 Improving Import Trade Policies................................................................................................ 16 3.3 AcceleratingWTO Accession..................................................................................................... 17 3.4 EnhancingPreferential Market Access ....................................................................................... 22 3.5 HighPriority Actions to Improve Trade Policy and Market Access........................................... 24 CHAPTER&ENHANCING TRADEAND TRANSPORTFACILITATION ................................................. 26 1.1 Introduction ................................................................................................................................. 26 1.2 Improving Customs and Transit Operations................................................................................ 26 1.3 UpgradingTransportation and Trade Infrastructure.................................................................... 30 1.4 HighPriority Actions to Improve Trade andTransport Facilitation........................................... 32 CHAPTER5-IMPROVING THE BUSINESSENVIRONMENT ..................................................................... 35 1.4 35 Facilitating Business Entry.......................................................................................................... Introduction................................................................................................................................. 1.5 37 1.6 Improving Access to Land and Simplifying Site Development.................................................. 39 1.7 Improving Labor Policies............................................................................................................ 41 5.5 Simplifying Taxation and Improving FiscalIncentives.............................................................. 42 5.6 Increasing Access to Credit., ....................................................................................................... 44 5.7 EncouragingCompetitive Markets.............................................................................................. 46 5.8 Improving Contract Enforcement................................................................................................ 47 5.9 SupportingEntrepreneurship. ...................................................................................................... 48 5.10 Improving Public Sector Governance ......................................................................................... 49 5.11 HighPriority Actions to Improve the Business Environment..................................................... 50 CHAPTER6-DEVELOPING COMPETETIVEINDUSTRY CLUSTERS ..................................................... 54 1.8 Introduction................................................................................................................................. 54 1.9 1.10 Promote Innovation, Quality. and Specialization........................................................................ Promote Inter-firm Cooperation .................................................................................................. 55 56 1.11 HighPriority Actions to Promote Cluster Development............................................................. 57 CHAPTER7-IMPLEMENTATION PLAN ......................................................................................................... 58 1.12 Prerequisites for Success............................................................................................................. 58 1.13 Establishing a Framework for Implementation........................................................................... 59 1.14 Next Steps ................................................................................................................................... 59 I.16 1.15 MonitoringProgress.................................................................................................................... 60 Integrated Action Plan................................................................................................................. 61 BIOGRAPHY ............................................................................................................................................................ Appendix A-Ongoing and PlannedTrade CapacityBuilding-RelatedAnalyses and Initiatives .....81 83 LIST OFTALBESAND FIGURES Boxl.1...................................................................................................................... 2 Chapter 1 Chapter 2 Box 2.1-A Definition of Competitiveness.................................................................................................. 5 Table 2.1-Geographic Orientation of Azerbaijan Exports. by Sector. 2001 (percent) ............................... 6 Table 2.2-Key Challenges to Increase Non-Oil Exports and Investment................................................. 10 Chapter 3 Table 3.1-WTO Accession Progress (as of Nov. 2002) ........................................................................... 18 Box 3.1-Building 20 Table 3.2--Basic Characteristics of Azerbaijan's Exports to the EUunder the GSP................................... I S 0 Competence through Business Associations ........................................................ 22 Table 3.3-High Priority Actions for Improving Trade Policy and Market Access................................... 25 Figure 4.1--Customs Delays. Number of Days........................................................................................... 27 Chapter 4 Table 4.1-PWC Y Customs ReformRecommendations and Actions Taken.................................... 27 Box 4.1-Why Some SEZs Fail-Key Factors..................................................................... 32 Table 4.2-High Priority Actions for Improving Trade Facilitation .......................................................... 33 Chapter 5 Figure 5.1-Qualitative 35 Box 5.1-European Union Guidelines for Improving Company Registration........................................... Assessment of the Business Environment in 1999 and 2002............................... 38 Figure 5.2-Number of Days Lost from Utility Outages............................................................................ 41 Figure 5.3-Private 49 Figure 5.4-Firm GrowthSales, by Size (1999-2002) ............................................................................... Sector's Perception of Court System........................................................................... 50 Figure 5.5-Decline 50 Table 5.1-High Priority Actions for Improving Macro Business Environment ....................................... inAdministrative Corruption..................................................................................... 50 Chapter 6 Box 6.1-Information 54 Table 6.1-High Priority Actions for ImprovingIndustry Cluster Development ...................................... and Technology Extension Services....................................................................... 57 Chapter 7 Box 7.1-Checklist of Macroeconomic Indicators..................................................................................... 59 Table 7.1-Strategy Endorsement andLaunch........................................................................................... 60 Table 7.2-Action 62 Plan for Trade Facilitation and Transport .................................................................... Plan for Trade Policy and Market Access .................................................................... Table 7.3-Action 65 Table 7.4-Action 70 Planfor Xndustry Cluster Development........................................................................ Planfor Macro Business Environment......................................................................... Table 7.5-Action 79 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER 1 INTRODUCTION - 1.1 Background Following 1. Azerbaijan's early transition to an independent, market-based economy has been independence, tumultuous, entailing significant economic costs and social impacts. Following Azerbaijan independence in 1991, Azerbaijan was subject to massive economic shocks resulting experienced a from the disintegration of the Soviet Union's managed system of production, trade, and dramatic drop fiscal transfers. The economy was characterized by hyperinflation, real currency in output, much depreciation, and a dramatic drop in output-on average much greater than that greater than experienced by other transition economies during the same period. By 1995, it i s other transition economies estimated that GDP was only 44 percent of its 1990 level and household consumption declinedby approximately 50 percent. 2. Yet, unlike many transition economies, sound economic reforms since 1995 have While it has enabled Azerbaijan to achieve macroeconomic stability and resumption of growth been able to relatively quickly. Since 1995, the inflation rate has been kept below 2 percent, falling to achieve 1.5 percent in 2001. The budget deficit has been cut from 10 percent of GDP in 1994 to macroeconomic between one and two percent. The privatization programhas contributedto the growth of stability and resume growth the private sector, which now accounts for more than 71 percent of GDP. Land reform remarkably was implemented, with 1.3 million hectares of agricultural land distributed to rural quickly... residents. Between 1995 and 2001, GDP increased by a factor of 2.5, industrial production by 3.5, and foreign trade by 2.2. ...poverty 3. Despite these important achievements, the impact on poverty reduction has been modest, particularly in the case of the urban poor that did not benefit from land reform. remains a persistent and According to the most recent World Bank Poverty Assessment, poverty remains a major growing challenge: almost four million people, close to 50 percent of population of Azerbaijan, problem live in poverty (as of 2001), consuming less than US$24.50 per capita per month; and especially approximately 1.3 million persons live in extreme poverty, with monthly consumption among IDPs below US$14.70 per capita. Moreover, most non-income indicators of poverty, such as the quality of health care and schooling, and access to basic services, appear to have deteriorated. Unemployment and underemployment remain high. 4. Inlight of this persistent magnitude of poverty, the Government of Azerbaijan has committed to a comprehensive and ambitious poverty reduction program through a balanced approach to economic reform, as outlined in the recently approved State Program on Poverty Reduction and Economic Development (SPPRED). Ongoing macroeconomic and structural reform efforts are coupled with direct interventions to alleviate poverty and improve living conditions. 1.1.1 The Role of Trade and Investment in Reducinn Poverty 5. The World Bank' has forecasted fast economic growth in the coming years-real GDP is projected to grow 13 percent per annum. The oil sector is expected to be the 'World Bank, "Azerbaijan RepublicPoverty Assessment," ReportNo. 24890-M, December 19, 2002. INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan primary driver of this growth, accounting for 75 percent of the total increase in real output. Projected growth in the non-oil sectors i s 6.3 percent. While relatively slow compared to the expected rapid growth in the oil sector, it would be a significant improvement over the average 3.8 percent growth rate achieved between 1995 and 2001. This base case growth scenario would reduce the incidence of poverty from 50 percent to 30 percent of the population and would reduce the share of those inextreme poverty from 17 percent to 7 percent by 2010. Growth of the 6. It is widely recognized that achieving the forecasted growth inthe non-oil sector non-oil sector is will be critical to achieving the SPPRED's objectives. While the oil sector will contribute critical to to the majority of GDP growth, the magnitude of poverty reduction will be dependent on achieving achieving the projected growth in the non-oil sectors. The oil sector i s not expected to poverty have a direct impact on the poor due to the very limited effect of expanded petroleum reduction output on employment. In 2001, for example, the oil sector accounted for 30 percent of GDP, but only one percent of employment. Therefore, the achievement of any significant increases in employment, and accompanying reductions in poverty, will require substantial and sustained efforts to stimulate the growth of the non-oil sectors. 7. Achieving the necessary expansion of the non-oil sector will be a challenge, given the dramatic contraction of the non-oil sector over the past decade. Between 1990 and 2001, the non-oil sector (including manufacturing, agriculture, construction, and services) declined from more than 90 percent of GDP to 70 percent. The non-oil manufacturing sector was the hardest hit, declining by 70 percent, from more than 16 percent in 1990 to less Thechallenge is than 4.8 percent in2001. While it will to enhancethe be a significant challenge, the growth competitiveness projection i s less ambitious than it of the non-oil appears. Substantial capacity remains sector to world standards in place. According to the recent Business Environment and Enterprise Performance Survey (BEEPS)? firms are operating substantially below capacity and close to 50 percent of f i r m s surveyed are operating at below 40 percent capacity. This i s reflected in the evidenced decline in labor productivity (as measured by output per worker), which remains well below 1990levels. EBRDandWorldBank, BusinessEnvironment andEnterprisePerformanceSurvey, 2002. Approximately 200 firms inAzerbaijan were surveyed inthis comprehensive survey covering private sector perceptionsof the businessenvironment and firmperformance. 2 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 8. While physical capacity is still in place, the challenge remains to increase the competitiveness of Azerbaijan's non-oil sectors inthe marketplace. Given the small size of the domestic market-both interms of productionresourcesand consumption-access to foreign markets, through trade and investment, will be critical to achieving economic diversificationthat will ultimately bringincreasedemployment, more regionally balanced development, and encourage innovation. 9. Inmany ways Azerbaijan is a country of three economies-a large and growing The economy oil and gas sector that has driven rapid economic expansion, but has resulted in few must maintain macroeconomic employment opportunities; a small non-oil economy, where employment growth has been & monetary modest, or may have actually contracted over the past few years; and a hidden and stability while growing informal economy, whose size i s large even by standards of most transition and strengthening emerging countries. The economy is facing a dual macroeconomic challenge: to maintain non-oil macroeconomic and monetary stability while strengthening competitiveness of the non- competitiveness oil sector, and to complete the transition agenda of structural reform, which may see some traditional activities disappear or stabilize at much lower levels of output and employment. Maintaining macroeconomic achievements may represent a greater challenge to the authorities in the coming decade. Both the transition process and the booming oil sector will leadto large restructuring of the economy. Balanced growth 10. The oil and gas windfall will be of undoubted benefit to the country and its between the new citizens if combined with a very careful macroeconomic policy and fiscal stance, as well oil sector and the as steadfast implementation of the structural reform program and poverty reduction traditional non-oil strategy. The experience of other resource richcountries has often been disappointing and sector is a major left large strata of the population in continued poverty (Box 1.1). Balanced growth challenge. between the new oil sector and the traditional non-oil sector i s a major challenge- adapting to Azerbaijan's increasingintegrationinto the world market, creating productive employment opportunities, and reducing poverty. Excess supply of foreign exchange may lead to appreciation of the exchange rate, and excessive fiscal spending may lead to inflation and inefficiency-"Dutch disease" symptoms that hamper competitiveness and growth of the non-oil sector. The exchange rate 11. The exchange rate does not appear to hamper competitiveness as of now, but does not appear to remains a future challenge. There i s significant evidence that suggests that the real threaten exchange rate i s not overvalued3, and that structural factors are hampering competitiveness competitiveness. However, maintaining an adequate exchange rate will become a now, but remains challenge, once the oil windfall would materialize. Given the fact that private sector is afuture challenge liquidity constrained (the capital market i s underdeveloped), fiscal policy will provide the main policy tool to manage the oil windfall successfully, as well as accumulating the excess oil revenues in the Oil fund abroad, will provide a fiscal sterilization, thus avoiding excessive real exchange rate appreciation. This is evident by the fact that real exchangerate has even depreciatedwith about 20 percent during 1997 -2002. Robust growth of the non-oil sector, especially agricultureduringthe last five years provides further evidence that the real exchangerate is not overvalued. Furthermore, accordingto the analysisof the impactof exchangerates of transitioneconomieson their competitivenessprovidedby EBRD(EBRD Transitionreport, 2000,pp. 62) which compares dollar wages intransitioneconomies to dollar wages of countries of similar levels of productivity, workforceskills andcomparable economic structures, for Azerbaijan, the ratio of actualdollar wages to comparabledollar wages was 0.6 in 1999, which impliesthat the real exchangerate is notovervalued. (See AzerbaijanPublic ExpenditureReview, April 2003). 3 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan 1.2 ThisStudy 1.2.I Obiectives 12. This study is a diagnostic of the non-oil trade and investment environment in The study Azerbaijan. Its primary objective i s to define a strategy for enhancing competitiveness at outlinesan the macro- and micro-levels, and increase trade and inward investment in the non-oil integrated sector to assist in poverty reduction efforts. The strategy implements one of the key approachfor objectives of the SPPRED program, Le., enabling income generating opportunities and trade, jobs inthe non-oil sector. investment and development of 13. The main objective i s to assist Azerbaijan in adopting an integrated approach for the non-oil sector trade, investment, and industry development activities, and bring a focus on the development of actionable programs to enhance competitiveness at the industry cluster level. A key element of the strategy i s in providing a framework to better integrate the efforts of key stakeholders-i.e., the Government, multilateral and bilateral donors, the private sector, and others-in promoting non-oil trade and investment. It does so by incorporating the current and planned activities of the stakeholders in the non-oil sector. Italso integrates and complements the strategies outlined inthe SPPRED program. 14. The analytical basis for the study includes the SPPRED program; various strategies and analyses of the Government, donors, IFIs, private sector groups and NGOs; relevant analyses of the World Bank and IMF; as well as three assessmentsconducted for thisreport: An analysis of administrative barriers to inwardinvestment 0 An evaluation of trade policy and market access agreements of Azerbaijan including issues related to WTO accession 0 A pilot study ofthe potentialfor a fruit and vegetable processing cluster This study also incorporates detailed discussions with a wide range of private, government and non-governmental organizations and individuals in Azerbaijan, as well as a number of surveys. It integrates the findings and recommendations of participants at a one-day workshop on the strategy held on June 23,2003. 1.2.2 Organization 15. The overall study i s comprised of two volumes: Volume 1i s a summary report that outlines the development strategy and action plan; Volume 2 i s comprised of the various component reports conducted for the study: Annex 1: Recent Economic Developments and Economic Outlook 0 Annex 2: Analysis of Azerbaijan's Foreign Trade and Inward Investment 0 Annex 3: Market Access Issuesfor Azerbaijan Annex 4: I s Accession to the WTO inthe Economic Interest of Azerbaijan? 0 Annex 5: Business Environment and Competitiveness Annex 6: Azerbaijan Administrative Barriers Analysis 4 INOTIS-IntegratedNon-Oil Tradeand Investment Strategyfor Azerbaijan 16. This volume is organized into the following chapters. Chapter 2 outlines the overall potential for the non-oil sector in Azerbaijan and the challenges ahead, and presents an overview of the integrated strategy to overcome the challenges and achieve the development vision. Chapters3 through 6 presentthe detailed, component strategies. Chapter 7 presents a detailed, time-bound action plan of practical steps to implement the strategy. 17. The document incorporates the comments and suggestions of the Government, business community and other stakeholders made during a workshop conducted on the draft strategy inBakuon June 23,2003. 5 "TIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER 2-OVERVIEW: INTEGRATEDNON-OILSECTORTRADEAND INVESTMENT STRATEGY 2.1 RecentTrendsinNon-OilSector Trade andInvestment 18. Unlike most CIS countries, Azerbaijan enjoys a positive trade balance and has While been quite successful in attracting foreign direct investment (FDI).However, most of this Azerbaijan has activity i s focused on the oil and gas sector. The sector accounts for almost 80 percent of a positive trade FDIinflows, and is set to increase even further as the anticipated massive investments balance and signijicant FDI, associated with the oil and gas pipeline project materialize. Azerbaijan's exports are these are excessively concentrated, even by standards of major oil exporters in the world, and its concentrated in reliance on fuel exports has increased since the mid-1990s. In 2001, fuel exports oil and gas constituted over 91percent of foreign sales. 19. The dominance of the oil and gas sector and the reliance on traditional markets i s Non-oil exports also evident inforeign trade patterns. While Azerbaijan has reoriented a substantial share arefocused on of its trade toward the EUand other OECD markets over the past decade (in2001, almost traditional 70percent of Azerbaijan's exports went to the EU), the shift has beenless dramatic inthe markets; the case of non-oil exports, which remain destined largely for Russia and other CIS share sent to OECDmarkets countries. Only 12 percent of non-oil exports were sent to the EU and less than one has dropped quarter of non-oil exports went to OECD countries as a whole. More important, over the over thepast last five years, Azerbaijan's exports have been shiftingaway from its new markets inthe decade EU. Over this period, non-oil exports to the CIS markets increased by 18 percent, while non-oil sales to the EU and the rest of the world went down by 12 and 14 percent, respectively. Table 2.1-Geographic Orientation of Azerbaijan Exports, by Sector, 2001 (percent) Miscellaneous Finished Source: UNCOMTRADE via WITS Database. 6 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 2.2 Definingthe Future Potential 20. There is little doubt that Azerbaijan is a country with abundant naturalresources, a skilled workforce relative to prevailing wage levels, and a strategic geographic location. These comparative advantages give rise to a number of oil-related and non-oil development opportunities, which are only slowly being realized. Sustainable 21. But it is important to ensure that Azerbaijan not compete on the export of growth will be resource endowments and raw materials alone. Worldwide evidence shows that most in areaswhere developing countries solely on the basis of raw materials, low cost labor, and Azerbaijan has geographical advantages-have gotten poorer on average; and have developed a competitive persistent and often increasing gap between the rich and the poor.4 Many oil-rich advantages countries in the Persian Gulf and Latin America have viewed oil as the solution to their development problems; infact, there i s only a small positive correlation between rises in oil exports and increases in the standard of living. It i s important that Azerbaijan not fall into the same perceptions trap; oil must be viewed as a means to upgrading the competitive environment within which Azeri firms produce and compete. 22. It is clear that a rapid and sustained diversification of economic activity beyond the oil sector i s the only way for Azerbaijan to create employment opportunities, achieve broad-based growth, and meaningful levels of poverty reduction. Moreover, given the small size of the domestic market, increasing non-oil exports and investment will be critical inorder to attain this goal. Competitiveness 23. In this context, defining the future must be defined opportunities for growth and prosperity in at the cluster- Azerbaijan lies in building upon the competitive andjirm-level. advantages of the country. What i s Firms, rather than nations, competitiveness? The work of a number of competefor competitiveness theorists has shown that the market share competitiveness of a nation i s based upon the and resources competitive position of its firms or industries. They, rather than nations, compete for market share and resources. At its core, national competitiveness i s linked to productivity and the ability of a country to raise living standards over time. 24. This study does not rigorously identify future non-oil potentials for Azerbaijan, - especially those arising from the application of a competitiveness approach. It does, however, include a pilot study of the fruit and vegetable-processing cluster in Azerbaijan to demonstrate the application of the clusterkompetitiveness framework, and its possible application to other areas. Various other analyses have pointed to the potential of several other industry clusters, which are also profiled below, including support industries for the oil and gas sector; trade and transportation services; and telecommunications and IT services. Michael Fairbanks, "If Prosperity is a Nation's Choice: Seven things that government and private sector leader will have to do," Unpublished note, 2002. 7 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan 2.2.1 Fruit and Vegetable Processing 25. Azerbaijan has enormous agricultural resources-nine "micro climates," fertile Azerbaijan has considerable land, abundant supply of range of fruits and vegetables. The potential to enhance export- potential in oriented fruit and vegetable processing activities is considerable, especially in the exports of Russian market, as i s already occurring. A more diffuse and longer-term export processedfoods opportunity comes from the expanding international market for "green" products, which and vegetables are foods grown without the use of chemical fertilizers, herbicides, or insecticides. and "green" Because much of the Azeri agricultural land lay fallow or at least had no chemicals products applied over the last decade, foods grown on that land could qualify for green product designation. There are currently some 50 processing companies, of which five are successfully supplying a range of products (juices, dehydrated fruits, wine, jams, etc.) to local and export markets. 26. But there are a large number of factors to address to achieve this potential. These include weak factor conditions (e.g., inadequate supply of raw materials; price competitionfrom fresh produce markets; unreliable power supply and other infrastructure constraints); demand conditions (preference for imported products; poor product quality and packaging); significant gaps in supporting industry (e.g., collection networks, post- harvest facilities, glass containers, testing facilities, irrigation infrastructure); and an unfavorable micro business environment (lack of contract enforcement, duties on packaging materials, predatory businesspractices, etc.). 2.2.2 Oil- and Gas-Related Industries The 27. The full implementation of the pipeline projects and related oil and gas activities implementation has the potential to stimulate development of a variety of products and services to be of the oil and delivered 10cally.~ These include basic equipment and machinery; metalworking; gas projects will enable a range upstream industries; specialized chemicals and solvents; and the provision of a range of of support technical and business services (e.g., repair and maintenance, waste management and services and environment, transportation services, food services, among others). The Enterprise Center input suppliers set up under the aegis of the Business Development Alliance has already taken the leadto define and realizethese potentials, aimed at Azeri-owned and operated companiesa6 28. While this i s an immediate and tangible opportunity for local suppliers, several issues need to be addressed. A number relate to the highquality standards, large average orders, and stringent delivery requirements of western oil companies that are difficult for most local suppliers to meet. Other issues arise from the production sharing agreements that regulate the oil business. They implicitly contain an import bias in that local businessesare not protected by them and frequently cannot raise bank funding. 29. Other opportunities are found in upstream oil and gas-related processing industries, including various chemical and petrochemical industries. The viability of these, however, needs to be carefully established, including an assessment of long-term global demand and supply trends. Initial supply chain studies undertaken by BP identified some 12 industries with potential to support the oil and gas industry. The Center provides informationon supplier capabilities, resources available to suppliers, current and future supply opportunities, BP's expectations for Health, Safety and Environment, quality and businessconduct, required technical standards, pre-tender meetings and other related areas. The Center also provides supplier training and consultancy services. 8 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 2.2.3 TradeflransuortationServices and Renional Hub 30. Another near-term potential for Azerbaijan i s in the trade and transportation services sector. Azerbaijan lies on the most direct route from the Black Sea to the Caspian Sea, and onwards to the Central Asian Republics. Demand for trade facilitation Transit trade is services in Azerbaijan i s accelerating as oil and gas activities in the Caspian increase in likely to expand scale and scope. Already, it serves as a major conduit point for oil and oil products from dramatically, Caspian to the ports in the west. According to a recent World Bank report on trade and driven by transport facilitation,' transit cargo volumes are set to increase dramatically in line with activities in the Caspian the over US$10billion in oil-related investment expected over the next decade. The main components of West-East transit trade will include oil equipment; humanitarian aid and reconstruction support to Afghanistan; containerized consumer goods; and a variety of machinery and equipment for SMMEs. East-West trade is likely to be dominated by oil and gas (LPG)exports. 31. Given its favorable geographical location as the only major urban area on the Transit trade is Caspian, Baku has the potential to become a hub to serve markets in the Caspian region likely to expand more cost-effectively. At present, several companies based in Baku serve regional dramatically, markets by storing, sub-dividing, mixing, and re-packaging goods inEuropean locations, driven by activities in the such as Frankfurt. Much of these types of activities can be conducted in Baku. But many Caspian issues remain to be resolved to realize these opportunities. At present, major physical, administrative, and institutional factors raise effective trade and transportation costs, especially when all unofficial payments and delays are taken into account. Azerbaijan also lacks basic facilities such as bonded commercial warehouses and free zones' that would greatly facilitate development of these activities. Baku has the 32. A related, but longer-term opportunity is for Baku to become a full-fledged potential to services hub for the Caspian area. Baku is the only city in the area which can develop a become a full set of financial, trade, transportation, andrelatedservices. Itcan develop into a center services hubfor for regional headquarter operations, by capitalizing on these unique strengths. But the Caspian, and host realizing this potential will not only require the development of a specialized legal and regional regulatory framework for regional headquarters operations. It will also require the headquarter development of a common vision among government, business and other stakeholders, operations and the political will to establish an appropriate enabling environment. 2.2.4 Telecommunications and IT services Thereare 33. Azerbaijan also has the potential to attract investments and boost growth in a signijkant range of information and telecommunications services. With the growth of economic opportunities in activity associated with the oil and gas industry grows, demand for a wide range of value- value-added added telecommunications and networking services will increase significantly. These telecom, include local loop and long distance telephony services; cellular paging and satellite networking, services; data access services; Intemet services; and private network services. Growth of software,and IT corporate networks will provide demand for software and infrastructure integration services services; Intemet security applications; and web hosting services. There is also potential, "Trade and Transport Facilitationinthe South Caucasus-Azerbaijan,'' World Bank Policy Note, November2002. The scheme was effectively abolished through a recent deregulation decree of the President, which removed the needfor bondedwarehouses to be licensed by the State Customs Committee. Draftregulations havebeenpreparedby the SCC and are now awaiting Presidentialapproval. 9 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan eventually, for the expansion o f advanced media services, such as digital content creation and paid access services. With the right infrastructure and skills development program, Azerbaijan could also develop an export-oriented software and IT services ind~stry.~ 34. But the development of these services is deterred by significant legal, regulatory and institutional obstacles. At present, limited competition has been allowed in the telecommunications market-there are two cellular telephony providers (one a joint venture with the Ministry o f Communications); the national telecommunications operator, Aztelecom has a monopoly over fixed line telephony (voice and data), as well as a broad range of telecommunications services. Internet service providers are under a number o f restrictions that limit the potential for web hosting services. The basic laws governing communications and broadcasting have a number of problems including content controls. The Ministry o f Communications i s both the regulator and an operator. Privatization o f Aztelecom i s proceeding. 2.3 Key Challenges to Increasing Non-Oil Exports and Inward Investment Achieving 35. The potential exists to develop a range o f non-oil sectors i s substantial, but growth in the Azerbaijan's competitiveness in export markets and as a location for inward investment non-oil sectors in the non-oil sectors is adversely affected by a number of factors. Initial reforms have faces a wide created an important foundation for the development of a competitive market-based range of legal, institutional and economy, various legal, institutional, and infrastructure challenges remain (see Table infrastructure 2.2). The impact of each of these issues is particularly negative for SMMEs, who have challenges neither the resources nor the capacity to deal with many of these issues. Table 2.2-Key Challenges to Increase Non-Oil Exportsand Investment 0 Address policy and legal issues impedingWTO accession, including subsidies, standards, intellectual property, and agriculture 0 Reducelevel of tariff dispersion 0 Increaseutilizationof preferential bilateral and regional free trade agreementsto EUand CIS markets 0 Improve customs policies and proceduresto reduceadministrative and transactioncosts 0 Automate customsand trade proceduresandimprove customscapacity to reducedelays and curb illegal transactions 0 Improve management of transit cargo andcommunication amongborder agencies 0 Develop comprehensive and integratedtransport sector policy 0 Provide framework for andencouragecompetition intransportation and shipping services 0 Upgradehehabilitate key transport infrastructure 0 Provide critical facilities for trade efficiency such as bondedwarehouses and free zones 0 Increaseclarity of the draft investment law 0 Further reduce administrative burdenof business registration and licensingprocedures 0 Simplify land titling and site developmentprocedures 0 Strengthenjudicial system, contract enforcement, anddispute settlement systems 0 Improvemonitoringand enforcement of intellectual property laws A UNDP-sponsoredstudy of the ICT sector export potential inAzerbaijan has set very aggressive targets for exports of software and ICT services. 10 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 0 Address remaining gaps and inconsistencies inTax Code and regulations 0 Reduce effective tax burdenon SMMEs 0 Improve tax administration practices, particularly for SMMEs 0 Strengthen competition policy enforcement and corporate governance practices to discourage predatory business practices 0 Increase access to financing, especially for SMMEs 0 Increase flexibility in labor code to reduce effective labor costs 0 Improve skills training to meet needs of growing non-oil sectors 0 Upgradehehabilitate utility infrastructure 0 Strengthen private sector institutions to enable private sector input inpolicy-making 0 Develop effective public-private partnerships for dialogue and governance Micro BusinessEnvironment 0 Encourage development of business and technical support services for enterprises 0 Improve access to information on markets and technologies 0 Encourage greater vertical and horizontal relationships among firms in value chain 0 Provide greater support for entrepreneurship development 36. Most SMMEs prefer or are forced to operate outside the formal sector-in 2002, it was estimated that the size of the informal economy inAzerbaijan is equivalent to more than 60 percent of GDP, significantly higher than other transition economies (which average 38 percent)." The Government's estimates are lower, but still point to the existence of a large informal economy. 2.4 Ongoing and Planned Technical Support Activities in the Non-Oil Sector 37. To address these issues, the Government, donors and other stakeholders have Much donor assistance is sponsored a number of activities to develop non-oil activities. The Government (through already in place the Ministry of Economic Development, MED) i s active in business development to support non- primarily through an entrepreneurship development fund, whose activities are discussed oil sector further below. It also provides business development assistance through the Small and development, Medium Enterprise Development Agency (SMEDA). The potential for the establishment but gaps remain of business incubators and business and industrial parks i s also being examined. 38. Efforts to stimulate non-oil entrepreneurial activity have been spearheadedby a number of donors. Over the past few years, many donor programs have shifted from purely humanitarian assistance to the promotion of broad-based economic growth. There i s a shared view that Azerbaijan has a strategic window of opportunity over the next few years to capitalize upon the growth of the oil and gas industry. The various trade capacity-related initiatives (see Appendix A) can be grouped primarily into several areas: trade and investment; trade and transport facilitation; enterprise and industry development; and SME and microfinance. 39. Despitethe plethora of donor-fundedprograms to promote the non-oil sector, it i s evident that many important issues are not being addressed and there are overlaps among several programs. Even worse, many donor initiatives have established or have proposed the formation of a various project delivery mechanisms and public-private partnerships, lo Friedrich Schneider, "Unofficial Activities inTransition Countries: Ten Years o f Experience." (Working Paper, October 2002). 11 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan which may benefit from rationalization. Overall, donor, government and private sector efforts aimed at boosting the non-oil sector are still inadequately coordinated and integrated, and could greatly benefit from a more integrated approach. 2.4.I Trade and Investment 40. There has been an increasing emphasis among donors on promoting trade and investment in non-oil activities. Part of this has focused on enhancing the investment environment, where FIAS has taken the lead in undertaking a recent diagnostic study, and reviewing draft revisions of investment legislation and recent Presidential decrees on deregulation. This has been deepened by an initial analysis of administrative barriers to Direct support inwardinvestment conducted for this study. for trade capacity 41. Limited support has been provided inthe area of trade capacity-building directly. building A Tacis project to support implementation of the EU Partnership and Cooperation activities has Agreement (PCA) was been broadened to include WTO issues; a new project to continue been limited support of the PCA i s planned. A technical assistance activity funded by the U.S. Trade Development Agency (TDA) to assist Azerbaijan in its WTO accession process has just been started, with a long-termadviser assisting the MED. 2.4.2 Trade and Tranwort Facilitation Donor interest 42. Other initiatives have addressedthe issue of enhancing trade facilitation, customs in trade & operations and transport. These include a recent IMF-supervised study of the transport effectiveness of customs procedures and organizational framework;" a World Bank facilitation has regional study of trade facilitation issues in the South Caucasus;" and an on-going EU increased but trade and transport facilitation program in Central Asia and the Caucasus, including has not been Azerbaijan. l3These studies have identified the main areas for improvement and have comprehensive provided technical and financial support in a number of areas. Assistance to the State in scope Customs Committee in installing a data network system has been provided by UNDP; this has recently beenexpanded to the creation of price databases and a riskmanagement system. 43. Assistance has being provided to review draft regulations on bonded warehouses. Short-term assistance(through this study) was provided to the MEDto review a proposed Special Economic Zone (SEZ) law, which i s now under consideration. 2.4.3 Enterprise Development Themajor 44. The greatest focus of donor assistance has been directed at providing technical emphasis has and financial support to individual enterprises; strengthening business associations; and been on the conducting sector studies of selected non-oil industries. Various nongovernmental development of new non-oil organizations have been engaged in micro-enterprise and business association enterprises development, particularly in areas outside of Baku, primarily under USAID programs. "Azerbaijan Republic: Evaluation of the Structure and Activities of the State Customs Committee," PriceWaterhouseCoopers,January 2002. "Trade andTransport Facilitationinthe South Caucasus-Azerbaijan," World BankPolicy Note, November2002. l3TRACECA program(Transport Corridor EuropeCaucasus Asia). 12 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan The National Confederation of Entrepreneurs provides some technical assistance and matchmaking services to its membership with funding from the EU. 45. A number of Tacis and GTZ programs have been active in providing firm-level technical assistance. Tacis has provided funding and technical support to SMEDA, which has been working with a number of enterprises. GTZ i s undertaking a comprehensive program to provide business advisory and technical support to selected firms to promote non-oil exports. Targeted firms are in the garmentdsilk, wines, fruit and vegetable processing, and machine buildingindustries. 46. The Intemational Finance Corporation (IFC) has launched an initiative to develop supply and other linkages between SMEs and the oil and gas industry.A future program may be aimed at the development agribusiness enterprises. It also undertook an investor's conference inBaku inMay 2003 which was attendedby some 200 investor^.'^ 47. A comprehensive approach that i s sponsoring various activities to develop suppliers for the oil and gas industry, and promote enterprise development in other non- The BDA is a oil industries i s being led by the Business Development Alliance4omprised of a broad unique cross-section of NGOs, embassies, business associations, and oil ~ompanies.'~Among partnership the most important of its activities i s the establishment of the Enterprise Center in Baku approach to (funded by British Petroleum), which maintains a database of local firms; conducts enterprise training and entrepreneurship development; and has conducted a supply chain assessment development to identify potential products and services for the oil and gas industry and evaluate the capabilities of existing Azeri firms. 48. New activities are focusing on trying to facilitate the formation of industry clusters as a more effective tool for private sector support. Inparticular, USAID i s about to implement a program to facilitate the development of agro-processing clusters in the ruraleconomy, drawing upon the pilot study conducted for this report. 2.4.4 SME- and Microenterprise Finance A variety of 49. A number of initiatives are also underway to enhance SMME access to credit financing through funding provided by IFC, EBRD, KfW, and others, mainly in the form of credit schemesfor lines on-lent through local banks. However, there i s growing evidence that average loan SMMEsare size and interest rate levels are too high (3.5 percent per month), beyond the reach of available, but most SMMEs. overall coverage is still limited 50. While a number of innovative and well-regarded microcredit schemes are available under USAID and World Bank programs, the size and coverage of these are relatively limited. To address these issues, the IFC, along with EBRD, Black Sea Trade and Development Bank, KfW, and LFS, has established a microfinance bank to provide debt and equity under terms and conditions accessible by SMMEs. Since beginning l4The work was undertakenby SOFI (Swiss Organisationfor Facilitating Investments). FoundingMembersof the BDA includethe Embassyof Norway, InternationalAlert, BP, The EurasiaFoundation, CitizensDemocracy Corps, the AmericanChamberof Commercein Azerbaijan, andthe AzerbaijanEntrepreneursConfederation. Other participantsincludethe Embassiesof UK, USA, Israel and Germany; KosidSmeda;FAR Center, Statoil, DevonPennzoil andAgip; the IFC,EBRDand UNDP; and representativesfromthe Governmentof Azerbaijan andother businesses and NGOs. 13 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan operations in October 2002, the bank has provided over 1,000 microcredits" worth over US$1 million. 51. In August 2002, a presidential decree17 established a National Fund for Entrepreneurship Development (US$50 million) under the MED to provide a variety of funding for SMMEs, including micro-finance schemes; assistance to credit unions; venture capital; etc. According to MED officials, more than 300 enterprises have been financed through the Fundas of June 2003. Achieving the 2.5 Achieving the Vision: Strategy Overview potential will require the 52. The potential for growth of the non-oil sector i s significant, and can be greatly implementation of an integrated catalyzed by the increasing economic impact of the oil and gas activities. However, doing development so will require the formulation of integrated and actionable strategy, and a realistic strategy implementation plan that build on existing and planned Govemment and donor-funded activities. The following chapters provide an overview of the key issues and recommendations for improving the environment to increase non-oil sector trade and investment. The discussion i s broken down into four broad components: 0 Improving the Trade Policy Regime and Market Access. Key strategies include accelerating Azerbaijan's accession to the WTO, increasing access to regional markets and the European Union; improving access to finance; streamlining administrativeprocedures. 0 Enhancing Trade Facilitation. Key strategies include streamlining and strengthening customs procedures and improving the quality and capacity of Azerbaijan's transportation infrastructure. 0 Improving the Macro Business Environment. Strategies to improve the macro business environment cover a wide range of issues impacting on private sector development, including improving business registration and licensing; land acquisition and site development; labor market policies; taxation; access to credit; support for SMMEs; contract enforcement and dispute settlement; and public sector governance. Developing Competitive Industry Clusters. A pilot study in the agro-processing cluster points to industry-specific strategies for improving inter-firm cooperation, promoting innovation and quality, encouraging specialization and strengthening supply chains. 2.6 Key Success Factors 53. The experience of trade and investment strategies has pointed to a number of key success factors. First,the strategy and action plan itself must be practical, time-bound and The credits carry an annual interest rate o f 36 percent, much lower than the 15 percendmonth being charged SMMEs by informal lenders. Over 90 percent of clients are new to the banking system. "StateProgramonSmallandMediumEntrepreneurship DevelopmentintheAzerbaijanRepublic (2002-2005). Approved by Decree No. 753 dated August 17,2002, o f the President of the Azerbaijan Republic. 14 INOTIS-IntegratedNon-Oil Tradeand Investment Strategyfor Azerbaijan be able to effectively monitored and evaluated. Second, the strategy will succeed only if it is led and directed by the private sector. Industry leaders must continuously fine-tune strategies and actions to support the industry, and monitor the effectiveness of the actions implemented. In particular, the private sector in Azerbaijan (local and foreign) should spearheaddevelopment of a number of areas: Innovative approaches to manpower development. Industry can foster closer ties to the educational system, including funding and technical direction, to upgrade the quality and quantity of manpower, meeting the requirements of non-oil industries. Active support in marketing, technology and financing. The private sector can collaborate to jointly undertake export marketing and investment promotion initiatives, and enhanceefforts to access technologies. Upgrading industry capabilities. Industry can spearhead initiatives to create and implement quality certification systems to world standards. Companies can collaborate to develop the necessary scale and capability to penetrate service global markets. Infrastructure provision. The private sector can provide value-added data telecommunications services and develop purpose-built facilities to meet industry requirements. 54. Third, active and sustained support of the Government is also a key prerequisite for success. The political will to support development of an enabling environment must come from the highest levels. Coordination among various ministries and groups i s critical. Governmentshould take the lead role inthe following areas: Development of a supportive regulatory framework. This includes streamlining of procedures, better enforcement of existing laws, modifying certain provisions of existing laws and regulations, and separating the Government's regulatory functions from commercial operations through privatization and de-monopolization, particularly inthe utilities and transportation service sectors. Provision of critical infrastructure. This includes rehabilitation of transportation infrastructure; improvements to the power distribution network and municipal services. Development of innovative institutional and governance structures. The creation of a public-private forum for dialogue with the private sector and implementation of the proposed strategy i s critical to its success, to ensure that positive intentions and policy pronouncements are translated into concrete actions "on the ground." 55. Finally, the role of donors and other stakeholders i s critical to the success of the initiative. Donors need to provide financial and technical assistance to support strategy implementation, but in an integrated manner. NGOs are an important component of the outreach and consultation effort aimed at civil society that underlies implementation of the strategy. 15 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER3-IMPROVING THE TRADE POLICY REGIMEAND MARKET ACCESS 3.1 Introduction Azerbaijan's 56. With the abolition of the state monopoly over foreign trade and liberalization of trade regime prices in 1997, trade policy became a meaningful tool for trade development in has liberalized, Azerbaijan. Azerbaijan applied for WTO membership in 1997. In the same year, a two- but progress band tariff structure was introduced and the average tariff rate fell to 4 percent in 1998 has been slow (from 60 percent in 1996). Azerbaijan's openness to trade increased substantially and halting in between 1995 and 2001, as measured by the ratio of total trade to GDP, from 50 to 66 certain respects percent. Insome respects, however, liberalizationof Azerbaijan's trade policy regime has progressed slowly over the intervening years and has even suffered some setbacks. Until recently, for example, Azerbaijan's formal efforts to accede to the WTO have proceeded extremely slowly. 57. The composition and direction of Azerbaijan's trade can be linked, largely, to the existing trade policy regime, including import tariff barriers and Azerbaijan's participation in multilateral trade agreements, such as the WTO and preferential trade agreements with the EUand CIS. ImprovingAzerbaijan's trade policy regime, including market access agreements, can contribute to trade development and, more importantly, economic diversification through the development of the non-oil sectors. 3.2 ImprovingImportTradePolicies Azerbaijan has 58. Azerbaijan has a liberal and open trade regime in comparison to countries at a a liberal and similar level of GDP per capita. However, there has been a reversal, albeit not a large open trade one, in tariff liberalization in Azerbaijan since 199618.While the maximum tariff rate of regime with low 60 percent in 1996 was slashed to 15 percent in 1997, and a two band structure tariff rates with introduced, this was expanded to four bands (with the same maximum 15 percent rate), little dispersion and then subsequently to a six-band tariff schedule with the maximum rate of 25 percent (applied only one product). Moreover, while between 2000 and 2002 the overall tariff level slightly decreased, the dispersion in tariff rates appears to have increased. Overall, these reforms have decreased the weighted average tariff from 7.3 percent in 1999 to a reported 6.5 percent today. However, tarir 59. Despitethe low average tariff levels and limiteddispersion, Azerbaijan's tariff policies policies inadvertentlyexpand opportunities for corruption inthree ways. First, Customs inadvertently expand have significant discretion inclassifying products within the same six-digit groups (Le., opportunities relatively similar items) .19Second, the practice of tariff and VAT exemptions also offers for corruption '*Pleasereview the tariff analysis presented inAnnex Dcontained in Volume I1of this report. Note that the H S international specification covers first six digits, whereas the remaining 2-3 digits can be defined by national authorities Azerbaijan uses the first six digits inaccordance with 16 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan opportunities to misclassify goods at customs clearance, although on a much smaller scale. Not all products belonging to two-digit HS groups (84, 85, 86, 87, 88, 89) are exempt from VAT. Last but not least, the entry into force of several free trade agreements create extra opportunity to fraudulent behavior related to `misreading' of the origin of a shipment, i.e., classifying as one coming from apreferential, free-trade partner. 60. Together with the strengthening of the Customs Committee's operations, the Government i s addressing the problem of under invoicing of selected goods by replacing ad valorem tariffs on these commodities with specific tariffs, a process that i s expected to be completed by 2004. These specific tariffs have been set at levels designed to be consistent with maintaining a maximum ad valorem tariff of 15 percent, with the exception of synthetic carpets, cigarettes and alcohol, and the changes inthe tariff applied to products other than synthetic carpets i s minor. The Customs Committee began publishing monthly reports on imports and customs revenue, by tariff band, as well as excise collections by product, in May 2001. Tariffs account for a decreasing share of government revenues, falling from about 9.6 percent in 1999 to 5.7 percent in2002. 61. There are two key recommendations in terms of trade policies. First,there should be a shift towards a uniform tariff rate even slightly exceeding the current weighted average tariff rate. Introducing a uniform tariff rate would expand the "tariff base" and increase customs revenue. It would also push private interests to focus on productive activities rather than lobbying the government, remove incentive to misclassify products, and reduce smuggling, which result in lower budget revenues and business-unfriendly environment. Furthermore, it could contribute to the acceleration in the WTO accession process. 62. Second, the capacity of the Tariff Council should be strengthened. The Tariff Council was created in 2002, with its Secretariat at the MED, to provide a transparent mechanism for recommendations on tariffs and other customs charges (as well as the regulation of state monopolies). The Tariff Council may request information from State agencies and invite experts or representatives from the local or international business community to participate. The Tariff Council has the potential to be an important, unbiased source on tariff reform, and therefore resist the demands of special interests. The capacity of the Council to undertake objective economic analysis shouldbe upgraded to provide a sustainable source of tariff policy analysis andrecommendations. 3.3 AcceleratingWTO Accession WTO membership will 63. Azerbaijan took the important first step toward full integration with the global offer Azerbaijan economy with its application to the WTO in 1997. WTO membership will offer MFNaccessto Azerbaijan a number of important benefits. Accession to the WTO increases chances for world markets export diversification by opening new markets. Azerbaijan would be offered a minimum and an of Most Favored Nation (MFN) status and would protect its producers against economically undertakings by other countries to restrain access to their markets. Moreover, accession sound framework for can provide a number of benefits, including an economically sound framework for tradepolicy... structuring trade policy that helps lock in liberal reforms and the reduction in the HS, the next two digits inaccordance with the combinedusedinthe Councilof Europe, and the last digit takes into account Azerbaijan's preferences. 17 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan potential for state capture by narrow interest groups seeking to protect their markets. Accession also facilitates the introduction of "best practice" standards and practices that can boost Azeri competitiveness and attract FDI. 64. The costs of accession to the Azeri economy are not expected to be substantial. The benefits Of accession are Direct costs of accession result from meeting WTO transparency and information likely to more disclosure requirements-the need to establish a unit in the MEDto monitor trade policy than and meet WTO notification requirements, as well as enquiry points for technical direct and regulations and sanitary and phytosanitary standards. The other costs of accession will indirect costs result from efforts to comply with customs valuation, technical regulations, SPS and TRIPS requirements. WTO accession will also Table 3.1-WTO Accession Progress (as of NOV. 2002) have a mixed impact on Azeri agriculture, which can be managed in the accession process. But Partv Established I Julv 1997 1 there i s little doubt that the costs of accession are likely to be more than offset by economic gains-the Azeri foreign trade regime i s already liberal and additional adjustments are relatively small and additional administrative costs to meet WTO requirements are relatively low. 65. T~date,however, 8 Negotiationson Services None progress has been slow Draft Services Schedule None (Table 3.1). The first 9 Factual Summary None meeting of a Working 10 Draft Working Party Report None But Azerbaijan hasprogressed slowly toward WTOaccession The underlying economic 66. With the assistanceof the US TDA technical assistanceactivity, the Government choices being has the opportunity to accelerate its accession efforts. The technical assistance advisers made in the will assist across the full range of WTO accession issues, including bringingAzerbaijan's accession legislation into compliance with the various WTO agreements. Undoubtedly, the most process must be important initial priority i s to facilitate the preparation of reliable and credible answers to fully considered queries raised by Working Party members and to enter into negotiations with interested parties on a bilateralbasis. This i s the stated purpose of the TDA assistance. 67. At the same time, it is important for the Govemment to fully consider the underlying economic choices shaping the positions adopted in the negotiating process. Much too often, some countries-including several transition economies-have rushed 18 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan through the accession process, and have subsequently attempted to renegotiate their commitments. Our analysis suggests that some of the most important issues that Azerbaijan will have to consider inthe accessionprocess are the following aspects. 68. Seek developing country status. Azerbaijan can choose to be treated as a developing country2' under the WTO framework, thereby obtaining so-called "special and differential treatment." These privileges include as extended implementation periods to comply with WTO mandates, certain flexibility in the application of rules, etc. These privileges can be important assets in ensuring the smooth implementation of WTO commitments. 69. Improving customs valuation practices. The rules of the WTO Customs Valuation Agreement require that members levy customs duties on an imported good's transaction value rather than on some reference price constructed by the government. Azerbaijan's customs rules have not been in full concordance with that Agreement as revealed in the comments and questions of the WTO Working Party. The major issues raised concerned additions to transaction value, methods of applying deductive value, valuation using reasonable means, currency conversion, confidential information, the right of appeal, and definitions of some terms. Those that have not yet been addressed need to be reviewed and brought into compliance. In parallel, efforts to enhance the technology and capabilities of the SCC need to be implemented. Specifically, streamlining the administrative environment and reducing excessive "red tape" would bringtangible benefits to both the government (higher customs revenue) and consumers (lower prices of imports). Azerbaijan 70. Reducing technical barriers to trade. The Technical Barriers to Trade (TBT) must adopt and Sanitary and Phytosanitary (SPS) Agreements require non-discrimination in applying international technical regulations and sanitary and phytosanitary standards to imports, avoidance of standards to trade-restrictive mandatory technical regulations, non-discrimination in conformity expand exports to assessment procedures, and the establishment of a national enquiry point. It also leading encourages members to join and use international systems for conformity assessments markets and encourages the negotiation of mutual recognition agreements (MRAs). Azerbaijan has already brought its trade policy framework close to full compliance, with the exception of the establishment of a national enquiry point. Azerbaijan has also signed MRAswith CIS countries andBulgaria. 71. However, a number of urgent issues need to be addressed to ensure that local producers can meet the public and private standards for entry into overseas markets. One of the most important of these is to complete the shift from the previous, mandatory GOST standards to internationally recognized voluntary standards. GOST standards remain common in Azerbaijan. While, certificates of conformity and quality issued by Azerbaijan are honored in all CIS countries, only Turkey, Slovakia, Estonia, Latvia and Lithuania honor Azeri standards outside the CIS.21Another issue i s the lack of adequate laboratory and testing facilities to assist in the greater use of international standards for 2o Neither the GATT 1947nor the WTO agreements set criteria for "developing country" status. Whether a country is considered "developing" dependson a unilateral decision o f the country granting tariff preferences under the GSP (US approach), or on membership inthe Group o f 77 (EUapproach) or ona self-selection for other WTO purposes. 21 However, mutual recognition o f standards and conformity assessment among the CIS countries often do not apply to most agricultural products. 19 INOTIS Integrated Non-Oil Tradeand Investment Strategyfor Azerbaijan food safety, animal and plant health. Existing private labs are not properly accredited, and state-run facilities are inadequate.22 72. More attention needs to be paid to private, voluntary product standards that are Attention must playing an increasingly import role in access to export markets. Little progress has been also befocused made, for example, in the adoption of I S 0 standards. Despite the fact that Azerbaijan has on the private been a corresponding member of the I S 0 since 1998, a relatively few number of firms standards which have been certified as complying with I S 0 9000 standards to date, particularly outside are increasingly important in the oil- and gas-related sector. There are currently only very few accredited unitscertified market access to issue certificates for meetingI S 0 9000 standards on quality or I S 0 14000 series on the environment. 73. The importance of standards and technical regulations goes beyond WTO accession. Product standards are an essential component of any economy seeking integration into global markets. As a small country, Azerbaijan should not invest too much effort indeveloping its own standards. The best policy option i s to follow intemational practice and accept standards and certificates issued by recognized intemational and national bodies. In fact, harmonization of national with intemational standards i s essential to participation in intemational supply chains cutting across national borders, as common standards reinforce linkages between component manufacturers, assembly operations, and distributors inthe final product markets. 74. The development of organizational capacities to encourage improvements inthe quality of domestically produced goods through issuance of certificates of meeting intemational standards would be a good investment. In other countries, business associations have begun to provide quality assuranceconsulting and certification as one of their fee-based services to members (Box 3.1). 75. Protecting Improve enforcement of intellectual intellectual property rights. The WTO property rights Agreement on Trade Related Intellectual is criticalfor Property Rights (TRIPS) has been the development particularly controversial from the point of of value-added industries 22Assistanceinenhancingstandardsand technical regulationscanbe obtained from the recently establishedStandardsand Trade DevelopmentFacility of the World Bank, incooperation with the WTO and other partners. 20 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan view of benefits to developing countries. In contrast to the WTO Agreements discussed above, its implementation involves significant adjustments and costs and does not offer quick retums. However, intellectual property rights (IPRs) are crucial for the development of high value-added, knowledge-intensive industries. In contrast to many least developed WTO members, Azerbaijan has already in place much of the legal structure for protecting intellectual property rights and i s already a member of the major international conventions and organizations promoting IPRs. Where Azerbaijan still falls short i s in the area of monitoring and enforcement-improvements here will be essential to providing an environment where intellectual property is truly protected. 76. Develop agriculture trade strategy. Azerbaijan's agricultural sector accounts Developing an for a substantial proportion of the economy-in 2001 agriculture accounted for 22 appropriate percent of GDP and 37 percent of employment. However, agricultural products account negotiating for a mere 3.5 percent of exports and comprise primarily unprocessedgoods. Azerbaijan strategy for WTOaccession remains a net importer of agricultural products, importing more than 70 percent of its will be critical domestic consumption requirements. As such, Azerbaijan has a particular interest in both to ensuring food expanding its agricultural export base, particularly value-added processed goods, and in security and the ensuring food security through the importation of cheap foodstuffs from abroad. growth of the Developing an appropriate negotiating strategy for WTO accession will be critical to agriculture and ensuring food security and the growth of the agriculture and agro processing sectors. agro-processing These twin objectives must also be aligned with WTO Agreement on Agriculture, which sectors seeks increased market access for agriculture products through the tariffication of non- tariff barriers and reductions in subsidies and other support measures. Any policy measures designed to encourage increased agricultural production (of raw or processed goods), either for home consumption or export, must be carefully crafted to be compatible with WTO rules regarding subsidies, which restricts measures that distort trade or production. 77. Develop a single legislative package. Given the wide range of legal issues that may need to be addressed in the context of Azerbaijan's WTO accession, it i s recommended that a single, "take-it-or-leave-it" legal package be developed, rather than piecemeal changes to various acts, as the latter approach risks significant delays in pushingthe legislation through Parliament. 78. Improving transparency and information disclosure. Assuring transparency and disclosure of information on conditions of conducting foreign trade operations i s an important component and i s mandated by the WTO. Azerbaijan must set up a unit responsible for keeping information and monitoring trade policy and in charge of future WTO notification requirements, as well as enquiry points providing information on TBT, SPS, and conformity assessment procedures. 79. While WTO accession and implementation can bring substantial benefits to Parallel measures are Azerbaijan, accession in itself will not ensure that these gains are realized. As presented needed to elsewhere in this paper, a variety of other, parallel measures are needed to ensure that ensure that accession promotes economic growth, efficiency and poverty reduction. These include a accession gains broad and sustained program of trade capacity building, notjust of trade officials but also are realized of top government leadership, other ministries, the business community and other stakeholders (academia, think tanks, NGOs and civil society). 21 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 3.4 EnhancingPreferentialMarketAccess 80. While WTO membership will provide Azerbaijan with a minimumMFN access Azerbaijan has preferential to world markets, Azerbaijan currently benefits from preferential trade access to two of access to EU its most important markets: the European Union (EU) and CIS countries, including and CIS Russia. Both these markets provide Azerbaijan with important opportunities to diversify markets... its economic base through exports. 81. Azerbaijan's non-oil exports to its mainoverseas markets are highly concentrated on a very narrow range of products. For example, in 2001 Azerbaijan exported only 285 But non-oil products (defined at HS 6-digit level) to the EU,which comprised only five percent of the exports are available 5,326 product categories. By way of comparison, in2001, Slovakian exports to highly the EU were recorded in 3,287 or 62 percent of the available product categories. concentrated on Although exports of non-oil products to Russia were three times greater than exports to a narrow range of products the EU, the number of product categories in exports to the EU was higher. In 2001, Azerbaijan exported products in only 4.7 percent of available categories to Russia. It i s interesting to note that, in aggregate, exports to all regions cover 19.5 percent of all product categories. This indicates considerable scope for expanding and diversifying exports to the EU and CIS. However, various provisions of the agreements themselves, and the administrative systems that are charged with implementing them, have reduced the potentialbenefits to Azerbaijan. 82. Preferential access to the EU, in particular, which offers a large, sophisticated Utilization is market, provides Azerbaijan with the opportunity to export higher value-added, very low-only 25% of Azeri differentiated products. Azerbaijan's non-oil exports are eligible for substantial benefits exports eligible under the GSP scheme of the EU.The GSP i s a scheme that allows for duty reductions on under GSP certain products from particular countries, including Azerbaijan. A revised scheme was preferences introduced in January 2002 that will apply until the end of December 2004. There are actually entered only two categories of products: non-sensitive, for which duties are suspended, and the Ell sensitive, for which duties are reduced by 3.5 percentage points below the MFN rate. Certain agricultural and fishery products are, however, excluded. There appears to be significant scope for Azerbaijan to benefit from the scheme-at present 66 percent of Azerbaijan's non-oil exports to the EU are eligible for preferential treatment. However, only one quarter of these preferences are being utilized. Table 3.2-Basic Characteristics of Azerbaijan's Export to the EUunder GSP 22 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 83. Key strategies to improve access to the EUunder the GSP include: Improving access 0 to information can Improving public awareness. Initial consultations with exporters in Azerbaijan increase suggest several factors, related to the documentary requirements of the GSP, utilization of EU contribute to the low utilization of preferences. In particular, there is a low level of GSPpreferences knowledge about the GSP and its documentary requirements among Azeri exporters, as well as EU-based importers. Improving public awareness in both markets will be requiredto improve utilization and increasemarket shares. 0 Removing administrative constraints. Perhaps more important, however, are the administrative constraints involved in obtaining the requiredcertificate of origin. The Consumer Goods Certification Center under the MED i s given the authority to issue the certificate. Charges for issuing the certificate are determined by the Center and the exporter on a contractual basis. No set charges are fixed by the Government, opening the door to bureaucratic discretion. The fact that certificates are issued only by the Ministry in Baku may entail a significant additional cost on small enterprises which could benefit from the scheme but which are not located in the vicinity of Baku. Addressing these administrative constraints can encourage more exporters to take advantage of the GSP. Working with partners for improved access. Another potential issue i s the rules of origin requirement. Evidence suggests that the low utilization rate tends to be sector specific-preferences are heavily utilized in the chemicals and plastics sectors, but not in sectors such as textiles, clothing and footwear and basic metals. There are two elements to the constraining impact of rules of origin. First, there i s the nature of the rules themselves, which can be very difficult to meet whilst remaining competitive on the EUmarket. Rules of origin that force producers to source inputs from expensive domestic or EU sources can undermine the preferences that are being offered. Second, there i s the issue of the costs of providing the necessary documentation to prove origin. If these exceed the margin of preference, then the GSP i s redundant. Ascertaining the importance of these different factors in Azerbaijan would be useful. If there are particular difficulties in obtaining the required official certification of origin statements then this could be dealt with in a relatively simple and straightforward way. If it is the nature of the rules of origin that are problematic then it would require discussing with the EU the possibility of regional cumulation amongst the CIS countries (or a sub-set of those countries). Azerbaijan 84. Lastly, EUenlargement will provide Azerbaijan with bothnew opportunities and should work threats. For manufactured products, the impact of trade policy changes following with other enlargement will tend to be positive for CIS countries, including Azerbaijan. There will countries with be no change in market access to the current EU market since all tariff and non-tariff access to the barriers on imports from the candidate countries have already been removed. EU to broaden Enlargement will actually improve Azerbaijan's market access, as tariffs in the largest thepotential gains markets, Poland and Hungary, will decline as these countries implement the common external tariff and adopt the EU's GSP. In the case of agricultural products, however, relative market access conditions may considerably worsen and there may be substantial trade diversion away from agricultural exporting CIS countries as the new member countries, especially Poland, are given substantial preferences in the EU. High duties in the EUon processedagricultural products and substantial preferences towards competing suppliers inthe Central and Eastern European countries i s likely to be a major constraint upon the expansion of exports of existing products and diversification into a wider range 23 INOTISIntegrated Non-Oil Tradeand Investment Strategyfor Azerbaijan of processed agricultural products in Azerbaijan. This is an issue that Azerbaijan should raise in its bilateral discussions with the EU, when considering the extension of the GSP scheme after 2004, to classify a larger number of processedagricultural products as non- sensitive under the GSP and therefore eligible for zero duties. Azerbaijan 's 85. In addition to preferential treatment in the EU, Azerbaijan benefits from FTAs with CIS free trade access to a number of its regional trading partners. Plans to establish a CIS provide free trade area were initiated in 1992. However, the two multilateral free trade favorable agreements among the CIS countries-signed in 1992 and 1994-have not been ratified provisionsfor by the Russian parliament and therefore have not been implemented. Over the last expanding trade in the region... decade, these agreements have been supplemented by a web of bilateral free trade agreementsamong the CIS members. Azerbaijan has four free trade agreements in effect, with Russia, Ukraine, Georgia, and Kazakhstan, and three more free trade agreementsare signed but awaiting ratification, with Uzbekistan, Moldova, and Turkmenistan. 86. The texts of the signed free trade agreements are similar. The agreements stipulate duty-free trade in all goods, with unspecified potential exclusions, and free transit of goods through the signatories' territories. Moreover, the rules of origin allow for full cumulation amongst all 12 CIS countries, not just those countries with whom Azerbaijan has signed a free trade agreement, thereby making i s easier to meet the entry criteria. 87. However, the agreements suffer from several weaknesses that, if re-negotiated, could provide more favorable access for Azerbaijani exports to these markets: Re-negotiating 0 Limit the scope of exclusions. The value of these agreements is weakened by selected potential exclusions, which can be introduced unilaterally and changed from year to restrictions will year. This leaves considerable scope for the parties to restrict trade and creates a widen the scope degree of uncertainty concerning future market access. At present, the exclusions for regional cover only a small percentage of intra-CIS trade but the agreements do not guarantee trade that this situation will persist. Limiting the scope for such exclusions will create a more stable environment for exporters. 0 Remove provisions limiting benefits to tax residents. According to the rules of origin, exports subject to duty-free treatment must be conducted by tax residents in the free trade area. This i s important for it implies that exports of some foreign- owned companies can be denied duty-free treatment. Removing such provisions can increase the scope for Azeri exports to benefit from the agreements. 3.5 High Priority Actions to Improve Trade Policy and Market Access 88. The following table provides a list of high priority actions in support of the strategy recommendations on trade policy and market access. A complete list of actions i s provided intables 7.2 to 7.5 inchapter 7. 24 INOTIS-IntegratedNon-Oil Tradeand InvestmentStrategyfor Azerbaijan Table 3.3-High Priority Actions for Improving Trade Policy and Market Access Tariff Reform Enhance tariff policies Reduce levels o f dispersion incurrent tariff schedule 2003-2005 MED.Tariff Council 0 Shift toward adoption of a uniformtariff rate Strengthen the capabilities of the Tariff Council 2003-2005 MED,Tariff Council 2003-2004 MED Goods Enhance compliance with TBT and SPS 2004-2005+ MED,SSMA, MOA, SVC, SCC, 0 Revise technical regulations and standardspolicies to AZPLAC, business associations international standar inCodex Alimentarius 0 Promote local capab to provide I S 0 certification Upgrade capabilities o f the SSMA EstablishTBT and SPS enquiry points Enhance customs valuation practices 2003-2004 SCC Revise laws, regulations, instructions to comply with WTO valuation method BuildCustoms administrative capacity (see 4.2) Ensure compliance with TRIPS 2004-2005+ MED,SSMA Revise existing laws or prepare new WTO compliant legislation BuildcaDacitv of relevant agencies Develop agriculture sector trade policy 2003-2004 MOA, MED Prepare agriculture sector development strategy Analyze impacts o f WTO accession and develop Increase utilization o f EUGSP Scheme 2003-2004 MED Improve public awareness 0 Streamline administrative procedures 0 Enter into discussions with other beneficiaries to revise treatment o f processed agricultural products Re-negotiate CIS FTAs 2004 MED 0 Define and limit exclusions Clarify provision limitingbenefits to tax residents o f FTA areas AZPLAC: Azerbaijan Policy and Legal Advice Centre SC I: State Customs ommittee MED:Ministry ofEconomic Development SSMA: State Standards and Metrology Agency MOA: Ministry o f Agriculture SVC: State Veterinary Committee 25 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER4-ENHANCING TRADEAND TRANSPORT FACILITATION 1.1 Introduction 89. Trade liberalization revealed the need for second-generation reforms in Azerbaijan that will address the wide variety of non-tariff trade barriers, such as improper customs and transit procedures, and shifted the attention to the facilitation of trade. 90. The physical location of Azerbaijan makes it a key transport link and corridor on Azerbaijan 's the shortest land route between the Caspian Sea and the Black Sea, and between the strategic location makes Caucasus and Central Asian countries. Azerbaijan has been an active participant in the it a key TRACECA initiative (Transport Corridor inEurope, Caucasus and Central Asia), aiming transport link at stimulating transit inthe region since 1993. However, the multipleborders transporters between Europe have to cross to reach Central Asia through the Caucasus and the number of times and Central cargoes need to be handled with the associated payments and delays explain to some Asia extent the low volume of non-oil transit to date. The impacts of impediments to trade and transport are both direct and indirect. They increase the costs of inputs for domestic production. They also limit the ability of Azerbaijan to become a natural center for transit cargo and value-added shipments for the Caucasus and Central Asia. 91. While transit through Azerbaijan i s currently limited, particularly in non-oil !F products, the potential for increased transit to/from Central Asia is significant. Oil-rich countries like Kazakhstan and Azerbaijan are bound to grow fast over the next decade, to import equipment to develop their local SMMEs, and, presumably, to create significant consumer markets locally and regionally, beyond the oil and gas sectors and related supply chains. Among potential transit cargoes for the TRACECA Corridor, six types stand out: (i)equipment for the oil industry; (ii)humanitarian support and reconstruction material to Afghanistan; (iii) containerized consumer goods to oil exporting countries; The TRACECA corridor offers (iv) containerized equipment required to sustain SMME-led growth in the Caucasus and substantial Central Asia; (v) cotton exports from Uzbekistan and Turkmenistan; and (vi) more oil economic and gas from the Caspian Sea. All six types offer significant opportunities for Azerbaijan, opportunities... but also face significant competition from alternative corridors. Therefore, facilitating trade and transport i s critical to creating an environment that promotes sustainable development of the non-oil sectors. Improvement incustoms and transit operations and in transportation and trade infrastructure can contribute substantially to: (1) reduction of logistical costs and increasing the competitiveness of SMMEs in Azerbaijan; (2) attraction of additional transit traffic and related economic activities; (3) creation of a level playing field for all companies in Azerbaijan; and (4) an increase in revenue Realizing these collection. opportunities will require 1.2 ImprovingCustomsandTransit Operations substantial improvements in 92. The flow of potential transit in the upcoming ten years i s considerable, but customs and requires a different set of services than currently provided for the movement of liquid transit bulk or scrap metal. The potential transit of consumer goods, machinery, and equipment operations to to Central Asia demands high quality logistic services at reasonable cost, allowing no facilitate trade damage to the goods transported and no unexpected delays. 26 INOTIS-Integrated Non-Oil Tradeand InvestmentStrategyfor Azerbaijan 93. The Government o f Figure 4.1-Customs Delays, Number of Days Azerbaijan has already made important progress in improving customs and 16 transit operations. The EU- 14 funded TRACECA program 12 to support the development 10 of the Europe-Caucasus- 8 Asia Transport Corridor has 6 developed a number o f 4 policies, programs, and 2 initiatives to facilitate n border operations in Azerbaijan and the region. These efforts have already had a positive impact on transit and customs E l Average 8 " r m operations in Azerbaijan, Source: EBRDandWorld Bank, BusinessEnvironmentand which currently rate among EnterprisePerformance Survey, 2002. the least cumbersome in the region (see figure 4.1). 94. While progress has been achieved, additional efforts are required to eliminate the remaining barriers to trade in Azerbaijan, particularly in the area of customs policies and practices. In 2002, a comprehensive, WIF-supervised review of SCC operations was undertaken by PriceWaterhouseCoopers (PWC) in 2002. The SCC has implemented a number o f actions in response to the PWC recommendations. These are summarized in Table 4.1. Table 4.1-PWC Customs ReformRecommendations and Actions Taken Reform Recommendations Actions Taken Customs Law & Regulations Customs Law & Regulations 1. Lack of full compliancewith new Kyoto 1. Efforttojoin KyotoConvention underway; proposal Convention given to Cabinetof Ministers end 2002 2. Absenceof bondsandguarantee system 2. Dates for paymentusing bondsand guarantees extendedto facilitate use of guarantee system 3. Highpersonalallowancefor travelersencouraging suitcase trading 4. Absence of guaranteesfrom Customsbrokers 5. Restricted legal authority of Customs regarding post-importationcontrol of trade intermediaries 6. Duplicated descriptionof Customs offencesand sanctionsinthe Administrative Code and the CustomsCode (with some differences) 7. Absenceof provisions inthe Code to deal with any 7. Addressedby Regulationon services (7 December case of bribery and corruption for customs officials 1999) and Resolution02/01of SCC Boarddated 15 May 2001 8. Ambiguous statements inCustomscode (e.g., unspecifiedprocessingtimeframes and documentationrequirements,customs charges stipulated indifferent normative acts) 27 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan Customs Operations and Structure CustomsOperationsand Structure 1. Introduction of an advance declaration system to 1. Pilot project underway on automated customs allow for pre-clearance of goods declaration processing 2. Use of minimumprices or value for valuation 2. Minimumreference prices not being used; price data basebeing built with UNDPhelp 3. Traders' entitlement to clear imported goods at any clearance facilities inthe country, based on their business needs 4. Simplifiedprocedures for consolidated shipments, which are typically used by SMMEs 5. Enhance transit management procedures 6. Alignment of working hours with traffic flows, consistent across border agencies and across borders 7. Introduction of qualitative criteria for Customs 7. Course for merit-based certification of brokers broker licensing operational 8. Definition of selective controls and post-entry verification mechanisms 9. Introduction of mobile enforcement units 10. Improvehuman resource capabilities 11. Update SCC organizational structure; clarify and 11. Training programs undertaken at SCC educational coordinate roles and responsibilitieso f border center; WCO regional training center being established agencies inBaku CustomsAutomatiodTransit Management CustomsAutomatiodTransit Management 1. Installationof an internationally standard 1. Custom-built automation system (GRNAS) being comprehensive customs automation system developed; to be installed inseveral customs 2. Enhance SCC role intransit management by points coordinating role of government agencies inline with the Geneva Convention Private Sector Dialogue Private Sector Dialogue 1. Establishmechanisms to facilitate dialogue and 1. TRACECA and AZERPRO Committees policy consultation between SCC and other agencies established; integration underway involved inborder security, trade and transport and private sector The SCC has already made progress inresponding to the proposed recommendations. In particular, according to SCC officials, Azerbaijan i s committed to joining the revised Kyoto Convention, and revising the customs code and practices in response. The main remaining Customs reforms to be undertaken include: Key strategies Revision of the Customs law and regulations. In general, the Customs Code tofacilitate complies with the revised Kyoto Convention. The SCC has initiated efforts to accede trade include to the new Kyoto Convention and submitteda proposal to that effect to the Cabinet of streamlined and Ministers late last year. But the current customs law i s weakened by several computerized provisions including: limited legal authority of Customs regarding post-importation customs control of trade intermediaries; duplication in terms Customs offences and sanctions operations, and in the Administrative Code and the Customs Code; etc. Moreover, from a trade improved transit facilitation perspective, a number of ambiguous statements in the Customs Code management offer the opportunity for rent-seeking behavior. This applies to unspecified and services processing timeframes and documentation requirements, and customs charges that are stipulated in separate normative acts. In addition, the current policy granting a highduty-free personal allowance for travelers is encouraging "suitcase trading" and needsto be reduced urgently. 28 INOTIS-Integrated Non-Oil Trade and InvestmentStrategyfor Azerbaijan 0 Streamliningand strengthening of customsoperations. While the government has implemented a number of actions to improve customs operations and practices, further actions are required, including implementation of an advance declaration system to allow for pre-clearance of goods;23traders' entitlement to clear imported goods at any clearance facilities in the country, based on their business needs; and simplified procedures for consolidated shipments, which are typically used by SMMEs. One of the most important areas for improvement is enforcement activity. The SCC should implement a comprehensive approach to improve enforcement capabilities on a selective basis, including new procedures to fight corruption and illegal trade; introduction of mobile enforcement units; upgrading capabilities of importers and customs brokers24; a voluntary compliance program and the implementation of a risk management approach to inspection, which can be implemented effectively even without customs automation. Improvement of transit management and services. Another area for improvement i s transit management-the GOA must work to establish an efficient, cross-border integrated transit chain. Inaddition to its present duties, the SCC will carry as a major responsibility the coordination of all government agencies involved in transit to ensure the strict fulfillment of transit conditions in line with the Geneva Convention. The SCC would benefit from wide cross-designation and delegation to address other agencies' requirements. Its duty would start from the time the vessel berths at a port or the time a trucks crosses the border, until the time it leaves the country (and vice versa). The SCC must also work with its neighbors to minimize delays at borders, by engaging incross-border exchanges; establish pre-clearance facilities at ports of entry in Georgia; and align working hours with traffic flows, consistent across border agencies and across borders.25 Implementation of a Customs Automation System. Critical to implementing these procedural changes i s the comprehensive computerization and automation of customs operations. Existing systems are essentially paper-based and do not provide the needed support to facilitate clearance, control transit and related bonds and guarantees, or perform targeting and selectivity functions using intelligence and databases. The SCC i s inthe process of developing a custom-built system (GFWAS), which will be implemented in a number of locations on a pilot basis. However, international experience suggests that this i s a much less desirable approach than installing an internationally accepted system such as ASYCUDA which is in use by some 80 percent of developing and transition economies including most of Azerbaijan's neighbors. Enhance human resource development. The success of the SCC incarrying out its mandate i s inextricably linked to the skills and expertise of its staff. The PWC study outlined a broad program for developing the SCC's human resources and management systems. The recommendations are aimed at creating a fair and stimulating work environment, increasing accountability for performance, and 23The SCC is aboutto implementthe advanceprocessingof customsdeclarations inselect locations. 24The SCC has developed and is implementinga merit-basedcoursefor certificationof customs brokers. 25SCC states that internationally acceptednormspermitthe alignment of Customs' working hours with traffic volumes at individual customsborderposts. 29 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan combating corrupt practices.26The implementation of this organization reform plan will be essential to enhancing the organization's ability to facilitate trade. 0 Improve private-public dialogue. The border agencies in Azerbaijan, particularly the SCC, have made progress in interacting with the private sector and in informing companies about new procedures and requirements. A systematic dialogue across agencies and across private stakeholders (freight forwarders, road transport companies, etc.) started in the spring 2002 as part of this effort, through the creation of AZERPRO, a Trade and Transport Facilitation Committee. Its overall objective i s to improve the dialogue between the different bodies involved in trade and international transport, to define solutions to remove impediments to consignment movements at an operational level, to support the implementation of these solutions, and hence to achieve significant reductions inthe costs of clearance, transit or border crossing. This continuous process of monitoring and feedback, supported by ad hoc working groups, i s intended to maintain the focus on revamped services. However, it i s clear that AZERPRO should be merged with TRACECA's Azerbaijan commission. and there have been moves to that end. 1.3 UpgradingTransportationand Trade Infrastructure 95. The transport sector in Azerbaijan still operates without proper separation between (i) policy and legal framework; (ii) regulatory functions; and (iii) operation and ownership. This applies particularly to air (AZAL), maritime (Caspian Shipping Company), and rail transport. As a result, Azerbaijan has experienced difficulties in defining a coherent national and international transport infrastructure network. By controlling all legal and regulatory aspects and infrastructure, state-owned operators have a defacto monopoly on their market and can restrict competition as they see fit. The lack of competition removes the most essential incentive to improve service quality and cost. The high shipping cost across the Caspian Sea and the high level of profitability of the Azeri Railways demonstrate this phenomenon. Meeting the infrastructure needs of a growing trade sector will require: Development of a comprehensive transport sector strategy. The recent creation of Azerbaijan 's a Transport Ministry to cover all transport modes should prove a powerful asset to transport sector define a balanced policy across all modes, with a strong emphasis on strengthened must be competition and transparency. The role of the State i s likely to change considerably rationalized and by implication. The State would cease to be a transport operator or a provider of modernizedto transport services, but would create the institutional framework to support growth reduce through policies, regulation, and consultation with the private sector. While the transport costs Transport Ministry would define the overall transport policy, the subordinated and improve the administrations and authorities in the respective modes would manage the quality of implementation of regulations and legislation under the Transport Ministry's infrastructure authority. Companies like AZAL, the Azerbaijani Railways, and the Caspian and services Shipping Company would re-focus on operations instead of regulation. The definition of a detailed restructuring strategy i s a complex exercise due to the variety of interested parties-developing and implementing a comprehensive sector strategy 26The SCC has stepped up training programs at its educational center. It has also reached agreement with the World Customs Organization (WCO) to establish a regional training center in Baku, which is very significant step. 30 INOTIS-IntegratedNon-Oil Tradeand Investment Strategyfor Azerbaijan 4 must clearly be a priority action in order to deliver the necessary improvements and appropriate separationof responsibilities. 0 Rehabilitation of key transport infrastructure and facilities. Even before the comprehensive strategy i s carried out or the transport sector i s restructured, it is evident that urgent support i s required to improve the quality of transport infrastructure and facilities. A considerable part of the physical transport infrastructure in Azerbaijan is of poor quality. Azerbaijan's main port on the Caspian Sea i s Baku International Sea Port, which acts as a terminal for all trans-Caspian freight and passenger traffic, and some specialist heavy cargoes from the Black Sea. Baku's Bina Airport was significantly upgraded in 1999 to accommodate wide- bodied jets, however, the two other international airports in Azerbaijan (Gyandzha and Nakhichevan) require significant reconstruction and repair. The most immediate requirements are in the internal road and rail network. Approximately 56 percent of the main road network i s in a poor statez7,and about 1,000 kilometers (30 percent) of rail track requires reconstruction. The upgrading of the East-West and North-South corridors, in particular, and better connections to rural areas are among the most important infrastructure requiring attention. 0 Promoting competition in the Caspian. Ensuringaccess to quality transportation infrastructure and facilities cannot, in the long run, be sustained without the promotion of competition within the region. The Government, inpartnership with the freight forwarders' association, should monitor and publish the cost and time of transport on major corridors for each of the most significant transport modes. This information would be provided to the Governments of transit countries, in particular Russia, Iran and Georgia on a monthly basis to emphasize their need to be competitive. 0 Training transport operators. Freight forwarding and transport companies have faced very limited activity in the non-oil sector and, as such, need new training in order to meet new pressures for more timely and higher quality handling services. Encouraging the development of training and certification would greatly enhance the level of service. Such a program could be based on a Certificate of Professional Competence delivered by international professional associations such as the International Road Transport Union or the FIATA, in partnership with local professional associations. 0 Developing Bonded Warehousing and Free Zones. Azerbaijan, given its strategic Development of location on the Caspian Sea between Europe and Central Asia, has the potential to duty-jree exemption and develop into an important regional export hub. However, the availability of duty-free suspension exemption and suspension mechanisms, as well as ready-built facilities, i s very mechanisms can limited, and i s a significant competitive weakness for exporters.. If properly provide an implemented, bonded warehousing and free zones would provide more effective duty important suspension and exemption schemes as well as the necessary infrastructure to support competitive exporters, particularly smaller scale firms. advantagefor exporters 96. Interms of bondedwarehousing, the SCC is working onnew regulations for 2'RoadConditionSurvey, 1996. 31 INOTIS Integrated Non-Oil Tradeand InvestmentStrategyfor Azerbaijan private warehousing operations. The description of proposed customs control measures seems to indicate, however, that the envisaged solutions do not reflect international experience in the sector and would have highcost implications for customs coupled with a fairly bureaucratic approach to their management. Developing an effective framework that meets the needs of both the private sector and Customs should be a priority. It i s important that the draft regulations be reviewed in light of international standards set out inthe KyotoConvention. 97. Likewise, the establishment of a Special Economic Zone, currently under consideration by the Government, offers the potential to improve trade efficiencies, promote processing activities, and facilitate regional trade. The zone could have an important "demonstration effect" by de-regulating and de-monopolizing services (such as telecommunications), expedite the implementation of IT systems (such as a computerized customs system), and be a model of good governance. It can assist enterprises to use Azerbaijan as hub to serve markets in the Caspian region more cost- effectively. It also permits access by smaller enterprises who generally cannot afford the costs of operating a bonded warehouse. However, it i s important that the SEZ framework reflects the decades of international experience with SEZs and avoid mistakes made elsewhere (Box 4.1). 98. In this context, it is important that the draft SEZ law be revised to address a number of weaknesses, which undermine an otherwise competitive framework. Among the most critical of these are to: 99. The key elements of a world-class zone should include: simplified and automated business procedures, de-monopolization and deregulation of telecommunications and other services; development and operation of the zone by a private development group; a public-private partnership for provision of offsite infrastructure; WTO-compatible duty and tax policies; and a lean, efficient and private sector-oriented zone regulatory authority (for regulation and administration of the zone regime, not physical development). 1.4 HighPriority Actions to Improve Trade and Transport Facilitation 100. The following table provides a list of high priority actions in support of the strategy recommendations on trade and transport facilitation. A complete list of actions i s provided intables 7.2 to 7.5 inchapter 7. 32 INOTIS-IntegratedNon-Oil Tradeand Investment Strategyfor Azerbaijan Table 4.2-High Priority Actions for Improving Trade and Transport Facilitation IEnhance Customs legal and regulatory framework 2003-2005+ SCC, MED, Border agencies, 0 Expand implementation of advance customs MOA, private sector declaration system 0 Introduce risk managementprogramfor selective inspections (initially paper-based) 0 Join the revised Kyoto convention and revise the Customs Code, regulations and instructions to (i) Introduce simplified procedures for consolidated shipments; (ii) enhance Customs authority regardingpost-importation control of trade intermediaries; (iii)eliminate duplication in Customs offences and sanctions inthe Administrative Code and the Customs Code; (iv) clarify requirements for processing timeframes and documentation; (v) consolidate customs charges in Customs Code and enhance penalties and sanctions Improve anti-smuggling activities 2003-2005+ SCC 0 Reduce the individual duty-free allowance for residents and regulate "suitcase trade" 0 Introducemobile enforcement units 0 Facilitate establishment of system for pre-clearance of consignments at Georgian ports 0 Introducehtrengthenanti-corruption program at SCC Support SCC organizational reform efforts 2003-2005 SCC e Implementorganizational restructuringefforts in line with new Kyoto-compliant Customs Code 0 Facilitate HRDand training efforts, develop plan for performance-based salary and compensation improvements 0 Establishan SCC organizational reform committee with private sector participation Enhance cross-border trade facilitation e Align operating hours of customs posts with demand, rationalizeroles of border agencies Identify and implement a legal solution to post Azeri and Georgian customs officers at ports of entry on areciprocal basis Draft bilateral agreementswith neighboring 33 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan Implement an intemational-standard customs 2003-2005+ SCC automation systemsuch as ASYCUDA Strengthen public-private dialogue via AZERPRO 2003-2004 MOT, MED,SCC, Port of Committee Baku, ADDY, Freight Forwarders' Association sector Promote competition inCaspian shipping services and 2003-2005 MOT, MED ports Rehabilitation of key transport infrastructure facilities 2003-2005+ MOT, MED Review and finalize draft regulations and establish a 2003-2004 MED, SCC bonded warehouse scheme Review and finalize draft legislation and regulations; 2003-2005 MED,SCC and establish a special economic zone regime and promote first private zone as a pilot project ADDY: StateRailway Company MOT: Ministry of Transport MED: Ministry of EconomicDevelopment SCC: State Customs Committee MOA: Ministry of Agriculture 34 INOTIS-IntegratedNon-Oil Tradeand InvestmentStrategyfor Azerbaijan CHAPTER5-IMPROVING THE BUSINESSENVIRONMENT 1.4 Introduction 101. While trade-related policies can contribute significantly to the development of Azerbaijan's non-oil exports, supply-side issues must also be addressed if Azerbaijan is to maximize its full development potential. Building a competitive macro business environment i s a key factor in boosting private sector development in the non-oil sector, diversifying trade, and achieving sustainable growth and poverty reduction. 102. Much of Azerbaijan's economic progress to date can be attributed to the Government's economic reform program. The creation of the MED in 2001, bringing together five ministries and state committees into the one body, i s a major administrative step towards the achievement of a coherent and integrated economic strategy. Legal and regulatory reforms have spanned the full spectrum of economic policy areas, including commercial law, trade and investment law, banking and finance, privatization, and tax and customs. Figure 5.1-Qualitative Assessment of the BusinessEnvironment in 1999 and 2002 Access to Financing Quality of Judiciary4 L-gulations Source: EBRD andWorld Bank, BusinessEnvironment and Enterprise Performance Survey, 2002. Note: The combined measureof qualitative assessments of the businessenvironment is calculated as an unweighted average across seven dimensions. The values range from 1to 4, with 1indicating no obstaclesto business growth andoperation, and4 indicating major obstacles. The extremity of each axis represents a score of 4, indicating a less favorable business environment. 35 NOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan Azerbaijan 's 103. Azerbaijan's progress to date has been measured, together with 25 other economic transition countries, in the EBRD's Business Environment and Enterprise Performance reform program Survey (BEEPS) that was conducted in cooperation with the World Bank. The BEEPS, has contributed first conducted in 1999 and again in 2002, illustrates the substantial progress that to its progress Azerbaijan has made in transitioning toward a market-based economy. Major in transitioning achievements include successful privatization of small-scale enterprises and farms, price toward a liberalization, and a relatively liberal trade and investment regime. The Government's market-based reform program contributed substantially to the development of the private sector. By economy.. . 2001, the private sector share of GDP grew to 71percent, up from a meager 24 percent in 1994. But many 104. While initial reforms have introduced key elements for the establishment of a impediments to market-based, private sector driven economy, barriers remain that hinder private sector private sector development and the expansion of trade, both in terms of the legal and regulatory development framework itself, as well as the administrative systems that are charged with remain, implementing them. The legal framework i s complex, with significant inconsistencies including and gaps. Information on decisions implementing laws and regulations i s often difficult inconsistent to obtain. While laws and decrees are usually published in one of the country's official legislation, lack of iriformation newspapers, implementation i s often delayed while regulations are developed. Those on rules and regulations often are not published or distributed. Many investors doing business in regulations, and Azerbaijan complain that bureaucratic procedures contribute to long delays in gaining administrative necessary permits and licenses. barriers.. . 105. The hardest hit are SMMEs who do not have the resources to navigate labyrinthine requirements and procedures. Such barriers impose high costs on firms, in ..SMMEs are terms of both money and time spent, as well as indirect costs resulting from operating in the hardest hit an environment of uncertainty. This negatively impacts their growth as scarce resources are diverted to dealing with administrative requirements. Others have been forced to operate in the informal sector, which is larger in Azerbaijan than in many transition economies. Building a 106. Building a competitive macro business environment is a key factor in boosting competitive private sector development in the non-oil sector, diversifying trade, and achieving macro business sustainable growth. The macro business environment can be improved in a number of environment will be a key areas, including: factor in boosting private Business Entry sector Access to Land and Site Development development in Labor Policies and Relation the non-oil Taxation and Incentives sector, Access to Finance and Credit diversihing trade, and Competition Policy achieving Contract Enforcement and DisputeResolution sustainable SMMESupport growth Public Sector Governance 36 c INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 1.5 Facilitating Business Entry Azerbaijan 107. Azerbaijan provides a relatively liberal and open regime for direct investment. provides a Direct investment in Azerbaijan i s governed by two separate, but related laws: the Law relatively on Investment Activity (Investment Law) and the Law on Protection of Foreign liberal and open Investments (FDI Law). These are supplemented by bilateral investment treaties that investment ... provide mutual protection of investment.28Relatively few sectors are either restricted or prohibited from private investment. Prohibited activities currently include those relating to national security and defense. Investment in other key sectors, including energy, banking, and telecommunications, are subject to restrictions, which apply to domestic and foreign investors alike. The FDIlaw provides equal treatment to foreign investors. While Theproposed these two laws generally provide a solid framework for investment, the MED has drafted unified law is a a single, unified investment law providing a single policy regime for both foreign and very positive domestic investors. While this i s an important and commendable step forward, there three step, but can be main weaknesses inthe proposed law, as currently drafted:29 further improved 0 Ambiguity regarding investment policy. Many parts of the law appear to suggest Government control rather than liberalization of investment. Examples include provisions requiring Government' s approval being apparently required for all foreign investments into the country; application of discretionary criteria for the granting of incentives for certain types of projects; and unclear and discretionary screening and approvalprocess. 0 Regulatory rather than promotional emphasis of the new IPA. Parts of the law are unclear whether the new Investment Promotion Authority i s an approval rather than a promotion agency. Neither the P A nor the "Executing Agency" are clearly defined in terms of structure and responsibilities; specifically, whether these Agencies are intended to promote investments, manage and grant incentives to investments, or both. 0 Unclear and discretionary screening processfor provisionof incentives. The law does not specify transparent processes for the award of incentives, and leaves open the possibility that these may be granted on a case-by-case basis. International experience suggests the use of "performance-based" incentives that are automatically gained, rather than a discretionary process. 0 Weaknesses in the Company Law. A related area of legislation is company law, which governs company formation. In Azerbaijan, company formation i s governed by a number of inter-related laws-the Law on Enterprises, Law on Joint Stock Companies, and Law on Securities. The provisions of each of these laws are, in general, compatible with best practice, but are in many ways incomplete, particularly interms of corporate governance and the protection of shareholder rights. The State Securities Committee has already drafted a revised Law on Joint Stock Companies '*Bilateral investment treaties have been signed with France, Georgia, Germany, Great Britain, Iran, Italy, Kazakhstan, Kyrgyz Republic, Lebanon, Moldova, Pakistan, Poland, Ukraine, Turkey, the United States, and Uzbekistan. 29This is a summary of points made by FIAS intheir comprehensive review of the draft investment law. For detailed points, please see "Republic of Azerbaijan-Desk Review of the Draft Investment Law," Mimeo, April 2003. 37 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan that addresses some outstanding issues. While a substantial improvement, this draft law needs to be further strengthened in a number of areas in order to ensure an adequatedegree of business flexibility and shareholder protection. 108. In terms of administrative procedures, the business registration and licensing Business regime has reportedly been one of the most cumbersome and time-consuming aspects of registration and licensing business start-up inAzerbaijan. Inthe assessment of administrative barriers conducted for procedures are this study, for example, registering a business took an average of 8-10 weeks; business lengthy, but licensing entailed an additional 2-3 weeks.30 Company Registry officials have the activities discretion to review almost every detail of a company registration, making for an often subject to long and overly discretionary process. In addition to company registration, some licensing have investors may be required to obtain sector licenses, depending on the type of activity. been reduced Like the company registration process, the licensing process has been both time- dramatically consuming and has often been used as an unofficial screening tool by public officials. While larger investors can absorb the costs associated with bureaucratic delays, smaller entrepreneurs can be discouraged from enteringthe formal sector. Recent reforms 109. The Government has already introduced important reforms. The September 2002 have reduced Presidential Decree "On Improvement of administrative Regulations of Granting Special Permissions barriers to (Licenses) for Some Types of Activities," which business entry.. reduced the number of types of activities subject to mandatory licensing from 240 to 30, and puts in place clear documentation requirements, has already substantially reduced the burden on investors. Improvements in other areas could further improve business start-up procedures. Reducing barriers to business entry will be particularly important for encouraging the development of small enterprises that are particularly hard put upon, given the direct and indirect costs associatedwith bureaucratic delays. Streamlining Simplify business registration. Box 5.1 business illustrates guidelines that a recent EU registration and commission has issued for the reform of licensing can company registration procedures in member further facilitate states. These guidelines comprise best practice business start- and their adoption inAzerbaijan would greatly UP reduce the scope for undue administrative discretion and bureaucratic delays. Provide clear guidelines. Whatever system is Land laws are ultimately in place, the provision of clear liberal, but site written guidelines, for use by both the private acquisition and sector and officials responsible for registration development and licensing, would provide increased procedures are transparency and ensure that the streamlined bureaucratic and lengthy procedures that are laid down inthe law are put into practice. 30See Annex Fo f Volume I1for analysis and further details. 38 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 1.6 Improving Access to Landand Simplifying Site Development 110. Among the transition economies, Azerbaijan has one of the most liberal land laws in the region. Azerbaijan offers investors a relatively liberal land regime in terms of ownership rights. Domestic and foreign-owned legal entities are free to own land and other property. While a favorable policy environment i s in place, the procedures associated with land acquisition and site development have been characterized by the private sector as often difficult and time-consuming. According to the administrative barrier analysis background study, acquisition of site development and building construction permits typically requires a period of 50-120 weeks. Improving access to land, particularly in urban areas, and simplified site development procedures, should be part of any future reformprogram: e Development of unified cadastre. The real estate market remains relatively underdeveloped in Azerbaijan and a multi-purpose, unified land cadastre has yet to be established, making the identification of land and other property and their ownership rights time-consuming. Information on privately owned land i s difficult to come by. Efforts are now underway to establish a unified cadastre under newly While efforts to drafted legislation. This work should be completed in as timely a manner as possible develop a in order to ensure that the most up-to-date and comprehensive information is wiped cadastre will contribute available. to the development of e Simplify transfer of state owned property. Acquiring ownership or land use rights an eficient land to publicly owned land tends to be difficult, as it typically requires multiple reviews market, this and approvals and, in some cases, preferential policies. Although designed to must be coupled alleviate sensitivities toward land allocation, this can hamper private sector with accelerated development and result in the inefficient allocation of resources, reducing the overall privatization of gains of privatization to the Azerbaijani economy. While land can be a politically urban property sensitive issue and needs to be handled accordingly, the difficulties encountered by and streamlined investors in accessing land need to be addressed if the country is to be successful in administrative procedures attracting private investment. Only by opening up more land for investment can a greater level of investment be realized inthe coming years. e Streamline title transfer. The registration process i s presently inefficient and non- transparent. It can reportedly take several weeks, and sometimes several months, to complete the registration process-a procedure that, ideally, should be an automatic filing process and take no more than one day once all documentation has been submitted. The procedures for registering land and other property should be Site streamlined and made available to the public. development procedures- e Simplify site development requirements. The site development process is often including perceived as a long and complicated.. There i s no formal zoning framework in place. zoning, Building regulations and standards date back to the Soviet era and are not readily construction and occupancy available to investors. Construction permitting, once all project plans have been permitting, and submitted to the relevant authorities, typically takes one to two months. Obtaining environmental environmental clearances are complicated by the lack of adequate resources at the clearance- Ministry of Environment. Procedures for obtaining utility connections are must be unpredictable and often problematic. It will be important to streamline procedures streamlined and establish clear guidelines and timeframes for approvals. The regime for 39 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan occupancy permitting should be reviewed and re-engineered to eliminate unnecessary duplication of efforts and long delays. Improving 0 Improve access to and quality of utilities and telecommunications. The utilities access to and sector, in its present state, i s unable to meet the needs of Azerbaijan's economic the quality of development goals. Though significant investments have already been made in uti1ities, upgrading and expanding infrastructure, service remains unreliable and capacity i s particularly insufficient, particularly electricity. Implicit subsidies to SOCAR (in the form of electricity, unpaid tax liabilities), which account for approximately 25 percent of GDP, and needs removal below-market tariffs have allowed consumers to over-consume as there i s little of implicit subsidies incentive to economize. It will be impossible to enhance economic efficiency, in both the oil and non-oil sectors, without addressing the shortcomings of the utilities sector, a sector that underlies economy-wide efficiency and competitiveness. The electricity Figure 5.2-Number of Days Lost from Utility Outages -2 p u) n 40 30 d 20 z 10 n Source: EBRD andWorld Bank, BusinessEnvironmentandEnterprise PerformanceSurvey, 2002. sector appearsto be particularly troublesome for investors (see figure 5.2). 111. The Government has now committed to significant reforms to increase financial discipline to improve the performance of the utilities sector and encourage the provision of quality services. Reform efforts also focus directly on improving access to and quality of utility and telecommunications services through increased public investment in infrastructure and private sector participation. Other supply-side issues need to be addressed, as well. Future reforms should include the elimination of indirect subsidies to utility providers through further improvements in financial discipline and gradual adjustments in tariffs to cover the true economic costs of providing these services. While it is clear that, given the size of the subsidies, any reform program must be long-term in nature, short- and medium-term goals must be set across the board in order to ensure movement toward full financial discipline. Improving performance in the 40 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan telecommunications sector will require substantial restructuring and further liberalization, including the privatization and eventual de-monopolization of Aztelcom, the establishment of an independent regulator, tariff rebalancing to stimulate efficiencies in domestic services, the loosening of restrictions on web hosting to facilitate the expansion of value-added ISP services. and relaxationof content controls. The Promote establishment of private industrial estates. The establishment of establishment of privately owned and managed industrial estates could alleviate infrastructure private constraints by providing factory shells, serviced facilities and dedicated utility industrial services to companies. The Government can promote the development of these estates can alleviate facilities by developing an land use and zoning exercise; identify prospective sites for infrastructure industrial estate development; develop a regulatory framework for the establishment constraints and operation of private industrial parks; and develop a public-private partnership approachesto stimulate such a~tivities.~~ 1.7 Improving Labor Policies 112. The transition processhas engenderedthe need for a substantial structural shift in Azerbaijan's labor market. Azerbaijan offers a relatively highly educated, low cost workforce for a country with its income level. According to the 1999 population census, up to one-fifth of working age population in Azerbaijan have completed specialized secondary education, and a similar share of the population has completed or was enrolled in higher education. At present, however, Azerbaijan has been struggling to sustain previously achieved education outcomes due to decreasing fiscal resources and increasing competition for limited funds, while reorienting its education system to the needs of a market economy and an independent country. At the same time, Azerbaijan's working age population i s growing rapidly, increasing 20 percent between 1990 and 2000. In order to reduce poverty, new economic opportunities must be created to generate a sufficient number of new jobs. The encouragement of the non-oil sector will require the re-alignment of labor policy to meet the demands of a more diversified, growing economy: The re- 0 Match education and skills training to private sector demands. Much of the Azeri alignment of workforce i s quickly losing its skills and the existing skills are becoming obsolete, as labor policies to reflected in the unemployment statistics. The lack of formal employment meet the opportunities for some groups of population means that an increasing share of demands of a workers with higher education i s either unemployed, or self-employed in low-skilled, more small-scale, informal activities and agriculture. In2000, more than 60 percent of the diversified, unemployed had higher or secondary special education. Many workers find that their growing skills have become obsolete in the new market economy. This confirms that there i s a economy is required significant skills mismatch-the skills obtained and possessed by new graduates differ significantly from the skills in demand. Developing training programs that meet private sector needs will be essential. Morejlexible labor dismissal 0 Relax restrictive dismissal provisions. Labor relations are regulated by the new provisions, together with Labor Code that entered into effect in 1999. Hiringprovisions are relatively liberal, investments to with no quantitative constraints on the employment of expatriate workers. More assist unemployed 31 Typically, the government provides all infrastructure facilities and service connections to the persons, are industrial estate site (off-site or external infrastructure), and the private investor provides all required infrastructure and facilities within the bounds o f the industrial estate. 41 INOTIS Integrated Non-Oil Tradeand InvestmentStrategyfor Azerbaijan important, however, are the relatively strict provisions for dismissal and generous statutory benefits that especially impact SMMEs. Written employment contracts are compulsory and are usually valid for an unlimited period. Fixed-termcontracts, either for five years or less, or for the duration of a project, are possible under certain conditions. Dismissals for economic reasons are restricted. Dismissals without notice are limited to cases of drunkenness, theft, and "immoral activity." Dismissalfor other reasons, such as incompetence, must be preceded by a history of under-performance. The Labor Code also imposes European Union-style restrictions on working hours and large minimum requirements to paid holidays, maternity leave, and other statutory benefits. Such provisions can substantially increase the operating costs, which can weigh particularly heavy on SMMEs. More flexible labor provisions, together with investments to assist unemployed persons-such as skills training and an adequate social safety net-are generally more helpful in achieving the increased efficiencies that ultimately determine competitiveness and promote sustainable economic growth and reduced poverty. 5.5 Simplifying Taxation and ImprovingFiscal Incentives The new Tax 113. Recent policy reforms in Azerbaijan include a substantial overhaul of the Code and on- statutory tax regime, including the introduction of a new Tax Code, the first codified going reforms digest of tax law which came into effect in January 2001. In the past, tax rules were has scattered across numerous laws and other legislation, which created an overly complex substantially and non-transparent regime. In addition to the consolidation of tax law into a single simplified the unified code, the new Tax Code provides for revised rates and improved procedures for tax regime..~. filing and auditing. Over the past few months, further actions have been implemented to improve tax policy and administration, including: 0 Restructuring of the Ministry of Taxes (MOT) including establishment of a Large Taxpayers Unit to simplify administration of taxes for large enterprises, and reductionof 40 percent of MOT staff and the number of offices 0 Preparation of draft amendments to the Tax Code to address inconsistencies with other laws and incorporate provisions contained within other laws 0 Improvements in tax administration practices including introduction of new work processes for receipt of tax retums; standardization of audit practices32; and establishment of taxpayer audit divisions at local tax offices 114. These actions have already improved tax policy and administrativepractices. However, interviews with the private sector suggest that taxation remains among the most prominent of the difficulties inthe investment climate inAzerbaijan, particularly for SMMEs. Tax legislationremains difficult for small entrepreneurs to understand, tax inspectors maintain a highlevel of discretion and influence, and the absence of clear, written materials makes it difficult to access the correct information. ~~~ 32 To ensurecompliance with the PresidentialDecree "On Preventionof Inspectionsthat Impede the Developmentof Entrepreneurship" of September28,2002, the MOT developedformats to be usedintaxpayer audits, standardizedproceduresandimprovedsupervisionof audits. Accordingto the MOT, these actionshaveresultedina significantdecline inthe number of on-site audits and an increase intheir quality andefficiency. 42 INOTIS-IntegratedNon-Oil Trade andInvestment Strategyfor Azerbaijan 115. Specific actions that can further improve the tax system include: The Tax Code Further strengthen the Tax Code. While draft amendments to the Tax Code have shouldbe beenproposedat various times, it is critical that the Tax Code be comprehensively strengthened amended and stabilized. Among the various issuedto addressedinclude: improve clarity, simplify tax - Gaps and inconsistencies with other laws-For example, while the Insurance administration, Law classifies insurance brokerage services as insurance activities, the Tax Code andreduce the does not, precluding such services from the more beneficial tax treatment effective tax burden accorded to income derived from insurance and financial services activities. - Tax regulations-Currently ,tax regulations aredispersedandarenotharmonized - with the new Code, adding a further layer of confusion. Provisions regarding tax administration-A number of administration related issues are contained inother legislation and needto be incorporatedinto the new Tax Code inorder to create a truly unified set of legislation. - Allowable deductions for business expenses-Provisions for allowable deductions are unclear and lead to discretionary interpretationby both the public and tax officials. Moreover, the limited range of deductions leads to relatively - higheffectivetax rates.33 Dispute settlement-Dispute settlement mechanismsare insufficient to address the concerns of taxpayers. An impartial appeals mechanism shouldbe established - to protect taxpayers and increase confidence inthe system. International Accounting Standards-Currently, local accounting standards must be used. Azeri Accounting Standards (AAS) differ in many ways from International Accounting Standards (IAS). Multinational taxpayers must keep two separate set of accounts, one incompliance with AAS and one incompliance with U S for their headquarters abroad, which increases the burden of comp~iance.~~ Further streamline tax reporting. The MOT has improved tax reporting practices by revising procedures for receiving tax returns and permitting taxpayers to submit returns personally, through an authorized representative and by mail. However, interviews with the private sector point to other issues that need to be addressed. The Recentefforts to tackle forms are deemed to be relatively complex, particularly for small entrepreneurs. administrative Simplifying tax forms and increased use of no-contact filing mechanisms (including, corruptionby eventually, electronic means35)would reduce the burden on investors, particularly tax oficials SMMEs. must be accompaniedby Improve transparency of auditing practices. Auditing procedures also tend to be simplijied, no- highly problematic and have been a regular source of illegal rent extraction by contact tax government auditors. The abuse of audits has also been perceived as a source of reporting and harassment and interference with private enterprises. In light of this growing more problem, a recent presidential decree restricted the auditing activities of the Ministry transparent of Taxes, including a prohibition on audits that last longer than envisaged by the auditing procedures legislation and that go beyond the limits of their authorities; a reduction on the number of on-site audits and the prevention of repetitive, unjustified audits; and the 33The MOT claims that the determinationof deductibleexpenses is consistentwith IMF recommendationsand internationalnorms. 34This is beingachievedthrough the Draft AccountingLaw which is currentlybeingfinalized. 35A draft law on digital signatures andelectronicdocumentationis under review. 43 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan a dismissal of 40 percent of the structural divisions of the Ministry engaged in auditing and related functions are significant developments. The introduction of a risk-based system, whereby audits are targeted at non-compliant businesses, would further ensure that audits are no longer a source of administrative abuse. 0 Increase public awareness. The tax system undergoes amendment on a frequent basis and remains one of the more complex aspects of the Azerbaijan business environment. The absence of clear, readily available printed materials and training programs explaining the Tax Code in layman's terms makes it difficult for investors to keep pace with changes, particularly small entrepreneurs that cannot afford the services of facilitators. Foremost among these i s the provision of clear and well- defined procedures and rules for calculatingand submittingtax returns to increasethe understanding of the private sector and reduce the discretionary powers of the tax authorities in interpreting tax law. Better access to consolidated, simplified written materials i s essential to increasing transparency and simplifying the system. 0 Negotiate double taxation treaties. Azerbaijan has entered into bilateral tax treaties with 13 other including several CIS partners, as well as Great Britain, Norway, Germany and Poland. No such treaties have been concluded with a number of other potential sources of foreign investment, including the United States, Canada, Japan, France, and Italy, among others. Tax Treaties play an important role in curbing fiscal evasion and encouraging foreign investment through the prevention of double taxation-Azerbaijan should actively seek to conclude tax treaties with the most promising sources of foreign investment. 5.6 Increasing Access to Credit 116. The banking sector has been a key component of the Government's structural reform strategy. In coordination with the IMFand World Bank, substantial reforms have been undertaken to strengthen the sector and expand credit opportunities to private enterprise, including the restructuring and privatization of state-owned banks; the consolidation and rationalization of private banks through increased capital requirements; improved regulatory capacity and powers for the National Bank of Azerbaijan (NBA); and improved institutionaland technical infrastructureto support the banking sector.37 Access to 117. While recent reforms have improved the sector's performance, the banking sector financing remains small and weak, playing a minimal role inan economy which functions primarily ranks among on cash. Access to financing ranks among one of the key factors constraining the one of the key development of private enterprise, particularly the SMME sector, in Azerbaijan. While factors short-term banking credit i s more readily available, many of SMMEs have no access to constraining the affordable long-term credit given collateral requirements and short payment terms. Azeri development banks offer difficult lending terms, usually 15-25 percent interest in dollar-denominated of private loans with a maximum two-year term, and collateral up to two to three times the loan enterprise, amount i s required for all but the smallest loans. This i s exacerbated by an undeveloped particularly the SMME sector 36Double tax treaties are inforce with Great Britain, Germany, Austria, Norway, Turkey, Poland, Russia, Moldova, Ukraine, Georgia, Kazakhstan, Uzbekistan, and Pakistan. 37A new banking system law is inthe President's office; a national bank law is beingdrafted. A clearing system for card payments for government payments will soon be operational. The use o f international accounting standards has already been applied to the commercial banking sector. 44 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan capital market and inadequate confidence in the Manat-some 80 percent of the borrowing base is inforeign exchange. 118. The non-bank sector provides limited support to SMMEs. Several microfinance projects, set up by donors and NGOs, are providing a limited supply of financing. However, loan sizes are small, averaging US$20&insufficient to meet the development needs of SMMEs. A new Micro-Finance Bank (MFBA) has recently been set up with funding from the EBRD (25 percent), IFC (35 percent), Black Sea Trade and Development Bank (35 per cent), and LFS Financial Systems (5 percent). Since October 2002, the MFBA has provided over 1,000 microcredits, with a total of US$l million outstanding. The MFBA provides loans ranging from US$400 to US$lO,OOO, with low collateral requirements (1.5 times loan size). While the loans carry a 36 percent annual interest rate, some 90 percent of the bank's clients are new to the banking system-most borrowers have relied on informal money lenders who provide credits at usurious interest rates of 15 percent per month. 119. The Government has also initiated efforts to provide much-needed financial support to SMMEs. A National Fundfor Entrepreneurship Development has been set up under the MED to provide financing and other support to SMMEs. As of June 2003, according to MED officials, more than 300 enterprises have been financed through the Fund. In addition, under the State Program on Small and Medium Entrepreneurship Development, approved by presidential decree in August 2002, other financing support mechanisms will be developed, including new microfinance schemes; assistance to credit unions; new mechanisms for investment support for industrial modernization of SMMEs; new mechanisms for venture capital and other technology development support; and the extension of cooperation with foreign financial and credit structures. Measures to 120. improve SMME While these new programs, and other donor-backed financing facilities that are in access to place, will certainly contribute to SMME development, they are unable to fill the vast gap finance will be that exists between supply and demand. Measures to improve SMME access to finance critical to will be critical to supporting the development of the non-oil sector: supporting the development of Banking sector reform and restructuring. Further banking sector the non-oil refodrestructuring will be required to develop a sustainable local banking sector sector... that can meet the project and trade financing needs of the private sector in Azerbaijan. Necessary reforms include the restructuring and privatization of remaining state-owned banks, measures to further increase consolidation, further liberalization of foreign participation, improvements in the regulatory framework, and further development of banking infrastructure. Key measures include ongoing Development of leasing mechanisms. Leasing can serve as a significant source of banking sector finance for small firms wanting to invest in equipment. Unlike banks, which rely on reform, the development of credit history, assets, or capital base to assess credit-worthiness, leasing companies newfinancing evaluate the lessee's ability to generate cash flow to service lease payments. SMMEs, schemes and without a long history of financial statements, can benefit from such arrangements. leasing Currently, there are very few leasing companies operating in Azerbaijan. Leasing in mechanismsfor Azerbaijan i s currently in its infancy. Weaknesses in the current legislation can SMMEs,and hinder its development. For example, the current legislationdoes not appear to permit improving a lessor to transfer the lease to the third party. To encourage the development of the financial leasing sector, the relevant legislation must be improved to increase the protection of management of lessors' rights. SMMEs 45 INOTIS Integrated Non-Oil Tradeand Investment Strategyfor Azerbaijan e Development of equity and/or venture capital funds. There is presently only one equity fund operating in Azerbaijan, the Soros Investment Capital Fund. The Soros Fund operates throughout the CIS and Central Europe, providing equity and other financing for large-scale projects. Currently there are no venture capital funds in Azerbaijan that provide financing to new entrepreneurs. Venture capital and other equity funds can be an important resource for SMME development. Experience from other developing and transition economies demonstrates private investment in the establishment of venture capital markets can be promoted through various mechanisms, including the development of an appropriate enabling framework, tax and other fiscal incentives, and the provision of matching funds. Designing an appropriate framework for Azerbaijan must be tailored to its development context, including the current culture for entrepreneurship and risk-taking3*. 0 Improving the framework for secured transactions. A related issue is the legal and institutional framework for secured transactions. The existing framework for secured transactions i s insufficient to meet the needs of the private sector, particularly in the case of movable property. The legislative and institutional framework governing collateral inAzerbaijan i s fragmented and incomplete. The Civil Code and Law on Mortgages, both of which cover different aspects of collateral, are inconsistent. Moreover, Azerbaijan does not presently have a regime that effectively allows the pledging of movable property collateral. Several registries are maintained by different governmental bodies for various types of collateral and not all types of collateral are covered, such as equipment, inventory, and accounts receivable. The establishment of a comprehensive collateral registry system i s a necessary institution to support the extension of securedcredit. e Improving financial management inprivate sector. While increasingthe supply of financing options for SMMEs will be critical for their development, equally important i s the development of their own financial management skills. Many SMMEs in Azerbaijan lack the tools necessary to develop relevant financial documentation, such as accounting standards (particularly International Accounting Standards), business plans, cash flow statements, budget, and income forecasts. 0 Introduction of new payment schemes for non-cash transactions. Azerbaijan is still a predominantly cash-based economy. Salaries, pensions, and day-to-day transactions are generally carried out in cash. Similar countries have developed innovative payment mechanisms to reduce dependence on cash transactions. For example, smart card technologies provide a cheap and easy mechanism for enabling cashless transactions. InAzerbaijan, the extensive network of postal offices could be leveraged to provide smart card terminals that would allow cashless transactions for a wide variety of services, frompension payments to utility bills. 5.7 Encouraging Competitive Markets 121. The development of Azerbaijan's export sector i s contingent upon the development of a competitive, market-based economy at home. The establishment of an effective legal and institutional framework for promoting competition and curbing 38 This recommendation is intended to promote private investment in the establishment of venture capital funds, and does not advocate the establishment of such a fund by the Government or any related entity, such as the Oil Fund. 46 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan monopolistic behavior is particularly important for Azerbaijan and other transition economies, given the highly monopolized nature of the centrally planned Soviet economy. Encouragingcompetition will require: Effective enforcement of competition policy. Azerbaijan has already come a significant distance in developing a legal and institutional framework for competition policy. An Anti-Monopoly Law was introduced in 1993 and amended in 1997, which defines several different kinds of monopoly and abuse of dominant position in the marketplace. In2001, the Department of Anti-Monopoly Policy was established within the MED. As the executing agency, the Department has the authority to impose a range of measures against monopolistic behavior, including the ultimate authority to terminate a company's activities. 122. However, as in many other policy areas in Azerbaijan, while the legal and institutional framework is in place, effective implementation has been more difficult to Competition achieve. The Department has little authority or capacity to carry out its mandateunder the should be law. To date, its role has been primarily advisory in nature. If the law i s to have any strengthened impact, the role of the department must be re-oriented toward monitoring and through effective enforcement and the Department must be armed with the tools, funding and resources anti-monopoly necessaryto back up its mandate. While the Department has initiated the development of policies and a public register as a database for the analysis of price movements and other indicators, enforcement and the Department needs to develop methodological guidelines and improve data collection by increasing SMME to enable the Department to effectively carry out its monitoring and enforcement participation in functions. government procurement 0 Increase S M M E participation in government procurement. An issue related to competition policy i s the set of rules pertaining to government procurement. As in many developing and transition countries, the government i s one of the largest domestic consumers of goods and services and can therefore play an important role in encouraging the development of local industry. Complex or unfair procurement rules can effectively rule out participation by SMMEs, limiting their ability to attain scale economies and compete in the global marketplace. A new procurement law in Azerbaijan appears to provide non-discriminatory rules. However, in practice, it will be important to monitor and promote the participation of SMMEs in public procurement. 5.8 ImprovingContractEnforcement 123. The need for a fair and reliable mechanismfor dispute resolution i s paramount to Strengthening building confidence in the business environment. In Azerbaijan, contract enforcement thejudiciary remains an important concern for investors (see Figure 5.3). Improving the quality and and providing reliability, as well as confidence in, dispute resolution includes: alternative dispute 0 Strengthen the judiciary. The Economic Court, which has jurisdiction over resolution would increase commercial disputes, is, according to most accounts, weak and inefficient. confidence in Established in 2000, the Court lacks the capacity to effectively carry out its mandate. the rule of law The Court has itself been subject to charges of c~rruption.~~While the Government 39 See U.S.ForeignCommercialService andDepartmentof State, "Azerbaijan Country Commercial Guide," (2003); andEuropeanBank for ReconstructionandDevelopment, Azerbaijan ZnvestmentProfile, (2001). 47 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan has already taken steps to strengthen and build confidence in the judiciary-for example, through new testing-additional measures that should be taken to strengthen the judiciary include more training of judges in commercial law, improvements in enforcement, better case management systems, and an improved mechanism for judicial oversight. Figure 5.3-Private Sector's Perception of Court Svstem The needfor afair Fair and reliable mechanismfor 0 5 dispute resolution is paramount to 0 - Able to enforce 3-- -\ Honest building \ Confidence in the \ business \ environment. \ Azerbaijan \ I - - -CIS-7 Quick Source: EBRDandWorld Bank, BusinessEnvironmentandEnterprise Pprfnrmnncr Siirvpv 71)1)7 0 Establish an independent alternative dispute resolution mechanism. While strengthening the judiciary i s an important component-and will ultimately be a medium- to long-term effort before public confidence is increased-also important is the role of independent alternative dispute resolution (ADR), i.e. arbitration, often a less costly and quicker means of dispute resolution. It is also deemed to be fairer in countries where the judiciary i s not well established or is distrusted, as in Azerbaijan. There i s presently no independent arbitration service in Azerbaijan that can provide an alternative to the localjudiciary. A recent Eurasia Foundation funded initiative to While the establish such a service should be actively pursued, including the development of number of training and credentialing mechanisms, as well as increased public awareness of the SMMEs is value of ADR. growing rapidly,firm- 5.9 SupportingEntrepreneurship level growth remains 124. SMMEs account for more than 80 percent of registered enterprises inAzerbaijan. sluggish Duringthe last five years, the share of SMMEs in GDP grew from under 25 percent to almost 43 percent. However, as in many of the CIS countries, in terms of sales, small enterprises are growing much slower than their larger counterparts in Azerbaijan (see figure 5.4). While most of the recommendations inthe preceding sections will contribute, A new State directly or indirectly, to the development of small enterprises and entrepreneurship, Program on supporting sustainable SMME development will require additional, targeted measures. A SME recent Presidential Decree established an Entrepreneurs' Council that will advise on Development SMME development-this new public-private dialogue should be actively supported. envisages a comprehensive Future efforts should also focus on: and ambitious program to 0 Implementationof State Program for S M M E Development. A new State Program support SMMEs on Small and Medium Entrepreneurship Development envisages a comprehensive 48 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan and ambitious program to support SMMEs, including financial support, technology transfer, human resource development, regional diversification, and protection of entrepreneurs' rights. More than 60 specific, actionable measures have been identified to encourage entrepreneurship. These initiatives-all worthy and practicable-need to be carefully prioritized to ensure that maximum efforts are Figure 5.4-Firm Growth Rates, by Size (1999-2002) 90 /I ou 70 60 50 40 30 20 10 0 Source: EBRD and World Bank, Business Environment and Enterprise Performance exerted on those activities that will provide the most results. 5.10 ImprovingPublic Sector Governance 125. Ambiguous and/or conflicting legislation, the lack of transparent and consistently The GOA has applied rules, and overly discretionary powers granted to public officials can all combine taken thefirst to create a challenging business environment and can give rise to state capture and steps towards administrative corruption. Recognizing this growing issue and its negative impact on rooting out corruption.. . economic development, the Government of Azerbaijan has already taken the first steps towards rooting out corruption. A presidential decree "On the Intensification of the Fight And its impact against Corruption" was issued inJune 2000, instructing the Prime Minister and the head has been positive Fieure5.5-Decline inAdministrative Corruption Source: EBRDand World Bank, Business Environment and Enterprise Performance Survey, 2002. 49 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan of the Presidential Administration to prepare a draft anti-corruption law and a state anti- corruption program. To date, the draft law has passedthe first hearing in the Parliament. The impact has been positive, with a substantial decline incomplaints about corruption. Nevertheless, 126. Several other decrees have been issued that attempt to tackle various types of corruption and corruption. Most recently, the September 2002 decree "On Prevention of Interferences state capture Impeding the Development of Entrepreneurship" aims to reduce public sector abuses of remain power, including prohibiting the law enforcement agencies and state authorities from important interfering with business activities of private entities. Additional steps that can assist the issues.,. Government's mission to combat corruption include: Developing an Develop legal and institutional framework. Passing the anti-corruption law and, effective legal equally important, setting up an effective institutional framework to monitor and and institutional framework, and enforce the law will be essential to ensuring that the Government's continued success increased incombating administrative corruption. public-private dialogue, are Develop private-public dialogue. State capture, another form of corruption, must essential also be addressed. The most effective means of combating state capture i s the development of transparent mechanisms for public-private dialogue on economic policies. The ability of the private sector, particularly SMMEs, to promote its interests needs to be strengthened. One of the most effective means of promoting private sector interests is through business and trade associations-improving their skills in policy analysis, advocacy and public outreach can play an important role in reducing state capture and promoting economic policies that provide broad-based benefits to the Azeri population. 5.11 HighPriority Actions to Improve the BusinessEnvironment 127. The following table provides a list of highpriority actions in support of the strategy recommendations on the macro business environment. A complete list of actions i s provided inTables 7.2 to 7.5 inchapter 7. Table 5.1-High Priority Actions for Improving the BusinessEnvironment BusinessStart-up ReviseCompanyLaw to improveprovisionson corporate governance, businessflexibility and shareholderprotection Finalize Draft Investment law 2003 MED ~~ Clarify needand scope for approvals Removeneedfor registrationof all FDI 0 Eliminatediscretionary incentives Clarify role of investment promotionagency--promotion rather than regulation 50 INOTIS-Integrated Non-Oil Trade and InvestmentStrategyfor Azerbaijan 2003-2004 Company Registry, MOJ, MED Provide written guidelines to investors 2003-2004 SCLC, MED 2003-2004 Dept of Privatization, Municipalities 2003-2004 SCLC, MED, BTI, BakuMayor's Office, Privatization Agency, private groups ndSite DevelopmentRegulations & 2003-2004 MED,SCAC, Municipalities, Dept of Fire Safety, SED/MOH Building regulations to international standards Streamline construction and occupancy permitting requirements and procedures Develop effective environmental protection mechanisms Promote Private Industrial Parks 2003-2005 MED Undertake land useisite selection study Develop regulatory framework for industrial parks & public-private partnership Encourage establishment of private parks Facilitate Participation inUtilities 2003-2005 MED Increase competition intelecommunications and IT Initiate privatization and demonopolization o f Aztelcom Develop legal framework for ICT and e-government 2003-2005+ MOL e Revise restrictive provisions on hiringand dismissal o f workers; move forward with labor re-deployment Eliminate general license for expatriate workers Review educational curricula to better match industry MOEd, private sector I Promote industry-education collaborations Set up regional labor exchanges, training centers 51 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 2003-2005 MoTax Accelerate process of addressing gaps & inconsistencies o f Tax Code Consolidate regulations; harmonize with tax code Implement decisions taken to enhance auditing and dispute settlement procedures Clarify policies regardingdeductible expenses Streamline VAT refund mechanism Allow use of international accounting standards (new Accounting Law) MOF MED Strengthen capacity Antimonopoly Dep't Increase private sector/NGO participation inpolicy MED,PMO, NGOs 2003-2005+ MOJ Initiate judicial reform and upgrading effort aimed at Economic Court Continue banking sector reform and restructuring 2003-2004 MED,MOF, NBA Privatize remaining state-owned banks Encourage establishment of new private banks Improve banking supervision Develop banking infrastructure Improve banking system and central bank laws Reform leasing legislation 2003-2004 MED,MOTax Improve framework for secured transactions 2003-2004 MED Develop coherent legal framework for collaterals Establish comprehensive movable property registry Reform Credit Law to allow foreign companies to extend 2003-2004 MED credit 2003 NBA, commercial banks 2003-2004 Private business associations 2003-2004 NBA transactions 52 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan incl. consulting, training, information,trade fairs MED: Ministry of EconomicDevelopment MOTax: Ministry of Taxes MENR:Ministry ofEcologyandNaturalResources NBA: NationalBank of Azerbaijan MOC: Ministry of Communications PMO: PrimeMinister'sOffice MOEd: Ministry of Education SCAC: StateConstruction and ArchitectureCommittee MOF: Ministry of Finance SFD: State Fire Department MOFA: Ministry of ForeignAffairs SSC: State Securities Committee MOH: Ministry of Health STATCOM: State StatisticalCommittee MOJ: Ministry of Justice 53 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER&DEVELOPING COMPETETIVEINDUSTRY CLUSTERS 1.8 Introduction 128. There is growing evidence that improvements inthe macro business environment The cluster are a necessary but insufficient condition to ensure a nation's competitivene~s.~'As approach articulated by several competitiveness theorists, a nation's prosperity i s based upon the provides a competitiveness of its firms or industries,which is determined in large part by the quality holistic of the "micro business environment" within which firms compete. framework for understanding 129. Competitive advantage i s increasingly being defined by the cluster approach, sources of rather than traditional sector-based analysis. The cluster approach, which provides a competitive holistic framework for understanding how firms interact to build a competitive advantage advantage, provides a market-based perspective for the development of appropriate government policies and programs to complement macro-level reforms and support firm and industry-level competitiveness. A pilot study of 130. A pilot study of the fruit andvegetable-processing cluster highlights the types of thefruit and issues that will need to be addressedat the micro-level to improve competitiveness: vegetable processing 0 Processing companies inthe cluster are relatively small, with 55 percent having 50 or cluster fewer employees. Foreigninvestment in the cluster i s very limited. highlights the types of issues 0 Most inputs and equipment are imported. There is a lack of local suppliers of that will need to equipment and related services. The local supply for packaging materials i s also be addressed at the micro-level limited. to improve competitiveness, Supply and other relationships among the various parts of the cluster are weak. The including small closest relationships are between processors and their suppliers, a legacy of the firm size, lack oj Soviet era model of vertical integration. There is virtually no collaboration among local supply processors. base, weak vertical 0 Access to information on markets and technologies i s extremely limited. The flow of linkages, and information appears to be mostly informal and unstructured. Many of the managers lack of market rely on personal relationships, friends, customers, as well as the media and the information Internet to obtain information about markets and technologies. Information about technologies i s accessed informally, through equipment suppliers, customers, or local consultants. 131. Overall, the fruit and vegetable processing cluster can best be characterized as emerging, with limited vertical and horizontal supply, marketing and other linkages, and even more limited "soft" collaborations, in terms of skills development, knowledge, 40"It is well understoodthat sound fiscal and monetary policies, a trustedandefficient legal context, a stableset of democratic institutions, and progresson social conditions contribute greatly to a healthy economy. However, these broader conditions are necessarybut not sufficient, providingthe opportunity to create wealth but not by themselves wealth creating. Wealth is actually createdinthe microeconomic level of the economy..." fromMichaelPorter, "Building the Microeconomic Foundationsof Prosperity: Findings from the Microeconomic CompetitivenessIndex." 2002. 54 INOTIS-Integrated Non-Oil Tradeand InvestmentStrategyfor Azerbaijan innovation and related areas. Several parts of the cluster are missing compared to similar clusters elsewhere. The legacy of strong vertical integration of industries, for example, has stifled the development of specialized transportation, trade, and financial services. The limited collaboration and extensive competition among processors has limited the scope for the development of local sources of knowledge, innovation, and skills. Key strategies that can buildcluster competitiveness include the following. 1.9 Promote Inter-firm Cooperation There is scope 132. The benefits of a cluster occur when the private firms and other components of for increased the cluster develop and build relationships. Synergy between firms helps create collaboration to competitive advantage for the cluster. There i s scope for increased collaboration among improvefirm processors and other cluster participants in terms of workforce development, capabilities and development of specialized business services, joint marketing, policy advocacy, and the promote like. This can be used to help firms improve their capabilities and promote further innovation innovation. Some mechanisms for strengthening inter-firm cooperation include: Create a cluster working group to begin cluster organization. Currently it i s very difficult to get the necessary government approval for formation of an industry association. The cluster approach and an informal cluster organization offer a framework for effective inter-firm cooperation. This group will be involved incluster development planning and serve as a framework to identify needs for information and technical assistanceand opportunities for cooperation among firms. 0 Establish a cluster-based information system. Participation of both the Azeri NGOs and the firms would be strengthened by providing them with information, especially specific examples, about counterpart clusters and competitiveness. Information about markets and other critical needs-such as sources of capital, training, and technology-are priorities. A good model framework i s the U.S.'s cooperative extension or manufacturing extension partnership where individuals are widely dispersed among local communities. 0 Provide technical assistance to firms in a cluster setting. Several of the international donors and NGOs are financing programs that provide management and technical assistance to Azerbaijan firms in a group setting. GTZ convenes meetings of fruit and vegetable processors, and USAID funded efforts created associations of hazelnut growers and dairy farmers. By defining and planning interventions according to the collective needs of a cluster and not only of individual firms, the government, companies, and donors can achieve economies of scale and have greater impact. 55 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan 1.10 Promote Innovation, Quality, and Specialization Institutionsfor 133. Exposure to the cluster approach surfaced support for collaboration among firms encouraging but did not modify participants' priorities, and promoting innovation, quality, and vertical innovation, and/or value-added specialization i s not a current priority. However, developing quality, and institutions for these functions i s likely to become a priority once improvements related specialization to vertical relationships and market orientations have been made. The absence of an are needed to ability to promote innovation, quality, and specialization will constrain cluster promote cluster development. Specific actions include: development Promote farming technologies that increase harvests. Assuring a supply of raw materials for processing must be given high priority. The importance of supply issues means that farmers and growers will have to play a large role in the strengthening of the Azeri fruit and vegetable-processing cluster. Plans should recognize that increased harvests, more effective and sustainable agricultural practices, and in some cases, a change to more appropriate varieties of fruits and vegetables are all fundamental to development of a strong cluster. Activities to promote greater harvests should parallelefforts to develop the processing industry cluster. Establish a demonstratiodteaching farm for farmers and growers. The demonstration farm was the precursor to America's cooperative extension system, a place where farmers could go to observe and try out new methods and technologies in a neutral environment without vendor bias. The site would be an open working farm that uses the latest technologies and growing methods where farmers can observe, learn about, and learn to use the most appropriate new techniques to improve productivity. 0 Establish a national laboratory for quality certifications. The highest priority for establishment of supporting institutions should be a testing and certification laboratory that will enable Azeri producers to export to EU and other western markets. If Azeri products are going to enter increasingly demanding higher end markets, they will need to be certified. If, for example, the cluster chooses to move toward higher end "green" and organic products, the product must meet specific standards. Within the EUand in many other places, testing labs that serve all of the firms in a particular cluster are becoming more common. For example, CERMET i s a testing lab for metalworking firms in Emilia-Romagna (Italy), and the Hosiery Technology Center tests socks for all companies incentral NorthCarolina inthe U.S. The testing of food products i s even more important because of health and other dietary, including religious, implications. Expand value-added forms of production based on locally grown products. Some crop-based mini-clusters have formed within the regions. For example, apples and apple juice concentrate are common in Quba, tomatoes and tomato paste in Lenkaran, and pomegranates and eggplants in Ganja and Goycay. Each region has a major packaging firm. However, a cluster could conceivably include numerous primary processors whose output i s purchased by a single large packager and/or numerous small and medium-sized processors that contract for packaging services. Large packagers and value-added processors could benefit from development of numerous small firms and workshops that perform initial processing of fruit and vegetable products, many of which will require packaging or be inputs for further processing. 56 INOTIS-IntegratedNon-Oil Tradeand Investment Strategyfor Azerbaijan Support development of a wholesale capacity. The regional mini-clusters look to the hub in Baku for warehousing and distribution, where some firms are locating their headquarters. For reasons ranging from habit to distrust, firms tend to be reluctant to contract for warehousing and distribution services, preferring to create needed capacities in-house. To promote the specialization that creates efficiencies and promotes innovation in a cluster, donor organizations should seek opportunities to support development of firms that provide these specialized services. Develop a better dialogue and a clear policy in the relationship between producers and processing firms. The importance of supply issues means that farmers and growers will have to play a large role in the strengthening of the Azeri fruit and vegetable-processing cluster. The first step should be to establish relationships on contract basis. 1.11 HighPriorityActions to Promote Cluster Development 134. The following table provides a list of highpriority actions in support of the strategy recommendations on cluster development. A complete list of actions i s provided intables7.2 to 7.5 inchapter 7. Table 6.1-High Priority Actions for Improving Cluster and Enterprise Development Implementdevelopmentof the fruit andvegetable processing cluster as apilot project Facilitate formation of a cluster working group MED,private stakeholders Expandvalue-addedproductionbasedon local produce MED, MOA Develop wholesalecapacity - warehousing & distribution Promote farming technologies to increase harvests MED, MOA MOA Facilitatedevelopment of industry clusters (e.g., oil and gas, 2004-2005+ MEDandprivate sector stakeholders garmentdtextiles, tourism, ICT, trade facilitation) Initiate programof clusters development basedupon a self- selectingbasis Map clusters andbenchmark competitiveness Formulate cluster development strategies Promoteinter-firmcollaboration through cluster groups Establish anationalCompetitivenessCouncil Promote access to specializedbusiness andtechnical services 2003-ZOOS+ MEDandprivate sector stakeholders Promote development of business development service providers andrange of technical support services at cluster- andfirm-levels Developmechanisms to access market andtechnology information Promote quality and technology innovation anddiffusion 2003-2005+ MED,relevant ministries, private Promoteuse of I S 0 9000 andother voluntary quality sector, SASMP certification programs Improve accreditation standards for private labs Buildcapacity of the State Agency on Standardization, Metrology and Patents Developtechnology diffusionnetwork -. Promote establishmentof industry-university collaborations MED:Ministry ofEconomicDevelopment; MOA: Ministry of Agric ture 57 INOTIS Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan CHAPTER7-IMPLEMENTATION PLAN 135. The preceding sections outlined a comprehensive, integrated strategy for stimulating sustainable development of Azerbaijan's non-oil export sector. The strategic recommendations are only valuable to the extent that they are implemented. This section forms the most important part of the overall strategy-a concrete implementation plan to ensure fulfillment of the goals and objectives outlined in the previous sections. 1.12 Prerequisites for Success Successful 136. Implementing the proposed strategy i s not a simple undertaking given the wide implementation range of inter-related actions and numerous stakeholders that need to be actively of this strategy engaged. Successfully implementing the strategy will require meeting number of basic will require the prerequisites: promotion of a common vision, Common Vision. Successful implementation requires that the implementing bodies genuine and related stakeholders-including the private sector, NGOs, and the donor political will, community-buy-in to the process and support its realization. This will require focus, and effective coordination and dialogue among the various public and private sector actors. A dialogue with "trade-specific" workshop or seminar to discuss the report with relevant parties, the private including the donor community and civil society, with a view to raising the profile of sector and trade issues within the overall context of the SPPRED. donors Genuine Political Will. As highlighted throughout this study, the Government of Azerbaijan has demonstrated its commitment to reform and private sector development. The Government needs to show a sustained high level of commitment to the project and to continued economic reform, both in words and deeds. Rapid implementation i s required in a number of key areas in order to lock-in the reform process and take advantage of opportunities that might otherwise erode in a highly competitive global marketplace. While this initial study was drafted by the World Bank, the GOA must provide the right leadership throughout implementation stages. Government ownership of the process i s a sine qua non condition for success. Focused Initiatives. To reap the greatest benefits, actions need to focus on the most critical of the proposed initiatives. Prioritizing actions will be key to maximizing the returns to the economy. Inthe implementation phase, there will need to be an annual review of ongoing actions, and their priority will need to be re-evaluated in accordance with the effect they are considered to be having on the achievement of the key strategies. Appropriate Institutional Framework and Public-Private Dialogue. Implementation does not depend on a series of independent actions by different ministries and government agencies: on the contrary, many of the policy actions require coordinated action between different government bodies, as well as with donor organizations and private sector and other stakeholders. Given the wide range of actors required to implement this strategy, an effective institutional framework needs to be developed to oversee implementation. 58 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan Sustainable Development. The sustainability of the strategy will be dependent on developing a framework to manage risks and monitor implementation and impacts. Socio-economic impacts-in terms of poverty, environment, women in development, etc.-are particularly important. Implementation of the SPPRED i s a necessary condition to achieving he objectives of this trade-oriented strategy. 1.13 Establishing a Framework for Implementation 137. It is important that an effective institutional mechanism be established for implementation of the INOTIS initiative. While there are a number of possible alternatives, any such mechanism should incorporate two main characteristics. First, it has to be clearly coordinated with SPPRED-as the key initiative for development of the non-oil sector-and therefore linked to the SPPRED Secretariat, which has the overall responsibility for coordinating the implementation of the SPPRED. Second, it must embody a mechanism for public-private sector dialogue and action. While the role of the public sector is critical, effective public-private dialogue is equally important. An appropriate mechanism needs to be linked to the highest levels of Government and the private sector, as well as internationaland bilateral donors, NGOs and other stakeholders. 138. A possible mechanism is to vest the newly established Entrepreneur's Council with the responsibility for implementation of the INOTIS initiative. The Council i s a public-private mechanism with a broad mandate to stimulate economic activity in the non-oil sector, comprised of leading members of the business community and Government, chaired by the Minister of Economic Development. The newly established Secretariat of the Council i s linked to the SPPRED Secretariat and the new IPA. 1.14 Next Steps 139. This strategy and action plan is only the first step of the implementationprocess. The first step has already been achieved, which was the holding of a national workshop in June 2003, includingparticipants from Government, businesscommunity, donors and NGOs. The workshop reviewed the findings, policy recommendations, and action plan presented inthis study. Critical next steps toward bringingthis plan to fruition include: 0 Government andBusinessCommunity Endorsement. High-level endorsement and Next steps to implement approval of the overall strategy outlined in this report i s a prerequisite for launching INOTIS are, the implementation plan. Endorsement of the strategy by the Government and the high level Entrepreneur's Council will demonstrate ownership of and commitment to the endorsement of agenda. At the same time, the institutional mechanism for implementationof INOTIS the strategy, should be announced. establishment of the 0 Selection of High Priority Initiatives and Finalization of the Implementation implementation Plan. The proposed implementation plan presented in this document needs to be mechanism, and finalized, and priority initiatives identified. This should be done through discussions selection of with key ministries, business community and other stakeholders. Priority initiatives priority initiatives, and should be further detailed and funding and technical assistancerequirements defined, increasing with technical assistance and support. These need to be discussed with prospective public donors, as donor support must be a major source of project funding. A number of awareness ongoing and planned donor-funded projects will provide an important foundation of support. 59 INOTISIntegrated Non-Oil Trade and Investment Strategyfor Azerbaijan Table 7.l-Strategy Endorsement and Launch donors andother Launchingof a public awarenesscampaign. A public awarenesscampaign should be designed and launched to begin the process of public education and consensusbuilding around the INOTIS initiative. 1.15 Monitoring Progress 140. Given the wide range of strategies and actions, implementation by the various Given the wide actors will need to be effectively coordinated and monitored. During the course of range of strategies and implementing a strategy, it i s normal for changes to be made. Previously unidentified actions, issues may emerge and/or new strategies may have to be pursued if existing ones fail to implementation produce the desired results. The implementation process i s expected to be dynamic, and by the various management and oversight of it will therefore need to employ flexibility and adaptation actors will need on a continuous basis. A system of to be effectively monitoring and evaluating the Box 7.1-Checklist of Macroeconomic Indicators coordinated and progress of the implementation of monitored the agreed upon action plan will need to be established within the Government and in close cooperation with the monitoring of the SPPRED. 141. The development of monitoring indicators for effectively measuring the economic impact of this'strategy i s the first step toward ensuring sustainability. The Action Plan, presented in the following section, provides action-specific monitoring indicators that will enable stakeholders to monitor progress in fulfilling each of the strategy components. In addition to these micro-level indicators, effective impact measurement will 60 INOTIS-Integrated Non-Oil Trade and Investment Strategyfor Azerbaijan require the monitoring of a range of macro-level, socioeconomic indicators, as well. Possible macro-indicators are summarized in Box 7.1. 1.16 Integrated Action Plan 142. The framework for implementationis basedon the following key principles: TheAction Plan 0 Assignment of Responsibility. Responsible parties are named for every key action, provides an so that there is direct accountability for results. integrated framework for implementation, 0 Prioritization of Actions. Priorities are indicated for each policy action (1-high, 2- including medium and 3-low priority). These priorities refer to the relevance and importance of assignment of the action in the strategy to stimulate the non-oil sector. The priorities have been responsibilities, ranked within each section of the action plan matrix. Thus, an action marked as high prioritization of priority, i s considered high priority within the range of actions listed for that actions, component, but does not necessarily have the same priority as an action marked as monitoring high priority in a different component. Thus, the priority of actions cannot be indicators, and compared across components. time-bound targets 0 Monitoring Indicators. Indicators may be either a monitoring indicator, to be used to assess the impact of the policy action, or may be outcome indicators, used to judge whether the policy action has been completed. 0 Time-Bound Targets and Goals. Start-up and finish dates are defined for key actions. These targets and goals are realistically set, and will be taken seriously by all concerned parties. Tables 7.2 through 7.5 on the subsequent pages present detailed actions designed to encourage the development of the non-oil export sector, including the assignment of responsibilities, key monitoring indicators, and timeframes for implementation. 61 ai E 3 v) C a, c 0 E v) m D -C m - v) m .-C0 - I fm .-a, C m + In In x 0 0 0 7 0 0 0 0 N 0 N VJ 0 - x 0 m i d x 0 Es 0 0 9 0 d m 0 8 0 0 0 0 cu 0 cu 0 cu 0 cu 0cu d2 f i W I c cu -0 S m -0 a, v) v) h '0 8PQ oi v) I I 0 .-a,m 3 I 0 ma, c0 Q F 0-0 r 5 s a2 5 % m t 'C ma, m m c v, 0 d 0 d 0 0 cu 0 (u 2 c 3S x 8 8 !! 5c h x x 3 w 3 0 0 3 3 0 N 0 cu c K 00 W + x0 ln ln x x x ln 0 8 0 0 0 0 0 0 0 0 0 0 cu 0 cu 0 cu 0cu 0 0 0 v) 2 0 0 6. v) 8- d 5 5 2 n W a Q a v) r c) .c 0 2 ~ 8 x 0 0 0 cu e L 2 & c b m 'D C B D .-m c 0, % 0 c 0 'U ca, C a, - .-2 E r- -m U a, n x 3 3 3 3 N . . 0 . 0 . m r- Q S z 0 - v) C z 0 w z a E 0 E w a, + e C c .-C 0 a, 0 P C C 2 > .-m I v) - L - - SPe. ~ 1 s - n SP e. v) 12 2 - w z L u a, c 0 z E 3 TU) z3 z'Z C '- .-z z u C C I s - =-a m a , 2 2 e 5 I-0 UI- Im- mC x u L T > a,a - d x 0 0 0 d 0 0 cu 0 cu 7 7 cu 7 C 0 0 I 1.L 0 4- v) x 0 0 0 N 0 d x x x 0 w 0 0 0 0 0 0 0 0 0 N 0N 0 cu n !2 U Y 3 z N cu cb 0W z c9 0 VI a, 2 S 0 /I v) x x 0 B 0 0 0 0 0 N 0 cu a 0 z 5I Ei d z W z cu 7 INOTIS-IntegratedNon-Oil Tradeand InvestmentStrategyfor Azerbaijan BIOGRAPHY Agricultural Strategy Unit, Ganja RegionalAgro-Consulting Center (2002), "Comparative Advantage Studies and Analysis of the Impact of Developments LimitingFactors inAgroprocessing Industry, and Formationof a Policy Framework," Report to the World Bank. 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