Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises Investment Climate Advisory Services | World Bank Group In partnership with: Swiss Cooperation Office in the Kyrgyz Republic Кыргыз Республикасындагы Кызматташтык боюнча Швейцариялык Бюро Швейцарское Бюро по сотрудничеству в Кыргызской Республике 2010 Swis s Confederation The contents of this report are protected by copyright. Neither this report nor its parts may be reproduced, copied or distributed in any form without reference to the IFC Report “Investment Climate as seen by Small and Medium Enterprises in the Kyrgyz Republic”. IFC encourages dissemination of this publication and hereby grants permission to the user of this work to copy portions of it for the user’s personal, noncommercial use, without any right to resell, redistribute, or create works derived from the contents or information contained herein. Any other copying or use of this work requires the express written permission of IFC.The materials contained in this report are presented as an overview of results from the Survey that was conducted between May and August 2009 among owners and/or managers of Kyrgyz small and medium companies, individual entrepreneurs, and farmers. The information in this report is presented in good faith for general information purposes, and IFC, the World Bank Group, Government of Switzerland shall not be held liable for any of the information contained herein. This report does not claim to serve as an exhaustive presentation of the issues discussed herein, and should not be used as a basis for making commercial decisions. Please approach independent legal counsel for expert advice on all legal issues. All information and materials used in preparing this report are the property of and archived by IFC. © 2010 International Finance Corporation The report is available, in printed and electronic form, at the following address: IFC Investment Climate Advisory Services Project 4th floor, 6 Ryskulov Street Bishkek, Kyrgyz Republic 720001 www.ifc.org/beekg Photographs: Boris Kuptsov, Vlad Ushakov 1. ExEcutivE summary 1 Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises Investment Climate Advisory Services | World Bank Group In partnership with: Swiss Cooperation Office in the Kyrgyz Republic Кыргыз Республикасындагы Кызматташтык боюнча Швейцариялык Бюро Швейцарское Бюро по сотрудничеству в Кыргызской Республике 2010 Swis s Confederation 2 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Contents Foreword and acknowledgements .................................................................................................................................................... 4 list of abbreviations ............................................................................................................................................................................ 5 name of government agencies ......................................................................................................................................................... 5 1. ExECutIvE SuMMaRy ............................................................................................................................................................................... 6 Key recommendations......................................................................................................................................................................13 2. BuSInESS EnvIROnMEnt .......................................................................................................................................................................18 2.1. the impact of the global economic crisis in the Kyrgyz republic remains relatively limited .......................................................18 2.2. the private sector has grown significantly in the past years, except for medium and large companies ....................................20 2.3. high tax rates, corruption, macroeconomic instability and an unreliable electrical supply are the main problems faced by small and medium enterprises.....................................................................................................................................................22 2.4. important legal reforms were made to improve the business environment, but the impact has been limited..........................26 annex 2.1: total cost of electricity outages for small and medium companies in 2008...................................................................29 3. REgIStRatIOn ............................................................................................................................................................................................30 3.1. Key findings...............................................................................................................................................................................30 3.2. registration: the “one-stop shop” has improved the legal framework......................................................................................30 3.3. small and medium companies comprise the greatest proportion of respondents completing registration in 2008 ................36 3.4. registration procedure: small and medium companies bear a greater burden than individual entrepreneurs..........................37 3.5. recommendations ....................................................................................................................................................................40 annex 3.1: registration of all smEs in 2008 – total costs ................................................................................................................41 4. PERMItS ........................................................................................................................................................................................................42 4.1. Key findings...............................................................................................................................................................................42 4.2. the lack of a unified permit law and a comprehensive permit register are the main shortcomings of the permit legislation....42 4.3. permit coverage and frequency: the number of enterprises obtaining permits is significant, with regional disparities.............45 4.4. the ministry of health, the Fire safety department, the ministry of transport and local governments are the heaviest regulators on permits........................................................................................................................................................................47 4.5. permit administration: time-consuming and complex procedures promote informal solutions...............................................48 4.6. recommendations ....................................................................................................................................................................51 annex 4.1: indicative list of permit issuing agencies and of the main types of permits (2009) .......................................................52 annex 4.2: the implementation of the construction permits’ “one-stop shop” is weak, article published on February 2009 on the investment council website...................................................................................................................................................53 annex 4.3: Entrepreneurs believe they have a good knowledge of the permit legislation ...............................................................53 annex 4.4: total cost of obtaining permits for all smEs in 2008 ......................................................................................................54 5. lICEnSIng ....................................................................................................................................................................................................56 5.1. Key findings...............................................................................................................................................................................56 5.2. licensing: the legal framework includes a number of good practices.......................................................................................56 5.3. license coverage and frequency: the short validity of licenses is problematic ...........................................................................58 5.4. license administration: the Kyrgyz republic outperforms most of its neighbors, yet smEs still bear a big burden ...................61 5.5. recommendations ....................................................................................................................................................................63 annex 5.1: indicative list of license issuing agencies and of types of activities subject to licensing (2010) .....................................64 annex 5.2: total cost of obtaining licenses for all smEs in 2008......................................................................................................66 6. tEChnICal REgulatIOnS......................................................................................................................................................................68 6.1. Key findings...............................................................................................................................................................................68 6.2. technical regulations: legislation has evolved positively following accession to the WtO membership, but implementation is slow...............................................................................................................................................................68 1. ExEcutivE summary 3 6.3. mandatory certificates hinder the development of small and medium companies ..................................................................73 6.4. the share of small and medium companies obtaining voluntary certificates of conformity remains very small........................78 6.5. recommendations ....................................................................................................................................................................79 annex 6.1: certification schemes.....................................................................................................................................................80 annex 6.2: total cost of the certification procedure for all smEs in 2008.........................................................................................81 annex 6.3: list of isO certified companies in the Kyrgyz republic ...................................................................................................82 7. InSPECtIOnS ...............................................................................................................................................................................................84 7.1. Key findings...............................................................................................................................................................................84 7.2. despite recent reform, the legislative framework is not based on contemporary practice in the conduct of inspections..........85 7.3. perceived risk is not a criterion in the selection of businesses for inspection..............................................................................90 7.4. the frequency of inspections dropped during the moratorium, but this respite was not used to initiate reform ......................93 7.5. the majority of inspections are performed by the four most active inspectorates.....................................................................94 7.6. information on technical requirements is not always readily available to entrepreneurs ...........................................................95 7.7. the sanctions used do not encourage compliance....................................................................................................................96 7.8. the existing system is costly, for both businesses and inspectorates..........................................................................................97 7.9. Frequent inspections do not guarantee safety...........................................................................................................................98 7.10. recommendations..................................................................................................................................................................99 annex 7.1: state inspectorates and inspection agencies................................................................................................................100 annex 7.2: legislation governing inspections as of december 2009 ............................................................................................101 annex 7.3: incidence of inspections by state inspectorates and other agencies before, during, and after the moratorium ..........102 annex 7.4: small and medium enterprises’ estimations of their knowledge of inspections legislation..........................................103 annex 7.5: the labor cost of inspections........................................................................................................................................104 8. taxatIOn ................................................................................................................................................................................................. 106 8.1. Key findings.............................................................................................................................................................................106 8.2. legal framework: the new tax code is an important step in improving the tax system, but additional reforms are needed....106 8.3. context: tax revenues in the Kyrgyz republic are growing ......................................................................................................113 8.4. survey results: tax accounting and compliance cost businesses an estimated Kgs3.3 billion ($88 million) in 2008.............114 8.5. small and medium companies bear the greatest burden in fulfilling mandatory reporting requirements...............................116 8.6. businesses with a small turnover bear a comparatively heavier burden in terms of tax accounting and mandatory reporting ... 118 8.7. inspections are a heavy burden and are not sufficiently risk-focused......................................................................................119 8.8. the tax system discourages “graduation” from the patent regime to the simplified tax regime..............................................122 8.9. recommendations ..................................................................................................................................................................128 annex 8.1: Eligible activities under the voluntary tax patent regime ..............................................................................................129 annex 8.2: taxes and rates applicable under each of the four tax regimes ....................................................................................134 annex 8.3: number of reports to be submitted to state tax service annually by small and medium companies under the old and the new tax code ........................................................................................................................................................135 annex 8.4: annual labor cost of tax compliance for smEs.............................................................................................................136 annex 8.5: annual labor costs of tax audits ...................................................................................................................................139 9. SuRvEy MEthOdOlOgy...................................................................................................................................................................... 140 annEx 1. aCCESS tO FInanCE................................................................................................................................................................ 146 annEx 2. FOREIgn tRadE ........................................................................................................................................................................150 4 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Foreword and aCknowledgements IFC, in partnership with the Swiss Government, presents the results of the first Survey of the investment climate in the Kyrgyz Republic. The Survey has been undertaken by IFC’s Kyrgyz Republic Investment Climate Project. The objective of this Survey was to assess the existing conditions for doing business in the Kyrgyz Republic in 2008 and to develop recommendations for improving them. This report is based on the results of a Survey of managers of about 2,000 small and medium enterprises (SMEs), conducted in May – August 2009, representing all regions of the country. Besides small and medium companies, the survey also included the sub-populations of individual entrepreneurs and farmers. Detailed information on the realities of the investment climate that are faced by these three segments of the population is pre- sented here; it is hoped that the empirical data from this Survey will be used by various stakeholders to stimulate the investment climate and make administrative procedures more efficient and transparent. Since it began operating, the IFC Kyrgyz Republic Investment Climate Project has benefited from close interaction with many public and private institutions operating in the Kyrgyz Republic, as well as a number of international organizations. The project would like to thank the Ministry of Economic Regulation, the State Tax Service under the Government of the Kyrgyz Republic, and the State Department for Sanitary and Epidemiological Control under the Ministry of Health of the Kyrgyz Republic with whom the project signed a Memorandum of Understanding most in 2009. The project would also like to extend its gratitude to the Secretariat of the Investment Council under the President of the Kyrgyz Republic with which it developed a longstand- ing relationship, and to the State Statistic Committee of the Kyrgyz Republic, which has provided enormous support during the survey implementation and report writing process. Numerous individuals and organizations contributed generously to the report, including the World Bank (Paulo Guilherme Correa, Ayse Boybeyi) and IFC (Christopher Miller, Wendy Jo Werner, Jacqueline Coolidge, Alberto Criscuolo, Sanjar Ibragimov, Jan Loeprick, Denis Torkhov, Alisher Isaev, Fakhriyar Jabbarov, Madina Nurmatova, Kateryna Onul, Serhiy Osavolyuk, Sanjukta Mukherjee, Olga Morozova and Ernst Mehrengs). Bishkek, 2010 1. ExEcutivE summary 5 list oF abbreviations APEC – Asia-Pacific Economic Cooperation BEEPS – Business Environment and Enterprise Performance Survey EBRD – European Bank for Reconstruction and Development EU – European Union FIAS – Foreign Investment Advisory Service GDP – Gross Domestic Product GHP GMP – Good Hygiene Practice and Good Manufacturing Practices HACCP – Hazard Analysis and Critical Control Points IEC – International Electrotechnical Organization IEs – Individual Entrepreneurs IFC – International Finance Corporation ISO – International Organization for Standardization KGS – Kyrgyz Som LVL – Latvian lats METR – Marginal Effective Tax Rate NISM – National Institute for Standards and Metrology OECD – Organization for Economic Co-operation and Development SMEs – Small and Medium Enterprises SMCs – Small and Medium Companies UNDP – United Nations Development Programme USAID – United States Agency for International Development VAT – Value Added Tax WHO – World Health Organization WTO – World Trade Organization $ – U.S. dollar name oF government agenCies Pursuant to the Presidential Decree No. 425 “On Measures to Ensure the Implementation of the Law of the Kyrgyz Republic on the Struc- ture of the Government,” adopted October 26, 2009: • The State Committee on Taxes and Fees was reorganized into the State Tax Service • The Ministry of Economic Development and Trade was reorganized into the Ministry of Economic Regulation The old and new names of agencies are used throughout the report interchangeably, even when the report refers to events, which took place prior to the adoption of Presidential Decree No. 425. 1. Executive summary iFc study of investment climate as seen by small and medium Enterprises in the Kyrgyz republic This report examines the key challenges faced by small and medium enterprises (SMEs) in the Kyrgyz Republic, in an attempt to identify the issues and areas in most urgent need of reform. The IFC Study of Investment Climate as seen by Small and Medium En- terprises in the Kyrgyz Republic1 (the “Survey”) is the first survey of the investment climate in the Kyrgyz Republic conducted by IFC (following the publication of similar surveys throughout the region since 2000, including in Azerbaijan, Georgia, Tajikistan, Ukraine, and Uzbekistan), and analyzes the views of 2,010 SMEs in three separate categories: individual entrepreneurs (667); small and medium companies (711); and farmers (632). Respondents’ views were sought on the key administrative procedures encountered in either establishing or running a business, during January–December 20082. This report presents the key findings of the Survey, and incorporates background information on the policy, legal, and regulatory frameworks currently in force. Recommendations to policymakers are included at the end of each chapter, on the basis of analysis of both the regulatory framework and Survey results. 1 IFC (2010) “Study of Investment Climate as seen by Small and Medium Enter- prises in the Kyrgyz Republic”. 2 The reference period of the Survey was January–December 2008 for most regulatory procedures. All U.S.dollar ($)/Kyrgyz Som (KGS) comparisons are therefore calculated on the basis of the average exchange rate in force during this period, i.e.: $1 = KGS36.57. For inspections, the reference period of the survey was January 2008 – March 2009. 1. ExEcutivE summary 7 The big picTure: high-level findings of The ifc survey of small and medium enTerprises in KyrgyzsTan • Small and medium enterprises cited high tax rates, macroeconomic instability, power outages, and corruption as the main obstacles to the development of their businesses. • Individual entrepreneurship and the formation of small companies are both increasingly popular means of establishing a business, while the number of medium-sized companies formed between 2002 and 2008 has stagnated. • Medium-sized companies face a significantly more difficult regulatory environment than other smaller business, in terms of the range and costs of the administative and compliance obligations to which they are subject. Farmers, however, enjoy the lightest regulatory burden. • Individual entrepreneurs bear the greatest regulatory burden, relative to turnover. For example, the cost of obtaining permits in 2008 represented one percent of the total turnover of individual entrepreneurs (including official and unof- ficial payments, but excluding labor costs), in comparison with the 0.16 percent of total turnover paid by SMEs. • Between 24 and 44 percent of all small businesses (i.e., individual entrepreneurs, small and medium companies and farmers) admitted to having given unofficial payments, gifts, entertainment, or other services in an attempt to expidite the process of obtaining mandatory permits, licenses, and certificates, or to pass inspections. The incidence of such “unof- ficial payments” in the Kyrgyz Republic is among the highest of the post-Soviet countries. • The incidence of regulatory procedures shows significant regional variation: businesses in Issyk-Kul are subject the most onerous procedures in obtaining permits and licenses, while businesses in Osh city face the most stringent inspection regime. • The procurement of permits is the most burdensome regulatory procedure for SMEs, in terms of both compliance obliga- tions and cost: the total cost to the private sector of complying with regulations governing the procurement of permits was KGS555.4 million ($15.1 million) in 2008 (including official and unofficial payments and labor costs). This represents close to 0.37 percent of national gross domestic product (GDP). • The average validity of licenses is short, at 22.7 months, on average, for small and medium companies and 13.1 months for individual entrepreneurs. Given that such licenses are often crucial to an enterprise’s core business, this makes for an insecure environment in terms of entrepreneurial activity. • Compliance with certification requirements is the most lengthy and expensive procudure faced by small and medium companies, and the procedure most likely to hinder their development. The 17 percent of small and medium companies obliged to complete such procedures in 2008 spent, on average, KGS14,583 ($399) in doing so (including official and un- official payments, but excluding labor costs). • Inspections place an onerous burden on all businesses, and are not risk focused. Seventy three percent of individual entrepreneurs, 69 percent of small and medium companies, and 29 percent of farmers were subject to investigation by at least one inspectorate in 2008, despite the government imposing a moratorium* on inspections between April 25 and December 31, 2008. • Tax administration is the most burdensome of all procedures for small and medium-sized businesses. Individual en- trepreneurs, small and medium companies and farmers spent KGS11,740 ($321), KGS79,054 ($2,162) and KGS6,010 ($164), respectively, in meeting their tax accounting and reporting obligations. This represents approximately 10 percent of individual entrepreneurs’ total profit, 13 percent of small and medium companies’, and 14 percent of farmers’. The total labor cost to SMEs in meeting their tax and reporting obligations (including tax accounting and mandatory reporting, but excluding tax audits) was in excess of KGS4 billion in 2008, representing 2.9 percent of national GDP, and exceeding the total costs of all other regulatory procudures together. * Presidential Decree No. 145 “On the Moratorium on Inspections by the Tax Authorities of the Kyrgyz Republic, and Reduction of Inspections of Business Entities Imple- mented by Other Authorized Inspectorates of the Kyrgyz Republic,” adopted April 22, 2008 and implemented between April 25 and December 31, 2008. 8 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs recent reforms have had a beneficial effect Medium-sized companies are also the category showing on the investment climate, but tangible the greatest degree of stagnation since 2002, in comparison improvements for most benefits are limited with the rapid growth recorded in the numbers of individual A number of regulatory reforms have been implemented entrepreneurs, small companies, and farmers registering a since 2007, particularly in respect of regulation governing business. the procurement of permits, as well as inspections, licenses, business registration procedures, and taxes. Further reform The dynamic growth witnessed in these categories, coupled is currently in development. The benefits of such reform are with the low corresponding growth of medium-sized com- clear, with the Kyrgyz Republic showing an improved ranking panies, points to an intrinsic problem in both the tax system in the IFC–World Bank Doing Business 2010 report.3 However, and the regulatory regime. Neither is designed or managed Survey results make clear that many of these reforms have yet in a way likely to encourage individual entrepreneurs and the to deliver tangible benefits or change for many businesses, smallest companies to “graduate” from the tax and regulatory in practice. The proportion of businesses subject to certain procedures governing the operations of the smallest entities regulatory procedures remains high, particularly among indi- (i.e., individual entrepreneurs operating under the patent tax vidual entrepreneurs and small and medium companies, with regime) to those governing medium-sized and larger enter- medium-sized companies, in particular, bearing the greatest prises. This is detrimental to the Kyrgyz Republic as a whole burden in terms of compliance (Chart 1.1). since medium-sized companies employ more staff, generate more tax revenue, and produce more exports than individual Chart 1.1: Medium-sized companies bear the greatest entrepreneurs and farmers. regulatory burden All of these factors point to a clear need for (i) the introduc- Percentage of businesses subject to various procedures in 2008 tion of further reform; and (ii) the effective on-the-ground 80% 77% implementation of reforms passed in recent years. Such im- 73% 70% 69% provements in the investment climate would increase the re- silience of the national economy and individual businesses to 60% external shocks (such as the current global economic down- 50% turn), as well as delivering direct benefits to business through reduced administration and compliance costs. 40% 34% 31% 30% 29% 29% Although the absolute cost of regulatory procedures and tax 26% 24% 22% administration is higher for small and medium companies 20% 13% 14% 16% (Chart 1.2), the proportional cost of regulatory procedures 10% and tax compliance relative to profit is overall higher for 3% 1% farmers and individual entrepreneurs than for small and 0% Inspections Permit Licensing Certi cation medium companies (Chart 1.3). In general, the costs of regula- tory and tax compliance are regressive, with the result that Individual entrepreneurs Medium companies businesses with low turnover and/or profit bear a proportion- Small companies Farmers ately heavier burden. 3 The IFC–World Bank Doing Business 2010 report (which analyzes the regulatory conditions for starting, doing, and closing a business worldwide) ranked the Kyrgyz Republic in 14th place of 183 countries surveyed. 1. ExEcutivE summary 9 Chart 1.2: Small and medium companies bear the highest absolute cost of regulatory procedures and tax administration average cost of the main regulatory procedures and tax administration (KgS) 80000 Individual 70000 Entrepreneurs 60000 Small and medium companies 50000 Farmers 40000 30000 20000 10000 0 Tax administration Permit Mandatory Registration License procedure Inspections procedure certi cation procedure procedure Chart 1.3: the proportional cost of regulatory procedures relative to profit is overall higher for farmers and individual entrepreneurs than for small and medium companies average cost of main regulatory procedures and tax administration, relative to profit 15% 13.5% 13.2% Individual Entrepreneurs 11.9% 12% Small and medium companies 9.7% 9% Farmers 7.0% 6% 5.6% 4.1% 3.2% 3.5% 3% 2.5% 2.3% 2.5% 1.4% 1.4% 0.8% 0% Cost of permit Cost of license Cost of mandatory Cost of Cost of Cost of tax procedure procedure certi cation procedure registration inspections administration The total cost of tax and regulatory compliance for SMEs (in- al GDP. This total, moreover, does not include indirect costs, cluding official and unofficial payments and the labor costs of such as delayed market entry, reduced competitiveness, and staff working on these procedures) is a significant burden on revenue or profit lost due to the interruption or suspension of businesses, and amounted to KGS5.4 billion ($147.6 million) for business operations. Of all procedures, tax administration rep- all SMEs nationwide in 2008 – equal to 3.69 percent of nation- resents the greatest compliance burden for SMEs (Chart 1.4). 10 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 1.4: tax administration represents the greatest registration: additional reforms are needed, compliance burden nationally, followed by permit beyond the implementation of the “one-stop procurement shop” principle The adoption of the Law “On State Registration of Legal Enti- total national cost of key procedures (2008) ties and their Branches,”5 and Government Resolution No. 182,6 4 500 000 000 3.5% together introduced the principle of the “one-stop shop” in 4 000 000 000 3.0% the registration of legal entities in the Kyrgyz Republic, reduc- 3 500 000 000 2.5% ing the number of stages involved as well as the number of 3 000 000 000 2 500 000 000 2.0% documents entrepreneurs were required to submit. While in- 2 000 000 000 dividual entrepreneurs are still required to register separately 1.5% 1 500 000 000 with the State Tax Service, this procedure does allow the 1.0% 1 000 000 000 simultaneous registration of individual entrepreneurs with 500 000 000 0.5% both the State Statistics Committee and the Social Fund. 0 0% Tax Permit Inspec- Licensing Regist- Certi - Since the reference period of the Survey was January–De- administ- procu- tions ration cation ration rement cember 2008, Survey results do not fully capture the impact of these reforms. During 2008, small and medium companies Aproximate total cost 2008 (KGS) As a percentage of GDP still faced lengthy procedures in registering a business, spend- ing, on average, 14 days on the preparation and submission of documents, and 15 days on obtaining registration. Such Key Survey findings, together with analysis of relevant aspects procedures regularly involved the payment of unofficial fees of the regulatory framework, are summarized below. and/or gifts, with 22 percent of small and medium companies responding to the Survey admitting they had done so during all procedures are subject to the solicitation the registration process. Research among focus groups also and payment of gifts, entertainment, and suggests that the registration of small and medium compa- unofficial fees nies remained complex throughout 2009, with applications Thirty five percent of individual entrepreneurs and 27 frequently refused on the grounds of minor errors (includ- percent of small and medium companies cited corruption ing, for example, minor discrepancies between Russian and as being one of the three most serious impediments to the Kyrgyz versions of documents). Moreover, the percentage of development of their business. Survey results also indicate small and medium companies re-registering in 2008 was rela- that between 24 and 44 percent of individual entrepreneurs, tively high (at 9 percent of all small and medium companies small and medium companies, and farmers admitted to registering that year), indicating a case for the reform of the having provided gifts, entertainment, services, or unofficial current grounds for and legislation governing mandatory re- payments in an attempt to speed up the process of obtain- registration. ing permits, licenses, or certificates, or to pass inspections. Individual entrepreneurs and small and medium compa- the procurement of permits is the most nies estimated spending between nine and 10 percent of onerous regulatory procedure turnover on such unofficial payments to state agencies in Some aspects of the permit procurement system have im- order to get things done. If this is borne out in practice then proved in recent years: the number of permits in force has it would appear that the rate of the “corruption tax” is even been reduced, from 110 in 2004 to 67 in 20097. Since 2004 higher than the rate of the single tax on turnover, quite apart these documents have all been recorded in a state “Permit from the labor and other direct costs involved in finding “unofficial” solutions to regulatory and compliance issues.4 Further reduction of the existing regulatory and compliance burden might help to alleviate this. 5 Law of the Kyrgyz Republic No. 57 “On State Registration of Legal Entities and their Branches,” adopted February 20, 2009, implemented April 2009. 6 Government Resolution No. 182 “On the Procedure for Cooperation between State Authorities for the Registration of Legal Entities and their Branches under the Prin- 4 The rate of the single tax on turnover is four percent for businesses engaged in ciple of the One-Stop Shop,” adopted April 23, 2008, implemented May 2008. manufacturing, trade, and agricultural processing, and six percent for all other 7 The “Register of Permits” issued by the executive bodies and their agencies, 2004 activities. and 2009. This excludes permits issued by local self government. 1. ExEcutivE summary 11 Register”8. Both the principles of the one-stop shop and the Survey results found the validity of licenses issued to be “silence is consent” were adopted in respect of construction shorter than provided for under current legislation: the valid- permits in 2008. Nonetheless, there is no single source of leg- ity of licenses for individual entrepreneurs and for small and islation governing the issue and/or procurement of permits, medium companies is, de facto, 13 and 23 months, respec- and the list of permits included in the Permit Register is not tively. The brevity of license validity was cited by respondents comprehensive. as one of the key problems of the current licensing proce- dure, which they also feel to be complicated: over 50 percent Recent reforms notwithstanding, almost 25 percent of in- of those businesses subject to licensing procedures indicated dividual entrepreneurs and small and medium companies that they had found current procedures to be so (Chart 1.5). were obliged to undergo procedures for the procurement of various permits in 2008 (Chart 1.1), as were 13 percent of technical regulation: the slow pace of reform farmers. Survey results also showed considerable regional is hampering the development of small and disparities here, with enterprises in Jalalabat least likely to be medium companies subject to permit procedures, and businesses in Issyk-Kul the The Kyrgyz Republic initiated the reform of its technical regu- highest. lation system in 2004. This process is currently in transition, and it is anticipated that updated regulation will be adopted Survey respondents felt permit procurement procedures to by December 2012. Current requirements not re-adopted be the most onerous regulatory procedure that they were at that point will either cease to be effective or will become forced to undergo (Chart 1.5), and it would also appear that voluntary according to the “guillotine” principle provided these give rise the greatest cost (in terms of total costs na- under the Law of the Kyrgyz Republic “On the Fundamentals of tionally, Chart 1.4): both of which factors indicate a need for Technical Regulation”.11 State standards relating to safety issues further reform. New legislation governing the procurement will remain mandatory during the transition period. Reform is and dispensation of permits and licenses is currently being proceeding at a slow pace, however, with only three technical drafted as this report goes to press9. regulations adopted by late 2009. Moreover, although the list of products subject to mandatory certification and conformi- the short validity of licenses, and the ty was reduced in number from 7,000 items in 2004 to 2,000 complexity of procedures relating to their in 2009, this list, nonetheless, still includes a number of low- procurement, are the main issues associated risk products (shoes, glass bottles, etc.), as well as foodstuffs, with current licensing regulation indicating scope for further reform. Some aspects of the licensing system have improved in recent years: the number of licenses in force was reduced to a As a result, mandatory certification remains a burdensome total of 30 in 201010, and a maximum lead time (of 30 days) in- procedure, particularly for small and medium companies, troduced, together with limits on fees to be charged. Current with 17 percent of small and medium companies (mostly legislation also stipulates that all licenses must be issued for a active in the industry/production and wholesale sectors) minimum duration of two years, unless provided for by law. being subject to such procedures in 2008, each obtaining an average of seven certificates. Despite recent reforms, the incidence of businesses having to undergo various licensing procedures remains high, with 22 Further reform of inspections regulation percent of individual entrepreneurs and 15 percent of small is necessary, and implementation of the and medium companies obliged to undergo various licensing inspections law must be improved procedures in 2008. As is the case for permit procurement, re- The adoption of the Inspections Law in May 200712 repre- gional disparities are evident, with the incidence of licensing sented a clear improvement on the absence of regulation procedures highest in Issyk-Kul and lowest in Jalalabat. that had previously existed in this area. The Inspections Law defines the types of inspections that may be conducted, as 8 Government Resolution No. 103 “On the Approval of the Register of Permits issued by the Executive Bodies and their Agencies,” adopted February 25, 2004. 11 Law of the Kyrgyz Republic No. 67 “On the Fundamentals of Technical Regulation,” 9 May 15, 2010. adopted May 22, 2004. 10 Presidential Decree No. 435 “On the Improvement of the State Regulation on Entre- 12 Law of the Kyrgyz Republic No. 72 “On Procedures for Inspecting Business Entities,” preneurship,” adopted December 9, 2008. adopted May 25, 2007, implemented May 1, 2008. 12 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs well as their frequency and duration, and obligatory aspects the current tax system does not encourage of the inspections process (including advance notification, business growth the production of an inspections report, and so on). However, Following the adoption of the new Tax Code, (implemented this law fails to introduce certain aspects of international best since January 1, 2009),13 the total number of taxes paid and/ practice and contemporary principles, including (i) the risk- or collected by businesses under the general tax regime based selection of businesses to be inspected; and (ii) the was reduced. Many local taxes, in particular, were abolished, introduction of checklists to determine a business’s level of substantially simplifying the tax system for the majority of compliance. Survey results also indicate that many of the pro- SMEs and drastically reducing administration costs for local visions of the Inspections Law (including, in particular, advance tax authorities. The reduction in the rate of the single tax notification) are not observed in practice. on turnover made the simplified regime more attractive to businesses, and the VAT rate was reduced from 20 to 12 Survey results indicate a high incidence of inspections, sug- percent. Further reform is needed, however. In particular, the gesting that risk factors are not sufficiently considered in the combination of VAT and the new sales tax puts an excessive selection of businesses for inspection, and indicating that re- financial burden on businesses, and the patent tax regime sources are not being targeted at those businesses most likely and simplified tax regime need to be further reformed in to present the greatest risk to society, public health, and the order to encourage graduation from the former to the latter. environment, as well as indicating a waste of resources that is Survey results indicate that the simplified tax regime did not, expensive for both government and business. Further reform during 2008, play its intended role as an intermediate regime is therefore urgently needed. between the patent tax regime and the general tax regime, resulting in a constraint on both business growth and tax revenue collection. The simplified regime was, in fact, used by only 10 percent of small and medium companies and individual entrepreneurs eligible to do so. Survey results also indicate the labor costs involved in tax compliance to be very high (and higher than the labor costs associated with any other regulatory procedures covered by the Survey), indicat- ing a clear case for the simplification of current tax administra- tion and mandatory reporting procedures. Chart 1.5: Businesses believe the procurement of permits to be the most complex procedure to which they are subject Percentage of businesses rating procedures as “Rather difficult” or “very difficult” 80% 69% Individual 70% Entrepreneurs 63% 61% 60% 59% 58% 59% Small and medium 57% companies 50% 46% 47% Farmers 45% 45% 42% 40% 39% 33% 30% 21% 20% 10% 0% Permits Inspections Tax administration Licenses Registration Technical regulations 13 The Tax Code of the Kyrgyz Republic, adopted October 17, 2008, implemented January 1, 2009. 1. ExEcutivE summary 13 key reCommendations One of the key objectives of the IFC Study of Investment Climate as seen by Small and Medium Enterprises in the Kyrgyz Republic is to identify precisely those areas in greatest need of reform, in order to reduce the regulatory burden and enable policy makers in the Kyrgyz Republic to establish priorities to encourage new business development and growth, resulting in higher employment and reducing poverty. Data contained in the Survey provide a basis on which the most viable potential reforms might be assessed. Table 1.1, below, summarizes the key recommendations arising from the Survey on that basis. More detailed coverage of each is available in relevant chapters. table 1.1: IFC key recommendations call for the further simplification of procedures and the full implementation of the reforms passed in previous years REgIStRatIOn 1. introduce the “silence is consent” principle into registration legislation, such that once an applicant has submitted all documents necessary for registration, the failure of the relevant registration agency to respond with a decision within a given timeframe shall be deemed to constitute approval. 2. amend simultaneous registration with the state tax service under the “one-stop shop” facility to include individual entrepreneurs. 3. cancel the requirement for re-registration in the event of a company increasing or decreasing its charter capital, and in the event of a business changing its name or address. PERMItS 1. develop a draft permit law, to include a comprehensive permit register. 2. reduce the burden of permit renewal by (i) extending the validity period of permits issued; and (ii) by simplifying the renewal procedure. 3. Extend the “silence is consent” and the “one-stop shop” principles to other permits in addition to construction permits. 4. adopt self-certification as an alternative to the issue of permits for businesses and/or business activities that pose little risk. lICEnSIng 1. implement the provisions of current licensing legislation, particularly in respect of the terms of validity of licenses. 2. introduce a statutory five-year minimum validity for all licenses, and introduce additional permanent licenses, to be revoked only in the event of an infringement. 3. identify opportunities to further reduce the number of activities subject to licensing by excluding activities that present limited risk to public health and safety: potential examples might include real estate valuation and cargo transportation. 4. adopt the “silence is consent” principle. 14 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs tEChnICal REgulatIOnS 1. remove low-risk products and foodstuffs from the list of products subject to mandatory certification and declarations of conformity (e.g., shoes, glass bottles, etc). 2. accelerate the process of the adoption and implementation of technical regulations in line with best international safety standards, norms, and rules, consistent with the provisions of the Law on the Fundamentals of Technical Regulation, 2004. 3. provide legal requirements to allow the gradual transition from the ex ante control of food product samples (mandatory food product certification) to (i) the control of the food production process implemented under the “hazard analysis and critical control points” (haccp) and based on good hygiene practice and good manufacturing practices (ghp gmp); and (ii) to ensuring food traceability. InSPECtIOnS 1. introduce the principle of risk-based selection for the identification of businesses to be inspected. 2. introduce in the legislation the obligation for all inspectorates to conduct inspections on the base of “checklists” and the obligation to develop inspection manuals outlining the inspection procedure. 3. revise and update the compliance requirements of all inspectorates in order that these reflect directly the interests of public health, safety, and the environment, are consistent with the institutional context of the Kyrgyz republic, and reflect international best practice. 4. improve the practical, hands-on implementation of the Inspections Law of 2007. taxatIOn 1. building on the amendments introduced under the new tax code, undertake further reform of the simplified tax regime to make it more attractive in terms of its financial and administrative burden. 2. Once the simplified regime has been further reformed, reform the voluntary patent regime. a medium-term objective in this respect might be to revise the upper limit of the patent tax regime (based on turnover) in order to limit this facility to the smallest enterprises. 3. implement a risk-based approach to the identification of businesses for tax audits, and to the planning and implementation of such tax audits. 4. publicize the availability (and key principles of) the simplified regime. materials for this purpose should include explicit information to help smEs determine the tax regime most appropriate to their business. 5. reduce the frequency of many filing requirements. it is recommended that businesses submit filings on a quarterly base for all taxes, with the exception of vat. 6. simplify reporting formats (by merging reports where appropriate, eliminating discretionary annexes etc.); eliminate the duplication of information requested by various agencies; and restrict to a minimum the amount of information requested by such agencies. 7. Encourage the voluntary filing of returns and reports online. 1. ExEcutivE summary 15 Portfolio of recommendations to improve the investment climate in the kyrgyz republic Size of bubble corresponds to expected impact Improves business compliance with norms and rules and 7 improves safety 4 Status along the process: Reduces informality, promotes 2 faster business entry 1 8 3 Promotes business 4 7 6 competitiveness and 11 10 productivity 9 5 Short term Medium term timing: (1-2 years) (3-5 years) time required to realize positive impact reCommendations registration 1 Introduce “silence is consent” principle into registration legislation 2 Amend simultaneous registration with State Tax Service under the “one-stop shop” facility to include individual entrepreneurs 3 Cancel requirement for re-registration in the event of a company increasing or decreasing its Charter Capital, and in the event of a business changing its name or address Permits 4 Develop a draft Permit Law, to include comprehensive Permit Register 5 Reduce burden of permit renewal by (i) extending validity period of permits issued; and (ii) by simplifying renewal procedure 6 Extend “silence is consent” and “one-stop shop” principles to other permits in addition to construction permits 7 Adopt self-certification as alternative to issue of permits for businesses and/or business activities that pose little risk liCensing 8 Implement provisions of current licensing legislation, particularly in respect of terms and validity of licenses 9 Introduce statutory five-year minimum validity for all licenses, and introduce additional permanent licenses, to be revoked only in event of infringement 10 Identify opportunities to further reduce number of activities subject to licensing (e.g., real estate valuation and cargo transportation) 11 Adopt the “silence is consent” principle Source: IFC Survey of the Investment Climate in the Kyrgyz Republic as seen by SMEs, 2010 16 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Portfolio of recommendations to improve the investment climate in the kyrgyz republic Size of bubble corresponds to expected impact 17 22 14 Improves business compliance with norms and rules and 16 improves safety 15 21 13 20 Status along the process: Reduces informality, promotes faster business entry 18 22 14 15 Promotes business 19 13 12 competitiveness and 24 25 productivity 23 17 21 16 Short term Medium term timing: (1-2 years) (3-5 years) time required to realize positive impact reCommendations teChniCal regulations 12 Remove low-risk products and foodstuffs from list of products subject to mandatory certification and declarations of conformity 13 Accelerate process of adoption and implementation of technical regulations in line with best international safety standards, norms, and rules 14 Provide legal requirements to allow gradual transition from the ex-ante control of food product samples (mandatory food product certification) to control of food production process insPeCtions 15 Implement principle of risk-based selection for identification of businesses to be inspected 16 Introduce in legislation the obligation for all inspectorates to conduct inspections on the base of “checklists” and the obligation to develop inspection manuals outlining the inspection procedure 17 Revise and update compliance requirements of all inspectorates 18 Improve practical, hands-on implementation of Inspections Law of 2007 taxation 19 Undertake further reform of simplified tax regime to make it more attractive in terms of its financial and administrative burden 20 Once the simplified regime has been further reformed, reform voluntary patent regime. A medium-term objective in this respect might be to revise upper limit of the patent tax regime (based on turnover) in order to limit this facility to smallest enterprises 21 Implement risk-based approach to identification of businesses for tax audits 22 Publicize availability (and key principles) of simplified regime 23 Reduce the frequency of many filing requirements 24 Simplify reporting formats 25 Encourage voluntary filing of returns and reports online Source: IFC Survey of the Investment Climate in the Kyrgyz Republic as seen by SMEs, 2010 1. ExEcutivE summary 17 investment Climate in the kyrgyz republic as seen by small and medium enterprises report: organization and structure The introductory chapter to this report paints a general picture of the macro-economic situation in the Kyrgyz Republic, as well as providing a data-driven description of each of the three categories of enterprises covered in the Survey – individual entrepreneurs, small and medium companies, and farmers. Chapters 3 through 8 provide a detailed examination of Survey findings on a variety of key topics, and each chapter begins with an explanation of the legal and regulatory framework of that issue. Chapter 9 provides an overview of the survey methodology. Finally, the Data Annex presents additional findings on issues covered under “Access to Finance” and “Foreign Trade”. 2. Business Environment reforms improved the business environment but additional measures are needed to foster continued growth 2.1. the imPaCt oF the global eConomiC Although the Kyrgyz Republic has since independence imple- Crisis in the kyrgyz rePubliC remains mented reforms to improve the business environment, growth relatively limited between 2000 and 2008 was mostly due to favorable external From 2000 to 2008, the Kyrgyz economy grew at an average factors such as a steady increase in the price of gold (Chart 2.2), annual rate of 4.8 percent – this despite zero growth in 2002 the main commodity of the Kyrgyz Republic, strong growth of (the result of an accident at the Kumtor gold deposit) and Russia and other trading partners and a significant increase in economic contraction in 2005 (falling gold output and politi- remittances, which boosted consumption (Chart 2.3). cal instability). Growth peaked in 2007 and 2008, with rates of 8.5 percent and 7.6 percent, respectively (Chart 2.1). Yet the Chart 2.2: gold exports receipts have more than Kyrgyz Republic’s economy has still not fully recovered from doubled between 2002 and 2008 the collapse of the Soviet Union. GDP in 2008 was still only Evolution of gold exports receipts and price of gold per troy 96.4% of the 1990 level. ounce, 2002-2008 thousand $ $ Chart 2.1: the Kyrgyz economy has grown strongly 500 000 1000 between 2002 and 2008 450 000 872.4 900 Gold exports 400 000 800 receipts Real gdP growth in percent (2000-2008) (thousand $) 350 000 700 11% 300 000 604.3 600 Price of gold per troy ounce on 250 000 500 9% 8.5% the international 7.6% 200 000 409.5 400 market ($) 7.0% 7.0% 150 000 310.1 300 7% 5.4% 100 000 200 463 498 205 966 287 389 5.3% 162 759 5% 50 000 100 3.1% 0 0 3% 2002 2004 2006 2008 1% Source gold exports: State Statistics Committee (2005) “Foreign Trade of the Kyrgyz Republic 2002-2004”; State Statistics Committee (2009) “Foreign Trade of the Kyrgyz Republic 2004-2008”. 0.0% -0.2% Source gold prices: London Bullion Market Association, Gold Fixings, -1% at http://www.lbma.org.uk/?area=stats&page=gold/2008monthlygold. 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IMF (2009) “Country Report No.09/209,” July; IMF (2007) “Country Report No. 07/193,” June; IMF (2006), “Country Report No. 06/235,” June; IMF (2004) “Country Report No. 04/200,” July. 2. businEss EnvirOnmEnt 19 Chart 2.3: Remittances have decreased by over 34 Chart 2.4: the processing/industry sector is the only percent as a result of the global economic crises sector that contracted in 2009. growth was highest in the agriculture sector Workers remittances 2005-2009 (million $) growth rate of the main sectors of the economy 1500 1391.1 (January-december 2009) 10% 1200 8% 7.4% 953.4 6.3% 6% 900 4.7% 4.2% 4% 686.7 610 2% 600 0.6% 448.7 0% 402.5 -2% 300 -4% -6% 0 2005 2006 2007 2008 2008 2009 -8% -7.8% half year half year -10% Source: National Bank of the Kyrgyz Republic (2009) “Balance of Payments of the Kyrgyz Republic, Gross Gross Restaurant Mining Trade Processing first half of 2009,” October. output of output of and hotel industry turnover, industry construc- agriculture, services (actual car repair, (actual tion hunting volume consumer volume The impact of the global economic crisis on the Kyrgyz sector and forestry index) goods index) repair economy has thus far been relatively limited. The gold price rise from $87214 in 2008 to $1,126 in November 200915 com- Source: State Statistics Committee of the Kyrgyz Republic (2009) “Express Bulletin,” December 9. pensated for the decrease in exports receipts, which, in 2009, reached less than 80 percent of their 2008 level.16 The global economic crisis has had no apparent impact on Merchandise imports and remittances dropped 25 percent employment in the Kyrgyz Republic: unemployment fell by and 34 percent, respectively, in the first half of 2009. However, 8.6 percent in 2009.18 However, a 34% decrease in remittances real GDP growth remained positive in 2009 (2.3 percent17), likely had an adverse effect on living standards in a country mostly thanks to growth in the agriculture, telecommunica- where more than a third of the population (35 percent) lives tions and construction sectors. Meanwhile, the processing/ below the poverty line. industry sector declined 7.8 percent in 2009 (Chart 2.4) mostly due to the decline in export-oriented sectors such as textiles. Survey results indicate that processing/industry is also one This drop could be traced to an irregular supply of electricity of the sectors for which the regulatory burden is the highest. and declining demand on the part of key trading partners The percentage of processing/industry companies that had Russia and Kazakhstan. to obtain government mandated “certificates of conformity” in 2008 was higher than that of any other sector. It is there- fore important that the government continues to reduce the regulatory barriers that increase the costs of doing business in the Kyrgyz Republic. In addition, the Kyrgyz economy cur- rently relies mostly on agriculture and trade (Chart 2.5) and needs to diversify. Alleviating the regulatory burden for SMEs would help expand the industry/production sector, boosting the diversification of the Kyrgyz economy. 14 Per troy ounce. 15 London Bullion Market Association, Gold Fixings, at http://www.lbma.org.uk/?a rea=stats&page=gold/2008monthlygold. 16 State Statistics Committee of the Kyrgyz Republic (2010) “Express information” (preliminary estimates), January 16. 17 State Statistics Committee of the Kyrgyz Republic (2010) “Express information” 18 State Statistics Committee of the Kyrgyz Republic (2010) “Express information” (preliminary estimates), January 16. (preliminary estimates), January 16. 20 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 2.5: agriculture and trade are the biggest sectors of the economy Structure of gdP, 2008 net taxes on products 13.2% 25.8% agriculture, hunting and forestry Other 15.6% mining, 0.4% 11.3% manufacturing 8.4% transport and communications 2.2% hotels and restaurants, 1.3% 3.1% generation and distribution of electricity, gas and water 18.6% construction trade, repair of cars articles for personal use Source: National Bank of the Kyrgyz republic (2008) “Annual Report”. 2.2. the Private seCtor has grown Following the collapse of the Soviet Union, private sector signiFiCantly in the Past years, exCePt For enterprises sprung up and soon became a key part of the medium and large ComPanies Kyrgyz economy, driving economic growth. The Kyrgyz SME For the purposes of this survey, the SME sector of the Kyrgyz sector now accounts for 13.8 percent of total employment Republic is dis-aggregated into three categories: individual and 42.8 percent of GDP.19 In 2008, the private sector included entrepreneurs, small and medium companies and farmers 204,246 registered individual entrepreneurs, 11,988 small and (Table 2.1). medium companies and 1,631 large companies (Chart 2.6). table 2.1: definition of SME categories From 2002 to 2008 the number of registered farmers grew from 251,526 to 321,856, a 28 percent increase. Over the same SME SuB- dEFInItIOn period the number of registered private sector enterprises POPulatIOn grew 60 percent, from 130,746 to 216,617. However, the busi- individual a sole proprietor who owns an unincorporated ness population grew unevenly. From 2002 to 2008, the entrepreneur business by himself/herself. a person who solely owns a legal entity is not a sole propri- number of: etor under this definition. • individual entrepreneurs increased by 67 percent; small and a small and medium company in the produc- • small companies increased by 61 percent; medium tion sphere is a legal entity having a maximum • medium enterprises increased by two percent (there company of 200 staff; in the non-production sphere it is were only 19 more medium enterprises in 2008 than in a legal entity having a maximum of 50 staff. 2002); Farmer Owners of private agricultural farms, whether • large companies decreased by 17 percent (there were 79 they are sole proprietors or legal entities. fewer large companies in 2008 compared to 2002). 19 State Statistics Committee of the Kyrgyz Republic (2009) “Small and Medium Enterprises in the Kyrgyz Republic, 2004-2008”. 2. businEss EnvirOnmEnt 21 Chart 2.6: the number of private enterprises increased sharply from 2002 to 2008, except for medium and large companies Composition of the private sector, 2002 Composition of the private sector, 2008 (number of businesses registered) (number of registered businesses) Farmers (individual entrepreneurs and individual individual companies entrepreneurs entrepreneurs altogether) 122525 321856 204246 small companies, 6893 medium companies, 866 Farmers (individual 251526 large companies, 462 entrepreneurs and companies altogether) small companies, 11103 large companies, 383 medium companies, 885 Source: State Statistics Committee. Note: Individual entrepreneurs and small and medium companies include businesses active in the agriculture and fishing sector. The decrease in the share of medium and large companies In spite of the increase in small companies between 2002 in the overall private enterprise population between 2002 and 2008, the number of registered small and medium com- and 2008 can be partly explained by their more demanding panies per 1,000 inhabitants, 2.3, remains comparatively low. business environment. IFC survey results indicate that, during Ukraine, for example, has 7.5 companies per 1,000 inhabitants, this period, a greater percentage of medium-sized companies while Slovenia has 20 and Sweden more than 36. At about 53 were subject to regulatory procedures than small companies, percent of GDP20, the Kyrgyz informal sector is a much larger individual entrepreneurs and farmers (Chart 2.7). slice of the total economy than that of Europe, which partly ac- counts for the difference in the number of small and medium Power shortages and political instability further explain the companies. A comparison with other countries in the Eastern lack of growth. Medium and large companies are active in Europe and Central Asia region, however, suggests there is the processing/industry sector, and their profits thus depend room for growth. International experience has shown that a heavily on uninterrupted access to electricity. more favorable business environment would encourage infor- mal businesses to register and join the formal economy. Chart 2.7: In 2008, coverage of the main regulatory procedures was greatest for medium companies and Therefore, the need to implement additional regulatory lowest for farmers reforms and to simplify the administration of regulatory pro- cedures and ensure growth is urgent. Medium companies Proportion of SMEs who went through selected regulatory procedures in 2008 employ more staff and contribute more revenues to the na- tional budget than do small companies, individual entrepre- 40% 34% neurs and farmers. They are also more likely to export goods 35% 30% 29% 31% and services. Survey results indicate that medium companies 25% 26% 24% employ on average 71 employees, against 16 employees for 22% 20% small companies, 4 employees for individual entrepreneurs 16% 15% 13% 14% and 5 employees and 5 relatives for farmers (Table 2). Survey 10% results also indicate that 8.5 percent of medium companies 5% 3% exported in 2008, against 5.9 percent of small companies and 1% 0% 1.1 percent of individual entrepreneurs. Permit procedure License procedure Mandatory certi cation procedure Individual entrepreneurs Medium companies 20 UNDP (2006) “The Shadow Economy in the Kyrgyz Republic, Trends, Estimates Small companies Farmers and Policy Options”. 22 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs table 2.2: typical Kyrgyz SMEs 2.3. high tax rates, CorruPtion, maCro- eConomiC instability and an unreliable nuMBER OF tuRnOvER, IndICatOR eleCtriCal suPPly are the main Problems RElatIvES PROFIt, In avERagE avERagE annual annual FaCed by small and medium enterPrises valuE In KgS KgS Survey data indicate that entrepreneurs view high tax rates, corruption, macroeconomic instability and the absence of a individual 361,708 120,566 4 entrepreneurs ($9,891) ($3297) stable source of electricity as the main obstacles to growth. small 5,052,320 559,021 16 Reducing the regulatory burden for SMEs is an effective companies ($138,155) ($15,286) way to reduce corruption, as it decreases contacts between medium 14,214,045 1,090,190 71 entrepreneurs and employees of regulatory agencies. A companies ($388,681) ($29,811) reduced regulatory burden also strengthens macroeconomic Farmers 114,601 44,173 5 5 stability. For example, in the aftermath of the 1998 Asian crisis, ($3,134) ($1,208) South Korea instituted radical regulatory reform, reducing the Source: Survey results. number of permits, licenses, regulations and administrative procedures by 50 percent within two years. This led to more medium companies are the least productive, businesses and increased the overall strength and competi- farmers are the most productive tiveness of the South Korean economy. In more advanced market economies, small and medium companies are more productive than individual entrepre- Chart 2.9: Individual entrepreneurs consider high tax neurs. The larger turnover of small and medium companies rates as the biggest obstacle to doing business usually allows them to capture economies of scale in the Main obstacles to business development as identified by production process easier than farmers and individual en- individual entrepreneurs trepreneurs. However, in the Kyrgyz Republic, medium com- 50% panies were in 2008 less productive than small companies, 43% individual entrepreneurs and farmers. Farmers were actually 40% the most productive segment of the SME population (Chart 36% 35% 2.8), although they had the lowest turnover (Table 2.2). One 30% 30% of the reasons why farmers were the most productive may be that the proportion of farmers subject to regulatory proce- 20% 19% dures is lower than for individual entrepreneurs and small and medium companies. The need to further alleviate the regu- 10% latory burden and increase SME productivity is therefore clear. 0% Chart 2.8: Small and medium companies are the least High tax Access Corruprion Macroeconomic Polotical rates to electricity instability instability productive of the SME sector21 (in ation level, uctuation Productivity accross the SME sector of foreign currency exchange rates) 2.0 1.6 1.5 1.5 1.1 1.1 1.0 0.5 0 Individual Small Medium Farmers 21 Productivity is calculated by IFC as a ratio of “Total annual turnover” to “Total entrepreneurs companies companies annual turnover” – “Total annual profit”. 2. businEss EnvirOnmEnt 23 Chart 2.10: Small and medium companies consider For all SMEs, high tax rates are the number one obstacle macroeconomic instability as the biggest obstacle to to growth (Chart 2.9, 2.10 and 2.11): 43 percent of individual doing business entrepreneurs, 37 percent of small and medium companies and 39 percent of farmers consider high taxes to be among Main obstacles to business development as identified by small and medium companies the three main obstacles to the development of their busi- nesses. An IFC survey done in September 2008 examined the 40% 40% 37% Marginal Effective Tax Rate (METR),22 which is the effective tax 35% on an incremental investment by a business. The METR sum- 30% marizes the effect of the entire tax code on an incremental in- 27% 26% 25% vestment; as a result it is a very useful parameter to assess the 25% impact of the tax system on an investor's decision to infuse 20% capital into his or her business. 15% 10% Chart 2.12: the tax burden on incremental investment is much higher than the 10 percent corporate tax 5% 0% Comparison of MEtRs under the old and the new tax Code Macroeconomic High tax Corruprion Access Frequent 70% instability rates to electricity changes (in ation level, of the rules uctuation (legislative 60% 59% of foreign currency system) exchange rates) 50% 48% 40% 36% Chart 2.11: Farmers consider macroeconomic instability 32% as the biggest obstacle to doing business 30% 28% 24% Main obstacles to business development as identified by farmers 20% 15% 15% 50% 47% 10% 40% 39% 40% 0% Manufacturing Tourism Agriculture Finance 30% 30% 24% Old Tax Code New Tax Code 20% Source: World Bank staff calculations, based on official data. 10% The METRs analysis for the Kyrgyz Republic reveals that, for all sectors, the overall burden of the tax system on investment 0% Macroeconomic Access to High tax Access to Frequent is significantly greater than the statutory corporate rate of 10 instability nance rates transport changes percent (Chart 2.12). The METRs for the agriculture, tourism (in ation level, infrastructure of the rules uctuation (legislative and finance sectors stayed the same or decreased under of foreign currency system) the new Tax Code, whereas the METR for the manufactur- exchange rates) ing sector rose. Because of the high number of transactions between the raw material stage and the retail sale, the cascading effect of the new sales tax poses a higher effec- tive burden than the 20 percent VAT rate under the old Tax 22 Foreign Investment Advisory Service (FIAS) (2008) “The Tax System and the Business Enabling Environment in the Kyrgyz Republic: Preliminary Results from the Initial Mission,” September. 24 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Code. The METR analysis indicates that enterprises face a high Some 35 percent of individual entrepreneurs and 27 percent burden on investment, which limits their growth. In addition, of small and medium companies cited corruption as one survey respondents also find tax administration complex: 58 of the three main obstacles to the development of their percent of individual entrepreneurs, 45 percent of small and businesses. Survey data indicate that between 24 percent medium companies and 47 percent of farmers found tax ad- and 44 percent of businesses admitted to making unofficial ministration either “somewhat difficult” or “very difficult.” payments to “speed up” the process of obtaining permits, licenses, certificates, or pass inspections (Chart 2.13). Individual Macroeconomic instability was the second main obstacle entrepreneurs and small and medium companies estimate identified by entrepreneurs (Chart 2.9, 2.10 and 2.11): 30 that they spent nine percent and 10 percent of their turnover, percent of individual entrepreneurs, 40 percent of small and respectively, on unofficial payments and gifts to representa- medium companies and 47 percent of farmers considered tives of state agencies. This suggests the rate of the “cor- macroeconomic instability to be among their three main ruption tax” is even higher than the rate of the single tax on obstacles. Entrepreneurs’ profits depend on macroeconomic turnover.23 In addition to making unofficial payments, owners stability. For example, farmers’ incomes depend on food and managers spend staff time dealing with “unofficial ways” prices, which are fixed internationally. The high share of en- of solving problems. trepreneurs who identified macroeconomic instability as a major growth obstacle could be partially attributed to the Chart 2.13: Between 24 percent and 44 percent of fact that, at the time the survey was conducted (April-August businesses said they made unofficial payments to 2009), fears remained that the global economic crisis would speed up the process of obtaining permits, licenses, adversely impact the Kyrgyz economic. As stated above, the certificates, or pass inspections impact has been relatively limited. Proportion of SMEs who practiced unofficial payments during procedures Access to electricity is also an important obstacle identified 50% by entrepreneurs, especially by individual entrepreneurs 44% 41% and small and medium companies (Chart 2.9 and 2.10): 36 40% 39% 38% 35% percent of individual entrepreneurs and 26 percent of small 34% 32% 33% 32% and medium companies ranked the problem among their 30% 24% three primary obstacles. Business Environment and Enterprise 20% Performance Survey (BEEPS) data confirm that lack of access to electricity is a major obstacle (Chart 2.14). Since 2008, the 10% Kyrgyz Republic has faced serious electricity shortages due to low water levels in the Toktogul reservoir. Survey results 0% Permit License Inspections Certi cation indicate that 81 percent of small and medium companies procedure procedure procedure faced scheduled power supply outages and 78 percent of Individual entrepreneurs Farmers small and medium companies faced unscheduled power Small and medium companies supply outages in 2008. Average scheduled power outage losses totaled about KGS134,666 ($3,682) per business – equal to 3.4 percent of small and medium companies’ annual turnover. Small and medium companies who suffered from Other surveys confirm that corruption is a serious problem for unscheduled power supply outages in 2008 estimated the businesses in the Kyrgyz Republic: the Kyrgyz Republic ranks losses at KGS96,054 ($2,627), or 1.7 percent of turnover. In total, 162 among 180 countries in Transparency International’s Kyrgyz small and medium companies lost the equivalent of 2009 Corruption Perception index.24 In addition, BEEPS data KGS2 billion ($55 million), or 1.4 percent of 2008 GDP. Despite confirm that corruption is a major problem for businesses: 59 these significant losses, survey results indicate that only 31 percent of small and medium companies implemented energy efficiency measures in 2008. This calls for the scaling 23 The rate of the Single tax on turnover is four percent for manufacturing, trade up of energy efficiency and saving policies such as efficient and agricultural processing and six percent for other types of activities. lighting, energy efficient equipment, thermal insulation of 24 Transparency International “Corruption Perceptions Index 2009”. Available business premises, etc. at http://www.transparency.org/policy_research/surveys_indices/cpi/2009/ cpi_2009_table 2. businEss EnvirOnmEnt 25 percent of BEEPS respondents considered corruption a major ideal regulatory system is one that (i) ensures businesses do obstacle to doing businesses (Chart 2.14). This share was not threaten human health and safety or the environment, among the highest of all post-Soviet countries (Chart 2.15). (ii) minimizes costs to businesses and (iii) optimizes outcomes One effective way to reduce the “corruption tax” for small and to government. Despite recent reforms, the Kyrgyz regulatory medium enterprises is to alleviate the regulatory burden. An system remains far from ideal. box 2.1: beeps daTa confirm ThaT unreliable access To elecTriciTy, corrupTion and high Tax raTes are major obsTacles To doing business in The Kyrgyz republic BEEPS are conducted by the World Bank and its partners across all geographic regions and cover small, medium and large companies. The surveys are applied to a representative sample of firms in the non-agricultural economy. The sample is consistently defined in all countries and includes the manufacturing sector, the services sector and the transportation and construction sectors. Public utilities, government services, health care and financial services sectors are not included in the sample. Via face-to-face interviews with firm managers and owners, BEEPS collect a wide range of qualitative and quantitative information regarding the business environment and the productivity of their firms. Topics covered include the obstacles to doing business, infrastructure, finance, labor, corruption and regulation, law and order, innovation and technology, and trade. BEEPS data indicate that the three main obstacles to doing business in the Kyrgyz Republic are corruption (59 percent of respondents), unreliable access to elec- tricity (58 percent of respondents) and high tax rates (48 percent of respondents). These obstacles were also among the four main obstacles identified by the IFC SME survey respondents in 2008. Chart 2.14: Corruption was the main obstacle to doing business identified by BEEPS respondents in the Kyrgyz Republic, followed by unreliable access to electricity Proportion of respondents who cited the following as major obstacles to doing business 58% 59% 48% 43% 36% 31% 32% 30% 28% 28% 26% 25% 15% 16% 14% 5% Transport Customs Practices Practices Electricity Compul- Access Crime, Corrup- Business Business Tax Tax Acces Labor Inadequa- and of Compe- of sory to land theft, tion inspec- licensing rates administ- to regula- tely regula- titors Formal certi cation disorder tions and ration nance tions educated tions in the Compe- procedures permits workforce Informal titors Sector Source: EBRD-World Bank Business Environment and Enterprise Performance Survey data. 26 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 2.15: The share of entrepreneurs who think corruption is a major obstacle to doing business in the Kyrgyz Republic is among the highest of post-Soviet countries Proportion of businesses who think corruption is a major obtsacle to doing business in selected post-Soviet countries 60% 59% 50% 50% 50% 45% 40% 38% 34% 30% 27% 25% 20% 20% 10% 0% Kyrgyz Republic Ukraine Russia Kazakhstan Tajikistan Latvia Uzbekistan Azerbaijan Georgia Source: EBRD-World Bank Business Environment and Enterprise Performance Survey data 2.4. imPortant legal reForms were made ness registration, taxes and inspections: a new Tax Code was to imProve the business environment, but adopted; three Laws and numerous Decrees and Resolu- the imPaCt has been limited tions covering the permit, licensing, registration, inspection The Kyrgyz Republic has since its independence been one of and import/export procedures were passed (Table 2.3). the leading economic reformers among post-Soviet nations, More are under preparation. As a result, the Kyrgyz Republic especially compared to other Central Asian countries. In was ranked third and second best reformer, respectively, in 1998, these reforms led to its accession to the World Trade the IFC-World Bank Doing Business 2009 and 2010 reports. Organization (WTO); today it remains the only Central Asian Survey results, however, indicate that legal reforms have member of the WTO. Since 2007, the pace of reforms has made minimal impact and that additional reforms may be increased, especially in the area of permits/licensing, busi- necessary. table 2.3: Main legislative acts that could positively impact the business environment introduced from 2007 to 2009 dOCuMEnt datE OF COntEnt adOPtIOn The Tax Code adopted on October the legislation reduced the total number of different taxes paid 17, 2008, in effect and/or collected by businesses in the general regime from 1525 since January 1, 2009. (8 national and 7 local taxes) to 8 (6 national taxes and 2 local taxes), cut the vat rate from 20 to 12 percent, decreased the rate of the simplified tax on turnover and introduced the sales tax. Law of the Kyrgyz Republic No. 57 “On State February 20, 2009 creates a “one-stop shop” for the registration of legal entities Registration of Legal Entities and their Branches” and cancelled some requirements for the registration of legal entities (e.g notarization of documents, the company seal is now voluntary, etc). 25 The immovable property tax existed in the old tax code, but was not enforced. It was therefore not counted. 2. businEss EnvirOnmEnt 27 dOCuMEnt datE OF COntEnt adOPtIOn Law of the Kyrgyz Republic No. 55 “On the april 5, 2008 Orders the use of the regulatory impact analysis (ria) meth- Streamlining of the Legislative Framework for odology to streamline the legal framework for entrepreneur- Entrepreneurship” ship. Forbids the issuance of permits and licenses which are not stipulated in the laws and in the resolutions of the government of the Kyrgyz republic. Law of the Kyrgyz Republic No. 72 “On Procedures may 25, 2007 defines the different types of inspections, the principles and the for Inspecting Business Entities” general procedure of inspections, the rights and responsibilities of the state supervisory bodies and business entities. Presidential Decree No. 435 “On the Improvement december 09, 2008 Orders the decrease in the number of licenses and permits by of the State Regulation on Entrepreneurship” 30% and ordered to draft a law on permits and licenses by the end of 2009. Presidential Decree No. 164 “On Streamlining of may 14, 2008 introduces the “one-stop shop” mechanism for construction the Construction Permits System” permits. Presidential Decree No. 344 “On Arrangements to July 23, 2007 Orders the use of the regulatory impact analysis (ria) meth- Streamline the Regulatory System” odology to revise and streamline the legislation pertaining to business activity. Parliament Resolution No. 553-IV “On Approval of June 20, 2008 lists most of state bodies who have the right to conduct inspec- the List of Authorized Bodies Having the Right to tions. Inspect Business Entities” Government Resolution No. 252 “On the Improve- may 30, 2008 defines the procedure to issue construction permits through the ment of the Regulation on the Procedure of “one-stop shop” principle Issuance of Construction Permits” Government Resolution No. 509 “On the Stream- september 11, 2008 approves the action plan for the implementation of the law on lining of the Licenses and Permits Legislative “the streamlining of the legislative framework for entrepreneur- Framework” ship”. Government Resolution No. 603 “On the december 20, 2007 defines the methodology for the use of regulatory impact Methodology of Regulatory Impact Assessment assessment to streamline the legislation linked with business of Normative Legal Acts Pertaining to the Opera- activities. tions of Businesses” Government Resolution No. 533 “On the Proce- november 6, 2007 prescribes the mandatory registration of planned and unplanned dures for Inspecting Business Entities”. inspections in the ministry of Economic regulation prior to being conducted. Joint Order of the State Statistics Committee april 23, 2008 and introduces the “one-stop shop” registration for individual entre- and the Social Fund, “On Cooperation Between may 12, 2008 preneurs (excluding the registration in the state tax committee) the State Statistics Committee and the Social Fund in the Process of the State Registration, Re-registration and De-registration of Individual Entrepreneurs The IFC-World Bank Doing Business 2010 report26 reflected ness”, “Getting Credit” and “Registering Property,” ranking the advent of these reforms. It ranked the Kyrgyz Republic among the top 20 countries for these indicators. Meanwhile, 41st in “Ease of Doing Business”, up from 80 th in 2009, and between 2009 and 2010 the Kyrgyz Republic made the most the second top reformer overall. The Kyrgyz Republic also progress on “Getting Credit,” “Registering Property,” “Trading performed well on “Protecting Investors”, “Starting a Busi- across Borders” and “Employing Workers” (Chart 2.16). 26 This report analyzes regulatory conditions for starting, doing and closing busi- ness worldwide according to 10 criteria. 28 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 2.16: the IFC–World Bank doing Business 2010 report ranked the Kyrgyz Republic in 14th place of 183 countries surveyed detail of the 2010 doing Business Ranking for the Kyrgyz Republic, out of 183 economies (arrows show evolution compared to 2009) 154 156 140 54 47 41 40 15 19 14 12 Doing Business Starting Protecting Getting Registering Dealing with Employing Enforcing Closing Trading Paying Taxes a Business Investors Credit Property Construction Workers Contracts a Business Across Permits Borders Source: IFC-World Bank “Doing Business 2010” report. However, these business environment improvements were Chart 2.17: Close to 50 percent of individual entrepre- mostly driven by focused legal reforms and have made neurs and small and medium companies estimated that minimal impact in terms of day-to-day business operations. the business environment had deteriorated in their One of the major regulatory issues in the Kyrgyz Republic regions in the first quarter of 2009 compared to 2008 is the inconsistent implementation of laws and regulations. SMEs estimation of the evolution of the business environment Survey results indicate that the provisions of the legislation in their region in the first quarter of 2009 versus 2008 are not always implemented. For example, State Inspectorates 60% do not always respect the provisions of the Inspections Law 52% regarding advance notification of inspections, presentation of 50% 48% 45% identification and inspection order, registration of inspections 40% in the logbook and mandatory writing of inspection reports. 36% Licensing agencies, meanwhile, do not always respect the 30% 28% 27% 29% validity period of licenses indicated in the legislation. In addi- 20% 20% tion, business administration remains plagued by corruption 16% and illegitimate practices. Both the inconsistent implementa- 10% tion of laws and regulations and corruption add instability to the terms of entrepreneurial activity and are a major barrier to 0% Individual Small and medium Farmers investment. Additional efforts are therefore needed to ensure entrepreneurs companies that changes in the legislation are implemented consistently Improved Worsened Did not changed throughout government agencies and ministries and de- crease the regulatory risk for businesses. Survey results indicate that 52 percent of individual entrepreneurs and 48 percent Other arguments call for a scaling up of reforms aimed at of small and medium companies estimated that in the first improving the business environment: (i) the Kyrgyz Repub- quarter of 2009 the business environment in their region had lic’s overall competitiveness remains low, with the country deteriorated compared to 2008 (Chart 2.17). This result is likely ranking 123 out of 133 countries on the World Economic influenced by the economic crisis, but also suggests that the Forum’s Global Competitiveness Index27 (Chart 2.18); (ii) in- legal reforms implemented since 2007 have yet to deliver tan- gible benefits or change for many businesses, in practice. 27 World Economic Forum (2009) “The Global Competitiveness Report, 2009-2010”. 2. businEss EnvirOnmEnt 29 ternational experience has shown that it is more difficult to Previously passed reforms need to be fully implemented and sustain growth than to ignite it, and required more extensive additional reforms are needed to further improve the coun- investment climate reforms. Thus, without implementing try’s economic competitiveness and increase its resilience major regulatory reforms, it may be difficult for the Kyrgyz to external shocks. Reducing the regulatory barriers that economy to maintain its 2000-2008 growth levels. increase the cost of doing business in the Kyrgyz Republic would reduce the price of Kyrgyz goods and services, making Chart 2.18: the Kyrgyz Republic is the least competitive them more competitive in the domestic and international of all post-Soviet countries according to the global markets. Competitiveness Index 2009-2010 Additional reforms would also help the Kyrgyz Republic over- the global Competitiveness Index 2009-2010 rankings and scores among selected post-Soviet countries come the negative impacts of the global economic crisis and 140 5.0 the subsequent slowdown in GDP growth. International best 4.3 4.15 4.5 practices have shown that regulatory reform is an efficient 120 4.08 3.95 123 3.81 122 4.0 way to promote growth and increase competitiveness and 100 3.5 resilience to external shocks. In particular, additional reforms 3.38 3.36 90 3.0 would help address the weaknesses of the Kyrgyz SME sector 80 82 2.5 60 67 by helping to (i) ensure the growth of the industry/processing 63 2.0 51 1.5 sector and (ii) the growth of medium companies. As indicated 40 1.0 previously, these sectors are currently contracting (industry/ 20 0.5 processing) or stagnating (medium companies), and suffer 0 0 from considerable regulatory burdens. This is problematic Azerbai- Russian Kazakh- Ukraine Georgia Tajiki- Kyrgyz jan Federation stan stan Republic as these sectors are key for the diversification of the Kyrgyz economy, the development of exports and job creation. 2009-2010 ranking Score Source: World Economic Forum (2009) “The Global Competitiveness Report, 2009-2010”. annex 2.1: total Cost oF eleCtriCity outages For small and medium ComPanies in 2008 COdE SChEdulEd OutagE unSChEdulEd OutagE SOuRCE 81% 78% survey results a number of small and medium 10,982 10,982 state statistics committee companies b number of small and medium 8,895 8,566 a*b companies subject to outage c average cost of outage 134,666 96,054 survey results d total cost of outage 1,197,910,630 822,794,722 b*c E grand total (KgS) 2,020,705,352 F grand total ($) 55,255,820 Ex rate 36.57 3. Registration the one-stop shop must be implemented with a vision for additional reforms 3.1. key Findings: 3.2. registration: the “one-stoP shoP” has • Seventeen percent of small and medium companies, 15 imProved the legal Framework percent of individual entrepreneurs, and three percent As part of the government’s efforts to improve the business of farmers completed corporate registration in 2008. Of environment in the Kyrgyz Republic, business registration pro- these, nine percent of small and medium companies and cedures have been extensively reformed over recent years. 0.2 percent of farmers re-registered.28 • The registration procedure was lengthiest for small and both the processes and the number of medium companies, with these companies taking 14 days documents needed to register a legal entity to prepare all necessary documents, in comparison with have been reduced the six days typically taken by individual entrepreneurs. Pursuant to Article 83 of the Civil Code, a legal entity is an Moreover, small and medium companies were obliged organization which (i) holds exclusive ownership, manage- to wait longer before their registration was confirmed, ment, or administration over its operations and property, and typically having to wait 15 days after submission of docu- is liable for all obligations pertaining to such property; (ii) can ments, in comparison with the seven days’ wait experi- independently acquire and exercise property and personal enced by individual entrepreneurs. non-property rights; and (iii) can sue and be sued. Legal enti- • Small and medium companies spent, on average, KGS 8,595 ties are required to maintain separate and exclusive financial ($235) on completing the registration procedure, including accounts pertaining to their operations and activities. official and unofficial payments and labor costs, in com- parison with the average KGS 4,238 ($116) cost incurred by individual entrepreneurs. Of those entities registering in box 3.1: The civil code provides for The following 2008, registration costs typically constituted 3.5 percent of legal enTiTies individual entrepreneurs’ profits, in comparison with the 1.4 percent of profits spent by small and medium companies. • Full partnership; • limited liability partnership; • Total expenditure on registration costs nationwide (for • limited liability company; both individual entrepreneurs and small and medium • joint-stock company; companies, and including labor costs and both official • additional liability company; and unofficial payments) amounted to KGS106.5 million • cooperatives; and ($2.9 million), representing 0.07 percent of gross domestic • state enterprises. product (GDP). 28 Information is not available on the percentage of individual entrepreneurs re-registering in 2008. 3. rEgistratiOn 31 box 3.2: Key legislaTion and regulaTion governing The regisTraTion of legal enTiTies • The Civil Code of the Kyrgyz Republic, Part I, adopted May 8, 1996; • Government Resolution No. 182, “On the Procedure for Cooperation between State Authorities for the Registration of Legal Entities and their Branches under the Principle of the One-Stop Shop,” adopted April 23, 2008, implemented May 2008; • Normative acts of the Ministry of Justice, the State Tax Service, the State Statistics Committee, and the Social Fund; • The Tax Code of the Kyrgyz Republic, adopted October 17, 2008, implemented January 1, 2009; • Law of the Kyrgyz Republic No. 57 “On State Registration of Legal Entities and their Branches,” adopted February 20, 2009, implemented April 2009; • Government Resolution No. 708 “On the State Registration Service Under the Government of the Kyrgyz Republic,” adopted November 17, 2009. This resolution created a separate government agency, the State Registration Service, responsible for the simultaneous registration of legal entities at the State Statistics Committee, the State Tax Service and the Social Fund. This one-stop shop registration facility had previously (from its adoption on April 23, 2008 to Novem- ber 16, 2009) been provided through the Ministry of Justice. The earlier Law of the Kyrgyz Republic “On State Registration of Legislative changes implemented in 2008 and 2009 (Box 3.2) Legal Entities” (adopted 1996)29 required registration at the have reduced these times considerably, particularly following Ministry of Justice, the procurement of a unique classification the introduction of the one-stop shop principle in November number from the State Statistics Committee, and registration 2009, which not only reduced the number of stages involved with the State Tax Service and the Social Fund. Registration in registering a legal entity, but also the number of documents of a new legal entity at the Ministry of Justice officially took to be submitted (Table 3.2). The main legislative changes per- 10 days, with registration at other government agencies taining to the registration of legal entities are summarized in taking one to two days at each. In practice, completing the Table 3.1, and the key stages involved in registration following full registration process could take longer than one month. the introduction of the one-stop shop outlined in Figure 3.1. table 3.1: Comparison of registration requirements pre- and post-reform PRIOR tO REFORM FOllOWIng REFORM IMPlEMEntatIOn (aS OF JanuaRy 1, 2008) (aS OF dECEMBER 31, 2009) datE30 legal entities required to register at the ministry of Justice, registration at the state registration Office June 2008 (one-stop shop) obtain a unique classification number recorded in the ensures simultaneous registration with the state november 2009 (es- united single state register of statistics, and register with statistics committee, the state tax service and the tablishment of the state the state tax service and the social Fund social Fund registration service) documents for submission subject to the form of entity to submission of a company charter no longer april 2009 be registered, but requiring, as a minimum, a copy of the required for registration of a legal entity company charter ministry of Justice no longer responsible for checking com- consistent with the “declarative principle,” re- april 2009 pliance of founding documents with current legislation sponsibility for ensuring compliance of foundation documents now rests with company founders notarization of documents necessary notarization of documents no longer required april 2009 permit required from ministry of internal affairs to obtain permit from the ministry of internal affairs no april 2009 a company seal longer required to obtain a company seal procurement of a company seal mandatory procurement of a company seal now voluntary april 2009 Official lead times for registration at ministry of Justice— it officially takes three working days in total to april 2009 10 days; at state statistics committee—one to two days; register a legal entity with the state tax service—one to two days; at social Fund—one day. total official lead time: 13–15 days 29 Law of the Kyrgyz Republic No. 39 “On Registration of Legal Entities“, adopted June 26, 1996, implemented January 1, 1997. 30 Survey conducted during 2008. 32 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs PRIOR tO REFORM FOllOWIng REFORM IMPlEMEntatIOn (aS OF JanuaRy 1, 2008) (aS OF dECEMBER 31, 2009) datE30 Entrepreneurs obliged to travel to regional centers to state notaries (based in district centers) may now april 2009 register legal entities receive applications for the registration of legal entities and forward these to the relevant office for one-stop shop registration under the depart- ment of Justice;31 an initiative intended to simplify registration in remote areas and obviate the need for travel to regional centers registration of a legal entity at the ministry of Justice since October 2009 registration of a legal entity april 2009 previously free of charge;32 registration with the state tax costs Kgs224 ($6.10) throughout the country33 service cost Kgs60 (equivalent to $1.60) table 3.2: documents required for registration of a limited liability company pre- and post-reform lISt OF dOCuMEntS tO BE SuBMIttEd tO REgIStER a lISt OF dOCuMEntS tO BE SuBMIttEd tO REgIStER a lIMItEd lIaBIlIty COMPany, BEFORE aPRIl 2009 lIMItEd lIaBIlIty COMPany, aFtER aPRIl 2009 three copies of company charter application form three copies of Founders’ agreement Founders’ resolution on the establishment of a new legal entity Founders’ resolution on establishment of a new legal entity Other documents pursuant to current legislation if one of the founding entities is a state enterprise, approval of the appropriate authorized agency. if one of the founders is a legal entity, the approval of the appro- priate authorized body on the establishment of such legal entity, together with copies of the Founders agreement and certificates confirming state registration Other documents pursuant to current legislation 31 Resolution of the Ministry of Justice No. 155 “On the Approval of Instruction on Receipt of Documents from Commercial Organizations for State Registration at the Regional/City Level,” adopted July 7, 2009. However, following the transfer of registration functions to the State Registration Service in November 2009 it is not clear whether this resolution will remain in force. 32 Law of the Kyrgyz Republic “On State Registration of Legal Entities,” adopted July 12, 2006. 33 Normative Act adopted by the Ministry of Justice and by the director of the State Agency on Antimonopoly Policy and Competition, adopted October 15, 2009. 3. rEgistratiOn 33 Figure 3.1: Stages involved in one-stop shop registration, as of december 31, 2009 Step #/ location List of documents to be Official cost Outcome Duration submitted/activities Step 1: Pre-registration National Bank • At least 18 document to be No official fee • National • Maximum 6 (for Banks only) submitted to National Bank (see Bank’s ap- months in the www.nbkr.kg/contout.jsp?item=1 proval National Bank Antimonopoly 468&lang=RUS&material=11747) • Antimo- (or one year Committee • At least 7 documents to be nopoly for foreign (when capital submitted to Antimonopoly Committee’s entities) is above 15,000 Committee approval • Antimonopoly KGS only) • Legalized Committee 30 documents days Step 2: State Registration Single window of • Application form 224 KGS + 30 KGS • Certificate • Three working the State Regis- • Shareholders’ resolution on the for Social Fund of State days tration Service registration of a new Legal Entity. application + 20 Registration, (includes registra- • (iii) Additional documents to be KGS for reference • Tax payer tion in Statistic submitted depend on the form to bank (7.5 $ in identifica- Committee, Tax of the legal entity and on specific total) tion number Authorities, Social cases (e.g registration of foreign • General Fund) legal entities). classifier for enterprises and organi- zations • Social iden- tification number Step 3: Not part of registration – optional Private Company • N/A The cost of the • Legal Seal • Between 1 seal depends on hour and 2 the delivery time. days The faster the delivery, the higher the cost. Once completed, registration of a legal entity is valid in- The reforms of 2008 and 2009 undoubtedly contributed to definitely. Re-registration may be required in some cases,34 the simplification of the registration procedure for legal enti- however, including (i) on reorganization of the company; (ii) ties – confirmed by the IFC-World Bank Doing Business 2010 following an increase or decrease in charter capital; (iii) fol- report (Box 3.3).35 lowing changes to company name; and (iv) following a court resolution ordering the company’s re-registration, etc. 34 Law “On State Registration of Legal Entities and their Branches,” adopted February 20, 2009. 35 IFC-World Bank “Doing Business 2010” report. 34 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs However, research among focus groups suggests that further reform needs to be undertaken – including the introduction box 3.4: reforms in oTher counTries are replicable of regulation governing the rejection of statutory documents in The Kyrgyz republic and the introduction of a single, unified registration number to be used by the State Tax Service, the State Statistics Com- Introduction of a single identification number for businesses Centralized registration often goes hand-in-hand with the introduction of a mittee, and the Social Fund – an initiative which would single company identification number. Malaysia was the first country to in- further simplify the registration process and simplify the iden- troduce the use of a single company identification number for all interaction tification of businesses for administrative purposes (Box 3.4). with government in 2001, recently followed by Singapore. India has recently introduced the use of a single identification number for tax purposes, fol- lowing the success of the use of identification numbers for voters. box 3.3: Kyrgyz republic ranKed in 14Th of 183 Making registration services electronic economies for “sTarTing a business” The use of online registration facilities in business registration is develop- The progress made by the Kyrgyz Republic in simplifying the process of ing rapidly, and the use of online facilities for business verification is now business registration is confirmed by the IFC-World Bank Doing Business common not just in developed OECD economies but also increasingly 2010 report, which ranks the Kyrgyz Republic 14th among 183 countries throughout Central Asia, Eastern Europe, Latin America, and the Carib- surveyed in terms of the ease of “starting a business” in these locations. bean. Better service attracts more customers: in Bangladesh, the use of With performance improved by 20 points in comparison with 2009, the an online registration increased business verifications and registrations by Kyrgyz Republic performs better than most Eastern European and Central 80 percent and 90 percent, respectively. Around 40 economies currently Asian countries on this basis (Chart 3.1). offer electronic registration services, although the level of implementa- tion varies. In India, Norway, and Singapore registration is fully electronic. Limited liability companies are not subject to any minimum capital re- In Sweden applications for company, tax, and labor registration can be quirement and, according to the Doing Business 2010 report, registration made online, but most forms must still be printed and signed by hand. in Bishkek can be completed in 11 days, including allowing time for the In some countries (including Malaysia and Pakistan), as an incentive to notarization of company documents and the purchase of a company seal. encourage their wider usage, online systems are offered at a lower cost This process has been made still simpler since these rankings were com- than traditional application methods, or are completely free of charge. piled, however, with the notarization of documents no longer required In Croatia, online applications are subject to a 24-hour response time – a and the purchase of a company seal now voluntary. Furthermore, with major improvement on the previous 14-day lead time for hard copy ap- effect from April 2009 it is envisaged that registration of a limited liability plications. Estonia requires no notarization for documents filed electroni- company should take no longer than three days. cally. New Zealand has one of the most innovative systems to ensure the timely processing of online applications, with management automatically alerted if any process exceeds strict time limits. IFC-World Bank “Doing Business 2010” report. Chart 3.1: doing Business 2010 – Ease of Starting a Business indicator registration of individual entrepreneurs still 150 offers scope for simplification 134 Registration by the State Statistics Committee is not manda- 120 106 tory for those individual entrepreneurs engaged in one of 124 90 82 activities eligible for inclusion under the voluntary tax patent regime. This facility offers individual entrepreneurs the op- 60 51 portunity to purchase a voluntary tax patent, which stands for both payment of taxes and registration. Individual entre- 30 preneurs interviewed for the purpose of this Survey were all 14 17 5 registered with the State Statistics Committee (this being one 0 Georgia Kyrgyz Azerbaijan Latvia Kazakhstan Russia Ukraine of the selection criteria for interviewees). Republic Source: IFC – World Bank “Doing Business 2010” report. 3. rEgistratiOn 35 box 3.5: Key legislaTion and regulaTion governing The regisTraTion of individual enTrepreneurs • The Civil Code of the Kyrgyz Republic, Part I, adopted May 8, 1996; • Government Resolution No. 404 “On Adoption of Regulation on the Procedure of State Registration of Citizens Engaged in Entrepreneurial Activity Without For- mation of a Legal Entity as an Individual Entrepreneur on the Territory of the Kyrgyz Republic,” adopted July 2, 1998; • Law of the Kyrgyz Republic “On State Statistics,” adopted March 26, 2007; • Joint Order of the State Statistics Committee and the Social Fund, “On Cooperation Between the State Statistics Committee and the Social Fund in the Process of the State Registration, Re-registration and De-registration of Individual Entrepreneurs,” adopted April 23, 2008 and May 12, 2008, respectively, introducing the one-stop shop principle (with the exception of tax registration) for the registration of individual entrepreneurs; • The Tax Code of the Kyrgyz Republic, adopted October 17, 2008, implemented January 1, 2009; and • normative acts of the Ministry of Justice, the State Tax Service, the State Statistics Committee, and the Social Fund. Citizens of the Kyrgyz Republic, as well as foreign citizens the Social Fund were unified, thus decreasing the number of and/or stateless persons permanently or temporarily resident stages individual entrepreneurs were required to fulfill. The in the Kyrgyz Republic, can register as individual entrepre- registration of individual entrepreneurs is now a two-stage neurs.36 Following the introduction in 2008 of the one-stop procedure (Figure 3.2). The introduction of fully unified reg- shop system for the registration of individual entrepreneurs istration, to include registration with the State Tax Service, (Box 3.5), registration at the State Statistics Committee and would further simplify this process, however. Figure 3.2: Registration of individual entrepreneurs Step #/ location List of documents to Official cost Outcome Duration be submitted Step 1: Registration Single Window of State (i) Application form 230 KGS ($6) in • Certificate of State • 2 working Statistics Committee (ii) Passport Bishkek for main Registration days (includes registration in (iii) Certificate of activity. Plus 108 KGS • General classifier Statistic Committee and registration in the ($3) for secondary for enterprises and in Social Fund) Ministry of Internal activity. organizations Affairs – for foreign The cost differs in each • Social identifica- citizens region. tion number Step 2: Post Registration State Tax Service • Application form Registration form, 5 • Tax payer identifi- • 5 working (no later than 15 days KGS. (15 cent) cation number days after registration in Registration free of Statistics Committee) charge. Current legislation provides for the registration of an indi- Procedure for the registration of farmers vidual entrepreneur within a maximum period of two days. Farmers are required to complete registration as either an Registration as an individual entrepreneur is valid indefinitely, individual entrepreneur or other legal entity. although re-registration is required in the event of a change in residence, business activity, or business name. 36 Government Resolution No. 404 “On Adoption of Regulation on the Procedure of State Registration of Citizens Engaged in Entrepreneurial Activity Without Forma- tion of a Legal Entity as an Individual Entrepreneur on the Territory of the Kyrgyz Republic,” adopted July 2, 1998. 36 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs 3.3. small and medium ComPanies ComPrise The proportion of small and medium companies completing the greatest ProPortion oF resPondents registration in 2008 was greatest in the capital city of Bishkek ComPleting registration in 2008 (where 28 percent of individual entrepreneurs and 20 of all The Survey was conducted between April and August 2009, small and medium companies nationally were registered), fol- with the reference period for registration-related questions lowed by Chui (registering 26 percent of all individual entre- being January–December 2008. Survey results therefore only preneurs and 13 percent of all small and medium companies) partially reflect the impact of the introduction of one-stop and the city of Osh (17 percent of individual entrepreneurs shop registration for legal entities (adopted April 23, 2008)37 and four percent of small and medium companies), reflecting and the introduction of one-stop shop registration for indi- the position of Bishkek and Chui as the most affluent areas of vidual entrepreneurs (adopted May 12, 2008).38 The impact of the country (Chart 3.3). Gross regional product in Bishkek and the introduction of the Law on State Registration of Legal Enti- Chui in 2007 was significantly higher than in other regions of ties and their Branches, adopted February 20, 2009 and intro- the country at KGS50,486.9 million and KGS23,607.7 million, re- duced to ensure, inter alia, business registration within a time spectively.41 Access to both start-up capital and markets is also period of three days,39 is not reflected in Survey results. easier in Bishkek, Chui, and Osh, which, as key urban centers, also provide a more amenable business infrastructure. Seventeen percent of small and medium companies, 15 percent of individual entrepreneurs, and three percent of Chart 3.3: Percentage of SMEs completing registration farmers completed registration in 2008 (Chart 3.2). Of these, in 2008, by region nine percent of small and medium companies re-registered.40 30% Since the percentage of farmers completing registration in 28% 26% 2008 was low, this category is not examined in this chapter. 25% 20% 20% Although the number of individual entrepreneurs in the 17% Kyrgyz Republic is much higher than the number of small and 15% 13% medium companies (at 204,246 and 11,988, respectively), and 11% 10% 10% the greater complexity of registering a legal entity notwith- 7% 6% standing, the proportion of small and medium companies 5% 4% 3% 2% 1% registering in 2008 as a proportion of all small and medium 0% companies is higher than the corresponding proportion of in- Bishkek Chui Osh Issyk- Jalal- Batken Naryn Osh city Kul abat Oblast dividual entrepreneurs registering in the same year. This may be due to a higher proportion of small and medium compa- Individual entrepreneurs Small and medium companies nies re-registering in 2008. Chart 3.2: Small and medium companies comprise the greatest proportion of respondents completing registration in 2008 20% 17% 15% 15% 37 Government Resolution No. 182 “On the Procedure for Cooperation between State Authorities for the Registration of Legal Entities and their Branches under the Prin- 10% ciple of the One-Stop Shop,” adopted April 23, 2008, implemented May 2008. 38 Joint Order of the State Statistics Committee and the Social Fund, “On Coop- eration Between the State Statistics Committee and the Social Fund in the Process 5% of the State Registration, Re-registration and De-registration of Individual Entrepre- 3% neurs,” adopted April 23, 2008 and May 12, 2008, respectively. 39 Law of the Kyrgyz Republic No. 57 “On State Registration of Legal Entities and their 0% Branches,” adopted February 20, 2009. Individual Small and Farmers 40 Data is not available on the number of individual entrepreneurs re-registering. entrepreneurs medium companies 41 Source: State Statistics Committee of the Kyrgyz Republic (2008), “National Accounts of the Kyrgyz Republic 2003–2007.” Calculated at current prices. 3. rEgistratiOn 37 Of those entities registering in 2008, 39 percent of small and 3.4. registration ProCedure: small and medium companies and 10 percent of individual entrepre- medium ComPanies bear a greater burden neurs engaged the services of external advisors (business than individual entrePreneurs consultants, lawyers, etc.) during registration (Chart 3.4). The Small and medium companies bear the greatest burden – in higher proportion of small and medium companies using ex- terms of both duration and cost – in registering as a legal ternal advisors (in comparison with individual entrepreneurs) entity. While the introduction of the one-stop shop principle may be because (i) the documents necessary for the registra- in 2008, and the implementation of the Law “On State Regis- tion of a company are more complex than those needed to tration of Legal Entities and their Branches” in 2009, were both register an individual entrepreneur (and particularly so prior intended to reduce the regulatory burden on legal entities, to the implementation of the Law “On State Registration of research among focus groups suggests that the procedure Legal Entities and their Branches” in 2009, when the compli- for business registration remains complex. ance of all foundation documents had to be verified by the Ministry of Justice); (ii) the clear majority (88 percent) of small Small and medium companies registering in 2008 typically and medium companies being registered in Bishkek, where took 14 working days to prepare the documents necessary the availability of professional services is greatest; and (iii) the for registration (in comparison with the six working days taken fact that more than half of those small and medium compa- by individual entrepreneurs). Again, this may be due to the nies completing the registration process in 2008 had been fact that registration of a company requires the submission of registered previously, with the result that their awareness of more complex documents (and, again, particularly so in 2008 available services was higher, as well as the likelihood of their prior to the adoption of the Law “On State Registration of Legal being able to afford them. Entities and their Branches” in 2009). Certain documents, includ- ing, in particular, the Founders’ Resolution and the Company Chart 3.4: almost 40 percent of small and medium Charter,42 are quite complex documents to produce. Small and companies used external advisors during registration medium companies registering for the first time typically took 20 days to complete all procedures, in comparison with the 10 100% days taken by those companies re-registering. 90% Indepedent registration 80% Small and medium companies also faced a longer wait than 61% Registration with the seven working days taken by individual entrepreneurs 60% the help of an intermediary following submission of all necessary documents – facing, 40% 39% on average, a wait of 15 working days, with those companies registering for the first time obliged to wait 19 working days 20% and those re-registering having to wait 12 (Chart 3.6). While 10% the impact of Government Resolution No. 182,43 implemented 0% to facilitate the adoption of the one-stop shop system, might Individual Small and medium entrepreneurs companies have been expected to be evident in Survey results, the typical lead times taken to complete the registration of a legal entity remained lengthy. Survey results also indicate that ap- plicants were obliged to register at a number of separate gov- ernment agencies (Chart 3.5), suggesting that the provisions of this reform had not been fully implemented even after May 2008. Research conducted among focus groups also suggests that registration remained complex even following the adoption of the one-stop shop principle. 42 In 2008, registration of a legal entity required the submission of the Company Charter to the Ministry of Justice. Following the adoption of the Law “On State Registration of Legal Entities and their Branches,” this is no longer necessary. 43 Government Resolution No. 182 “On the Procedure for Cooperation between State Authorities for the Registration of Legal Entities and their Branches under the Principle of the One-Stop Shop,” adopted April 23, 2008, implemented May 2008. 38 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs “ I am working for a consulting company which is helping small and medium companies to register. Not only was the registration procedure lengthiest for small and medium companies, but this category also faced the Well, I can tell you that the one-stop shop has not highest costs. Although the official cost of registering a simplified anything. Things have got even worse, limited liability company in 2008 was KGS60 ($2), payable to because in order to register companies in three days, the State Tax Service, small and medium companies spent, on average, KGS8,595 ($235) throughout the complete reg- registration bodies refuse any application if there istration process, including official and unofficial payments is a slight inconsistency within the documents, for and labor costs. Individual entrepreneurs, however, spent, on example between Russian and Kyrgyz versions of the average, KGS4,238 ($116) on registration (Chart3.6). Of those documents. Each word is scrutinized in order to find companies registering in 2008, registration expenses repre- reasons to refuse applications. Before, we were able sented 3.5 percent of individual entrepreneurs’ total profit, to correct these inconsistencies in one or two hours, and 1.4 percent of small and medium companies’. The total and re-submit the documents. Now the application is cost of the registration procedure for all SMEs nationwide is simply refused. This way, the procedure takes us one estimated at KGS106.5 million ($2.9 million), representing 0.07 month or a month and a half.” percent of the country’s GDP (Annex 3.1). Entrepreneur, focus group participant Expenses during the registration process include the following. (i) Payments to external advisors. The fact that small Chart 3.5: Registration at the Ministry of Justice was the and medium companies made greater use of external most lengthy stage of the registration procedure in 2008 professional services than other categories of respon- number of working days taken at each stage of registration dents (Chart 3.4) is likely to be one of the main reasons 20 for the higher costs incurred by this category. The costs Opening of bank account of such external services in Bishkek are typically between 2 16 KGS3,660–5,500 ($100–150). 3 Permit to obtain a seal and procurement of a seal (ii) Notarization of documents.44 Typical costs for notariza- 12 tion are between KGS150 and KGS200 ($4–5). Ministry of Justice 6 1 (iii) Official registration costs. For example, while legal enti- 8 2 Social Fund ties registering in 2008 were obliged to pay KGS60 ($1.60) 2 2 State Tax Service 2 to the State Tax service, the cost for individual entrepre- 4 3 2 Statistics Committee neurs registering with the State Statistics Service varied 2 0 2 according to their locality. Individual Small and medium (iv) Unofficial payments. Twenty four percent of individual entrepreneurs companies entrepreneurs, and 22 percent of small and medium com- panies indicated that they had made unofficial payments Chart 3.6: the registration burden is greater for small and during the course of completing the registration process medium companies than for individual entrepreneurs (Chart 3.7). duration and cost of registration procedures for individual entrepreneurs and small and medium companies (2008) 35 10,000 9,000 Days to obtain 30 8,595 registration after 8,000 submission of 25 7,000 documents number of days 15 6,000 20 Days to prepare documents KgS 5,000 15 4,238 4,000 Total amount of all 3,000 official and non- 10 7 official expenses and 14 2,000 5 labor costs spent for 6 1,000 the procedure (KGS) 0 0 Individual Small and 44 Mandatory during 2008 but not following the adoption of the Law “On Regis- entrepreneurs medium tration of Legal Entities and their Branches” in 2009. companies 3. rEgistratiOn 39 Chart 3.7: Over 20 percent of respondents had made Chart 3.9: those respondents who did not make unofficial payments during registration unofficial payments felt registration to be less complicated than the average Individual entrepreneurs Found the procedure complicated or “somewhat” complicated (out of those who did not make unofficial payments) Small and medium companies Individual 21% 22% 23% 24% entrepreneurs Small and medium Survey results indicate that over 40 percent of all respondents companies found the registration procedure to be complicated (Chart 31% 32% 33% 34% 35% 36% 37% 38% 39% 3.8), and those respondents who did not make unofficial pay- ments found the registration procedure less complicated that Of those respondents that indicated they had found the the average (Chart 3.9). registration process difficult, the three greatest difficulties concerned (i) the large number of documents to be submit- Chart 3.8: Between 42 and 45 percent of respondents ted; (ii) the number of agencies to be visited (and processes to felt registration to be “somewhat” complicated or be completed) during the registration procedure; and (iii) the complicated lack of information available on the registration procedure itself (Chart 3.10). Although half of all small and medium com- Individual panies had previously completed the registration procedure, entrepreneurs 17 percent of all small and medium companies indicated the Small and medium companies lack of information available on the registration procedure 41% 42% 43% 44% 45% 46% itself to be a major source of difficulty. Chart 3.10: the large number of documents for submission during registration was the difficulty most often cited by SMEs 35% 33% Individual 30% 30% Entrepreneurs 27% 25% Small and medium 25% companies 22% 20% 20% 19% 17% 16% 15% 15% 15% 15% 11% 10% 8% 5% 0% Large number Large number Unavailability Lack of Non-of cial Uncertainty Low competence of documents of procedures of information organization payments about the of registration within reg. agency requirements staff Those reforms implemented in 2008 and 2009 are likely to However, research among focus groups indicated some address some of these difficulties, since both the various delays in the implementation of recent reform, particularly stages of registration, and the number of documents re- with regard to the duration of the registration procedure, and quired, have been reduced. The introduction of the one-stop its complexity. The fact that many respondents also felt insuf- shop principle is also likely to result in a reduction in the ficient information on the registration process per se as to be number (and value) of unofficial payments made, since direct an issue might also indicate a need to raise public awareness contact between entrepreneurs and officials is also reduced. in this respect. 40 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs 3.5. reCommendations ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS the one-stop shop for the include registration at the state tax service simultane- Further consolidating the various registration of individual ously with one-stop shop registration at the national stages necessary to complete regis- entrepreneurs includes registration statistics committee for all businesses including individual tration as an individual entrepreneur at the state statistics committee entrepreneurs will reduce registration lead times and the social Fund, but excludes and costs (particularly unofficial registration at the state tax service costs), resulting in faster and cheaper incorporation and subsequent benefits for profitability, employment levels, and tax revenue the proportion of legal entities cancel the requirement for re-registration in the event of removing the requirement for re- obliged to re-register (for various an increase or decrease in charter capital, or a change in registration would result in far fewer reasons) remains high company name; replace this with a simple requirement companies undertaking registration, for this information to be updated through the state with subsequent benefits in terms of registration service time, costs, and profitability Frequent rejection of completed stipulate in law the grounds on which registration docu- speedier registration procedures will documents (arising over translation ments may be rejected result in the faster incorporation of queries and other errors) can result in legal entities significant delays inadequate information on the raise awareness of the registration procedure (including improving access to information will registration procedure per se is one the various stages, lead times, and costs) by making infor- facilitate the faster registration of of the main difficulties encountered mation available on the web sites of various government new businesses, encouraging busi- by businesses agencies; by conducting awareness campaigns in rural ness development and job creation areas; by distributing information on new registration procedures to entrepreneurs; and by making proce- dural summaries (“route maps”) available at registration offices. such activity might also be supplemented by the broadcast of public service announcements on television and other media Officials do not always adhere to introduce the “silence is consent” principle in the regula- in addition to preventing delays, and regulation on maximum processing tion of the registration process—i.e., registration must be allowing the faster incorporation of times granted if an explicit refusal is not given on the expiry of new businesses, such a system would certain periods following the submission of documents: also reduce the opportunity for unof- this might be three days for small and medium companies, ficial payments and two days for individual entrepreneurs MEdIuM-tERM RECOMMEndatIOnS the state registration service is now transfer responsibility for one-stop shop registration from the number of state agencies in- responsible for the simultaneous the state registration service to the state tax service. volved in registration will be reduced registration of legal entities with the from the current four45 to three,46 state statistics committee, the social resulting in faster incorporation and Fund, and state tax service encouraging the development of new businesses legal entities and individual entre- introduce a single, unified identification number for introducing a single, unified iden- preneurs are not currently able to individual entrepreneurs and legal entities, to be used in tification number will simplify both use a single, unified, identification dealings with these agencies the registration process and other number in their dealings with the administrative issues, including the state statistics committee, the social payment of tax and social Fund Fund, and the state tax service liabilities Over 20 percent of businesses report introduce online registration as well as resulting in a faster registra- having made unofficial payments tion process, online registration will during the course of the registration also reduce opportunities for the solic- procedure iting and payment of unofficial fees 45 The State Tax Service, the State Statistics Committee, and the Social Fund. 46 The State Registration Service, the State Tax Service, the State Statistics Com- mittee, and the Social Fund. 3. rEgistratiOn 41 annex 3.1: registration oF all smes in 2008 – total Costs IndEPEndEnt SMall and MEdIuM SOuRCE EntREPREnEuRS COMPanIES a total number of enterprises 145,663 10,982 national statistics committee b proportion of smEs undergoing the 15% 17% survey results registration procedure in 2008 c number of registered enterprises 21,267 1,911 a*b d average official and unofficial costs (Kgs) 2,804 5,112 survey results E Working days spent in preparing 5.6 13.6 survey results documents F average salary 5,378 5,378 national statistics committee g total official and unofficial costs (Kgs) 59,632,102 9,768,358 c*d h total labor costs (Kgs) 30,499,424 6,655,353 c * F * E/21 i total costs (KgS) 90,131,526 16,423,710 g+h J grand total (KgS) 106,555,236 K grand total ($) 2,913,733.50 Note: (i) the cost of various administration requirements were estimated based on reported official and unofficial payments as well as on time spent preparing to submit documents; (ii) the total cost of registering farmers was not calculated, as the number of respondents was not high enough to be meaningful; (iii) the estimated labor cost of registering individual entrepreneurs and small and medium companies was calculated although, since these SMEs are not yet officially registered, they have not yet incurred any official labor costs. 4. Permits the permit procedure is the most burdensome regulatory procedure 4.1. key Findings: 4.2. the laCk oF a uniFied Permit law and • Some 26 percent of individual entrepreneurs, 25 percent a ComPrehensive Permit register are of small and medium companies and 13 percent of the main shortComings oF the Permit farmers obtained permits in 2008. legislation • Significant regional disparities exist regarding the coverage Reform to permit regulation over the past six years has intro- of the permit procedure: in Issyk-Kul, close to 80 percent of duced a number of good practices, including a decrease in SMEs obtained a permit in 2008; while in Jalalabat, less the number of permits, a permit register and the introduction than 10 percent of SMEs obtained a permit in 2008. of the “silence is consent” and “one-stop shop” principles for • The average permit validity is short: one year for individual construction permits. However, the register does not include entrepreneurs and small and medium companies and all permits issued by all permit issuing agencies. In addition, eight months for farmers. Problematically, the procedure there is no unified single permit law. Additional reforms are for permit renewal is no easier than the initial application, therefore needed. as all documents must be re-submitted. • While small and medium companies bear the biggest A unified legal definition of what constitutes a permit was burden in absolute terms, farmers are the most burdened issued in Government Resolution No. 386 “On the Approval of by the permit procedure in relative terms: the cost (in- the Regulation on Permits issued by State Bodies to Businesses,” cluding official and unofficial payments and labor costs) adopted July 30, 2001. According to this resolution: for small and medium companies to get all permits in 2008 (KGS14,869) was 3 times higher than for farmers “A permit is a document that gives businesses the right (KGS5,259). The cost of obtaining permits represents, on to undertake specific activities. Permits are issued by average, 11.9 percent of farmers’ profits and 2.5 percent authorized State Agencies and aim at ensuring the of small and medium companies’ profits (for those who implementation of the legislation, as well as of certain went through the permit procedure). standards, norms and regulations”. • Including official and unofficial payments and labor costs, total permit costs for the private sector in 2008 were about $15.1 million, which represents nearly 0.37 percent of GDP. 4. pErmits 43 The Kyrgyz Republic has no unified law regulating permit issuance. Rather, over 40 laws regulate permits for specific box 4.1. whaT is The difference beTween a permiT and activities, in addition to the above-mentioned legal acts. The a license? law on permits and licenses currently under preparation In international practice, there is no difference between permits and will therefore fill a legislative gap. It is important that the law licenses. Both words come from Latin and mean “something which is includes a permit definition that covers “any kind of compul- allowed.” However, in the former Soviet Union, licenses are understood sory approval,” whatever its name. as special permits that allow the implementation of an activity that is either potentially risky or involves any limited resources on a regular basis. In addition, licenses are often tied to a special knowledge on the As a result of the reforms undertaken since 2004 (Box 4.2), part of the enterprise or entrepreneur (e.g. licenses to practice medicine) the number of permits listed in the permit register decreased whereas permits rarely require special knowledge from the enterprise or from 110 in 2004 to 67 in 2009 (Annex 4.1, Indicative list of entrepreneur, but are often tied to the particular location of an enterprise. permits and permit issuing agencies). However, the list of In addition, permits are documents that allow the implementation of permits listed in the permit register is not complete and ex- a risky activity for a specific period of time. These documents can be in cludes, for example, permits issued by local authorities. The the form of permit, approval, opinion, certificate, authorization, confor- creation of an exhaustive list of permits is required. mity assessment, payment of fees or any other document issued for the above-mentioned purposes. the permit legislation is more progressive than in most post-soviet countries The Kyrgyz Republic’s permit legislation compares favorably to those of other post-Soviet countries (Table 4.1). A unified legal definition of permit and the procedure for the creation box 4.2. Key legislaTion and regulaTion governing of new permits were introduced in the legislation as early as The permiT procedure 2001, whilst a permit register listing all national permits issued • The Civil Code of the Kyrgyz Republic, Part I, adopted May 8, 1996; by State Agencies was developed in 2004. The “one-stop • Government Resolution No. 386 “On the Approval of the Regulation on shop” and “silence is consent” principles for the construction Permits issued by State Bodies to Businesses,” adopted July 30, 2001; sector were adopted in May 2008 (Box 4.3). In addition, the • Government Resolution No. 103 “On the Approval of the Register of Permits issued by the Executive Bodies and their Agencies,” adopted legislation on permits stipulates that: February 25, 2004. This register lists most of the permits issued in the Kyrgyz Republic, as well as the State Agencies issuing these permits, • New permits can be introduced as a tool to protect na- with the exception of the permits issued by local government; tional interests, the environment and consumer health • Law No. 55 “On the Streamlining of the Legislative Framework for and safety, including construction and building safety, Entrepreneurship,” adopted April 5, 2008. This Law forbids the issuance and to ensure that businesses follow the norms and regu- of permits and licenses which are not stipulated in the Laws and in lations of the Kyrgyz Republic. the Resolutions of the Government of the Kyrgyz Republic. Presidential • The introduction or abolishment of permits is stipulated Decree No. 164 “On Streamlining of the Construction Permits System,” by law, presidential act or government resolution. adopted May 14, 2008’ • Permits are issued free of charge, or on a fee basis. The • Government Resolution No. 252 “On the Improvement of the Regulation fees associated with issuing permits shall not exceed the on the Procedure of Issuance of Construction Permits” adopted May 30, actual cost incurred by the administration issuing the 2008; • Government Resolution No. 509 “On the Streamlining of the Licenses permit. and Permits Legislative Framework,” adopted September 11, 2008. This • Once the application for a permit has been submitted, resolution approved the action plan for the implementation of the Law permit issuing agencies must respond with a decision “On Streamlining the Legislative Framework for Entrepreneurship”. Some within 30 days. amendments to this Government Resolution adopted July 17, 2009, • A state body can refuse to issue a permit (i) if the entre- introduced a moratorium on the creation of new permits and licenses; preneur conducts an activity not allowed by the legisla- • Presidential Decree No. 435 “On the Improvement of the State Regula- tion and (ii) if the entrepreneur does not present all docu- tion on Entrepreneurship,” adopted December 09, 2008, aimed at ments required to issue permits. reducing the number of licenses and permits by 30 percent and ordering a draft law on permits and licenses by the end of 2009; • Over 40 laws that regulate permits for specific activities. 44 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs table 4.1: Comparison of best practices in permit legislation among selected post-Soviet countries KyRgyz REPuBlIC taJIKIStan uzBEKIStan uKRaInE yES nO yES nO yES nO yES definition and official list of x x x x (definition) permits clear procedure to create new x x x (permits may be in- x permits troduced by laws only) deadline for permit issuance or deadline, silence x x (deadline for some ‘silence is consent’ principle principle for con- permits, including struction construction) self-certification x x x x (for fire safety) One-stop shop x (for construction) x x (for some permits, x including construc- tion) box 4.3. The “one-sTop shop” and “silence is consenT” mechanisms for consTrucTion permiTs were inTroduced in The legislaTion The “one-stop shop” and “silence is consent” mechanisms were introduced by Government Resolution No. 252 “On the Improvement of the Regulation on the Procedure of Issuance of Construction Permits,” adopted May 30, 2008, with the support of the USAID BEI project implemented by the Pragma corporation. These mechanisms apply to construction permits only. Construction permit applicants now go through two main phases to apply for permits. Phase one: the applicant applies to the State Agency for Architecture and Construction to obtain approval for the construction plan (City Planning Regulation of Architectural Planning Conditions). The Agency for Architecture and Construction is then responsible for linking with the Fire Safety Department, the Sanitary and Epidemiological Service, the Agency for Environmental Protection and utility service providers (electricity, water, sewage, etc) to obtain their approval for the plan, as per the “one-stop shop” principle. An answer on the application should be issued within 20 working days after the application. If the State Agency for Architecture and Construction fails to answer within 20 working days, the decision is taken as an approval, as per the “silence is consent”principle. Phase two: the applicant applies to the State Agency for Architecture and Construction to obtain approval and expertise of project documents and construction permit. The State Agency for Architecture is then responsible for linking with the Fire Safety Department, the Sanitary and Epidemiological Service, the Agency for Environmental Protection and utility services providers regarding permit approval. An answer on the application should be issued within a maximum of 40 working days after the application. The deadline of 40 days includes 7 to 20 working days to examine the project documents (depending on the complexity of the construction), 10 working days for approval of the project documents, and 10 working days for the issuance of the construction permit. If the State Agency for Architecture and Construction fails to answer within 40 days, the decision is considered as favorable to the applicant, as per the “silence is consent”principle. Businesses going through the construction permit procedure now need visit only one government agency, as opposed to four agencies and several utility provid- ers before the “one-stop shop” change was introduced. In addition, fewer documents are submitted. However, cost calculation for the procedure remains closed and indiscreet, despite reforms in disclosing the information on fee schedules. In addition, the implementation of the “one-stop shop” is uneven throughout the country, and needs to be improved, especially in rural districts (Annex 4.2, Article published on the website of the Investment Council). Thanks to the reform, the Kyrgyz Republic improved its ranking on the “Dealing with Construction Permit” indicator in the IFC-World Bank “Doing Business 2010” report (Box 4.5). Despite the fact that Kyrgyz legislation includes a number of 4.4). In particular, it is recommended that the new law intro- good practices relative to the legislation of other post-Soviet duces (i) “the silence is consent” and the “one-stop shop” prin- countries, additional improvements are needed. It is recom- ciples for all permits, (ii) a comprehensive permit register that mended that the law on permits and licenses currently being includes permits issued by local governments and (iii) a self- drafted takes into account best international practices (Box certification mechanism for businesses that poses little risk. 4. pErmits 45 began operations in 2008, 26 percent of individual entrepre- neurs and 25 percent of small and medium companies went box 4.4: oTher posT-sovieT counTries have through the permit procedure that same year. This indicates implemenTed some reforms ThaT are replicable in that even businesses already operating need to go through The Kyrgyz republic the permit procedure. In countries where effective permit georgia has adopted the “silence is consent” and the “one- reforms have been implemented, the vast majority of busi- stop shop” mechanism across permit issuing agencies nesses who go through the permit procedure are just begin- Rapid permit and licensing reform helped Georgia become one of the ning operations. In addition, individual entrepreneurs in the top 15 most business-friendly countries according to the IFC-World Bank Doing Business 2010 ranking. In addition to the sharp drop in the number Kyrgyz Republic face higher permit coverage than small and of licenses and permits, from 909 to 137, the country has adopted the medium companies even though individual entrepreneurs “silence is consent” and the “one-stop shop” mechanism across all permit often pose little or no risk to society and the environment. issuing agencies, making procedures faster and more transparent. In addition, Georgia introduced a 30-day time limit to issue licenses and a Chart 4.1: Close to one-fourth of small and medium 20-day time limit to issue permits. companies and individual entrepreneurs obtained one ukraine has adopted the self-certification mechanism or more permits in 2008 The self-certification procedure is one of the major innovations of the Proportion of SMEs who obtained permits in 2008 and average Ukrainian Permit Law. The majority of permit issuing bodies are eligible number of permits obtained to adopt the self-certification procedure. However, only one agency is 30% 3.5 pioneering the reform: the State Fire Safety Department of the Ministry 3.0 Proportion of Emergency Situation. According to self-certification, an entrepreneur 25% 2.7 3.0 of SMEs who may start doing business in the absence of a permit or an authorization. 20% 2.5 obtained permits in 2008 The business simply notifies the administrator or authorizing body that 2.0 15% it is conforming with the Law’s requirements. Self-certification does not 26% 25% 1.5 1.5 Average number require that a fire safety expert examine the applicant’s premises. Instead, 10% of permits 1.0 obtained (among conformity with fire safety regulations is assessed during inspections. The 5% 13% those who 0.5 self-certification procedure is becoming more popular every year because obtained a permit) 0% it costs less time and money than the permit procedure: it takes on Individual Small and Farmers 0 average four days for small and medium companies to self-certify their entrepreneurs medium enterprises, yet nearly five times that to obtain a permit (19 days). Self- companies certifications accounted for 22 percent of all permit documents issued by the Fire Safety department in 2008. The number of self-certifications has Survey results show regional disparities in the share of entrepre- doubled every year, while the number of permits continues to fall. neurs who obtained permits in 2008. In Issyk-Kul, for example, the share of entrepreneurs who obtained permits was much higher for all categories of respondents (close to 80 percent of 4.3. Permit Coverage and FrequenCy: the entrepreneurs) than in other regions. The share of entrepreneurs number oF enterPrises obtaining Permits obtaining permits was lowest in Jalalabat (Chart 4.2). is signiFiCant, with regional disParities The number of Kyrgyz businesses who went through the permit In Issyk-Kul, the high share of individual entrepreneurs who procedure in 2008 is lower than in some neighboring countries, obtained permits in 2008 could be partly due to the fact that but remains significant: 26 percent of individual entrepreneurs, the share of individual entrepreneurs engaged in permit- 25 percent of small and medium companies and 13 percent of intensive sectors such as transport tends to be higher there farmers obtained at least one permit in 2008 (Chart 4.1). In Ta- than in other regions (27 percent of Issyk-Kul entrepreneurs jikistan, by comparison, 44 percent of individual entrepreneurs, work in the transport sector). However, this is less true for 57 percent of small and medium companies and 7 percent of small and medium companies, as none of the top three small farmers went through the permit procedure in 2007.47 and medium companies permit intensive sectors is preva- lent in the Issyk-Kul region. The same goes for farmers. This Although close to 15 percent of individual entrepreneurs suggests that regional branches of permit issuing agencies and 9 percent of small and medium companies in Kyrgyz interpret and/or implement the permit legislation differently, which underscores the need for a streamlining of permit issu- 47 ance across the country. IFC (2009) “Business Environment in Tajikistan as seen by SMEs”. 46 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 4.2: there are regional disparities in the share of entrepreneurs who obtained permits in 2008 Regional distribution of SMEs who obtained permits in 2008 100% Individual Entrepreneurs 79% 81% 80% 80% Small and medium 70% companies 60% Farmers 40% 29% 25% 27% 24% 22% 22% 23% 20% 16% 17% 13% 10% 9% 9% 5% 4% 2% 2% 0% Issyk-Kul Talas Chui Osh city Bishkek Osh Djalal-Abad Naryn Batken “ My husband and I operate a small flour selling business. We need to obtain each year a permit from Among the small and medium companies that obtained permits in 2008, the average number of permits obtained was three – the same amount as individual entrepreneurs the Fire Safety Department, from the Sanitary whereas farmers obtained on average two permits. Permits and Epidemiological Service, from the Agency for issued to small and medium companies and individual entre- Architecture and Construction, from the city water preneurs were valid for an average of one year, while farmer supplier, from the energy supplier. These agencies permits were valid for an average of eight months. The fact inspect us regularly and fine us if we do not have that entrepreneurs have to renew their permits annually, re- permits.” gardless of whether or not their businesses have undergone Individual Entrepreneur operating in Issyk-Kul region substantial changes, adds instability to the entrepreneurial en- vironment and deters long-term investment. In addition, the permit renewal procedure is the same as the permit issuance Chart 4.3: the transport sector is the most permit- process, which represents a significant administrative burden. intensive for individual entrepreneurs A simpler procedure would ease the renewal process. Proportion of individual entrepreneurs who obtained at least The transport sector is the most permit intensive for individu- one permit per sector in 2008 al entrepreneurs: over 50 percent of individual entrepreneurs 60% working in the transport sector had to obtain at least one 52% 50% permit in 2008 (Chart 4.3). Conversations with individual en- 46% trepreneurs indicated that they needed to obtain an “itinerary 40% map” from the Ministry of Transport to operate. The majority of individual entrepreneurs active in the transport sector not 30% only went through the permit procedure in 2008, but also 23% 20% 21% went through the licenses procedure (69 percent obtained licenses in 2008), indicating that the regulatory burden for 10% individual entrepreneurs active in the transport sector is very high. The regulatory burden for individual entrepreneurs 0% Retail Industry/ Hospitality Transport active in the hospitality and catering sector is also quite high. trade production and catering Over 40 percent of these entrepreneurs had to obtain at least one permit in 2008 (Chart 4.3), while 25 percent of them went 4. pErmits 47 through the license procedure. Additionally, over 30 percent 4.4. the ministry oF health, the Fire saFety of the small and medium companies engaged in wholesale dePartment, the ministry oF transPort had to get at least one permit in 2008 (Chart 4.4). and loCal governments are the heaviest regulators on Permits Chart 4.4: the wholesale sector is the most permit- The most active permit issuing agencies are (Chart 4.6): intensive for small and medium companies • Sixty-eight percent of the permits issued to individual en- trepreneurs are issued by local governments (23 percent), Proportion of small and medium companies who obtained at the Ministry of Health (21 percent), the Fire Safety De- least one permit per sector in 2008 partment (12 percent), and the Ministry of Transport and 35% 32% Communications (12 percent). 30% 26% 26% 27% • Twenty-six percent of the permits issued to small and 25% medium companies are issued by the Ministry of Health 20% (14 percent) and the Fire Safety Department (12 percent). 15% The Fire Safety Department issues permits (i) when an en- 10% terprise starts its activities, (ii) when an enterprise builds or renovates its premises and (iii) as an intermediate step to 5% obtain a construction permit. The percentage of permits 0% Retail Construction Industry/ Wholesale issued by the Fire Safety Department to small and trade production medium companies in 2008, 12 percent, aligns with the 9 percent of small and medium companies that started doing businesses during that year. box 4.5: consTrucTion permiTs regulaTions: The • Sixty-nine percent of all permits issued to farmers were issued by local governments. This is due to the fact that Kyrgyz republic performs beTTer Than mosT posT- local governments issue land use permits, which are the sovieT counTries permits most needed by farmers. The Ministry of Agri- Improvements in the Kyrgyz permit procedure are confirmed by the culture, Water and Processing Industry is also an impor- IFC–World Bank Doing Business 2010 report, which ranks the Kyrgyz tant permit issuing agency for farmers (18 percent of all Republic 40 among 183 countries on the “Dealing with Construction permits issued to farmers). Permits” indicator – 19 spots higher than in 2009. The Kyrgyz Republic performs better than most of the post-Soviet countries on this indicator, and according to the report it takes 12 procedures and 137 days to build a Chart 4.6: top permit issuing agencies: local warehouse in the Kyrgyz Republic (including obtaining necessary licenses governments, the Ministry of health, the Fire Safety and permits, completing required notifications and inspections, and and the Ministry of transport and Communication obtaining utility connections), as opposed to 37 procedures and 211 days top permit issuing agencies in Kazakhstan (Chart 4.5). 100% 6% Others Chart 4.5: The Kyrgyz Republic does well in regard to “Dealing with 19% 18% Construction Permits” 80% Ministry of Transport Ranking, Dealing with Construction Permits Indicator, Doing Business 2010 12% 48% and Communications 181 182 Ministry of Agriculture 177 60% 161 23% Local government 143 4% 4% 69% State Agency of 40% 11% 9% Architecture and 10% Construction 12% 20% 12% Fire safety 40 21% Ministry of Health 14% 7 0% 3% Individual Small and Farmers Georgia Kyrgyz Kazakh- Moldova Tajikistan Ukraine Russian entrepre- medium Republic stan Federation neurs companies Source: IFC-World Bank “Doing Business 2010” report. 48 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Some 12 percent of individual entrepreneurs obtained either 4.5. Permit administration: time- a permit or a license from the Ministry of Transport and Com- Consuming and ComPlex ProCedures munication and 11 percent of individual entrepreneurs and 10 Promote inFormal solutions percent of small and medium companies obtained either a The Survey data shows that individual entrepreneurs, small and permit or a license from the Ministry of Health (Chart 4.7, 4.8). medium companies and farmers need an average of seven These numbers are high compared to international best prac- days to prepare documents to obtain permits (Chart 4.10). Al- tices. For example, in Georgia in 2005, only six percent of busi- though the time needed for document preparation is nearly ness obtained license or permit from all issuing agencies48. the same across all categories of respondents, the waiting time to obtain the permits, once the documents have been These numbers are all the more worrying in light of the submitted, varies significantly. For individual entrepreneurs and fact that some entrepreneurs need to obtain both a license farmers, the average wait time was eight calendar days, but it and a permit from the same issuing agency. For example, was 15 calendar days for small and medium companies. six percent of entrepreneurs obtained both a license and a permit from the Ministry of Transport and Communications. The cost of getting permits is also higher for small and medium companies. Including official and unofficial pay- Chart 4.7: Over 10 percent of all individual entrepre- ments but excluding labor costs, individual entrepreneurs and neurs obtained a permit or a license from the Ministry farmers spent an average of KGS3,674 ($100) and KGS2,654 of transport and from the Ministry of health in 2008 ($73), respectively, on permits in 2008. Small and medium companies spent an average of KGS9,396 ($257) (Chart 4.9). Proportion of individual entrepreneurs who obtained a license or a permit from selected agencies in 2008 This represents one percent of individual entrepreneurs’ turnover, 0.2 percent of small and medium companies’ turn- 14% over and 0.1 percent of farmers’ turnover. Relatively speaking, 12% 12% 11% individual entrepreneurs' permit expenses are thus ten times 10% 9% greater than those of farmers. 8% The relative cost of permits as a percentage of turnover for 6% individual entrepreneurs and small and medium companies 4% 3% is similar in Ukraine, a country where the permit burden is also 2% sizable (Table 4.2). Although small and medium companies 0% get, on average, only 15 percent more permits than individual Ministry of Ministry Ministry for State Agency entrepreneurs49, the cost for small and medium companies Transportation of Health Agriculture for Environmental Protection was on average 2.5 times higher than the cost for individual entrepreneurs – suggesting that small and medium compa- Chart 4.8: Over 10 percent of all small and medium nies made higher unofficial payments to get permits. companies obtained a permit or a license from the Ministry of health in 2008 Proportion of small and medium companies who obtained a license or a permit from selected agencies in 2008 Ministry of Health 10% State Inspectorate for the Supervision of Industrial 6% Safety and Mining State Agency for 5% Environmental Proctetion 48 IFC (2006) “Business Environment in Georgia”. Ministry for Agriculture 5% 49 The Fire Safety Department has confirmed that permits were issued free of Ministry of Transport charge for both small and medium companies and individual entrepreneurs 4% and Communication and the Ministry of Health has confirmed that permits were issued at the same fee for both small and medium companies and individual entrepreneurs. The 0% 2% 4% 6% 8% 10% list of documents to submit is also the same for both small and medium com- panies and individual entrepreneurs. 4. pErmits 49 One reason why small and medium companies were subject Figure one testifies to the complexity of the permit proce- to higher unofficial payments might be that they have higher dure. In order to obtain a permit on radiological safety for revenues. Therefore, permit-issuing agencies target small and imported confectionary, it takes entrepreneurs four steps and medium companies to force them to use unofficial ways to up to seven working days. One entrepreneur said he paid solve permit issues. Forty-one percent of small and medium KGS4,400 ($120) to obtain this permit, although the official companies reported that they had to make unofficial pay- cost is KGS600 ($16). Moreover, entrepreneurs have to re-apply ments to obtain permits. The percentage of individual en- for the permit on radiological safety for imported confection- trepreneurs that had to make unofficial payments was even ary each time they receive a shipment from abroad. higher at 44 percent of respondents, while the percentage of farmers was lower (34 percent), but still amounted to more than one-third (Chart 4.10). Chart 4.10: nearly 40 percent of businesses reportedly made unofficial payments and close to 60 percent found the procedure complicated Chart 4.9: the burden of the permit procedure is higher for small and medium companies unofficial payments and level of difficulty of the permit procedure duration and cost of the permit procedure in 2008 80% days KgS Share of com- 70% 69% panies having 25 10,000 9,396 used unofficial 61% 9,000 Days to obtain 60% 59% payments 20 8,000 permit after submission Share of 50% 7,000 44% companies 15 6,000 Days to prepare 41% considering the 15 40% documents procedure as 5,000 34% 8 complicated 10 8 Total cost 30% 4,000 3,674 including official, 2,654 3,000 unofficial 20% 5 2,000 payments 7 7 7 10% 1,000 0 0 Individual Small and Farmers 0% entrepreneurs medium Individual Small and medium Farmers companies entrepreneurs companies table 4.2: Comparative cost of obtaining permits in select post-Soviet countries ($)50 KyRgyz REPuBlIC (2008) taJIKIStan (2007) uKRaInE (2008) individual entrepreneurs $100 1% of $35 0.2% of $475 1.3% of turnover turnover turnover small and medium companies $257 0.2% of $458 0.7% of $1300 0.2% of turnover turnover turnover Farmers $73 2.3% of $65 1% of n/a n/a turnover turnover 50 Source: (i) IFC (2009) “Business Environment in Tajikistan as seen by Small and Medium Enterprises,” (ii) IFC (2009) “Investment Climate in Ukraine as seen by Private Businesses”. 50 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Figure 4.1: Step-by-step instructions to obtain a sanitary and epidemiological permit on radiological safety from the Sanitary and Epidemiological Service under the Ministry of health for imported confectionary StEP #/ lISt OF dOCuMEntS tO BE OFFICIal COSt OutCOME duRatIOn lOCatIOn SuBMIttEd/aCtIvItIES Step 1: Ministry of • Application form N/A Radiology 30 minutes Health, SES, • Copy of certificate of origin Division radiology • Copy of certificate of examines the division conformity object • Copy of invoice Step 2: Ministry of • Measurement of ionizing N/A Test report • Unofficially 4-5 Health, SES radiations of (i) the products working days, Laboratory and (ii) the container in possibility to which the products were have it in one transported (this often day if unofficial implies an on site visit). payments • Analysis of the measure- • Officially 1-3 ment’s results. days Step 3: Ministry of • Payment of fees by business Officially 382 KGS for the Receipt 15-30 minutes Health, SES analysis of the products, confirming 600 KGS for the analysis of the payment the container in which the of the fee product was transported (ca 1,000 KGS in total). Unofficially up to 4,400 KGS including analysis of product and container, and unofficial payments Step 4: Ministry of • Receipt confirming the N/A Issuance of 1-2 days Health, SES payment of the fees permit Survey data shows that all three SME segments find the These data suggest that the procedure to obtain permits permit procedures to be complicated. This is reflected in should be streamlined and simplified, which would lead to their assessment (Chart 4.10), in which 59 percent of small significant savings for entrepreneurs. The total average cost and medium companies representatives found the permit of the permit procedure in 2008 for the three categories of procedure to be “somewhat complicated” or “very compli- populations surveyed was approximately KGS555 million ($15 cated.” This percentage is even higher for individual entre- million). This includes labor cost, official and unofficial pay- preneurs (69 percent) and farmers (61 percent). Businesses ments, but excludes lost profit due to breaks or transactions consider the permit procedure the most complicated of all delayed while awaiting government approval. This represents regulatory procedures, excepting the licensing procedure. 0.37 percent of the country’s 2008 GDP. 4. pErmits 51 4.6. reCommendations ISSuES RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS the permit procedure is lengthy. reduce the permit issuing agency's response time from the duration of the permit proce- 30 to 15 days and extend the “silence is consent” principle dure will be reduced. to all permits: once an applicant for a permit submits the required documents, the failure of an issuing agency to respond within the given timeframe counts as an applica- tion approval. the percentage of businesses making reduce the timeframe during which a permit issuing agency unofficial payments made to unofficial payments during the proce- considers an application and issues an answer from 30 to “speed up the permit procedure” dure is high. 15 days and introduce the “silence is consent” principle to will be reduced. all permits. the validity of permits is short and (i) Extend permit validity periods and (ii) simplify the this will reduce the cost of doing the permit renewal procedure is as renewal procedure: permit renewal should be automatic if business and streamline the work of complicated as the permit issuance there were no changes in the operations of the business. permit issuing agencies. procedure. permit coverage varies widely across conduct permit legislation and issuance procedure trainings permit coverage, frequency and different regions of the country. of all permit issuing agencies' staff across the country. procedures will be made uniform. there is no single law on permits, the develop a framework permit law51 that includes an exhaus- a single, unified legal basis for permit register is not exhaustive as tive permit register encompassing permits issued by local permits will foster greater under- it does not include permits issued by governments and detailing the rules, procedures and standing among permit issuing local governments. timeframe to obtain permits. agencies and entrepreneurs, making for more efficient proce- dures and processes. MEdIuM-tERM RECOMMEndatIOnS the permit procedure is considered For businesses that pose little risk, permit-issuing agencies self-certification will significantly by businesses as the most complex should adopt self-certification as an alternative to issuing simplify the permit process: busi- regulatory procedure. permits. nesses will spend less time and the “one-stop shop” principle should be extended to ad- money than they did when follow- ditional permits. ing classical permit procedures. it will increase business responsibility and accountability for their opera- tions, because a self-certifying busi- ness undertakes full responsibility for its operations. the extension of the “one-stop shop” principle will simplify the permit procedure by reducing the number of agencies businesses have to visit to obtain permits. 51 A license and permit Law is currently being drafted. 52 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 4.1: indiCative list oF Permit issuing agenCies and oF the main tyPes oF Permits (2009) StatE BOdy dEPaRtMEnt tyPE OF PERMIt 1 ministry of health department of sanitary and sanitary and epidemiological statement Epidemiological control department of medicine and registration certificate medical Equipment supply 2 local government (akimiat, village various permits related to land use; advertisement council) permit; Others 3 ministry of agriculture, Water resources seed import permit; Fishing permit and processing industry state inspection on seeds certificate of conformity plant protection department registration certificate for pesticides; phyto-sanitary certificate; permit to import plants; Quarantine certificate veterinary department veterinary certificate; permit to produce veterinary medicines transport inspection ‘technical passport ‘ for tractors, trailers 3 state Fire department statement of compliance with fire safety requirements 4 state agency for architecture and con- construction permit; Qualification certificate (for struction specialist) 5 national statistics committee registration certificate for individual entrepreneurs 6 state agency for Environmental protection permit to use plant and animal by-products; permit and Forestry to import and export plant and animal by-products; permit on waste disposal, air pollutants emissions; Forest use permit 7 state inspection for supervision of indus- permit on blasting operations trial safety and mining supervision of the ministry of Emergency situations mining 8 state committee on taxes and levies registration of legal entities, individual entrepreneurs; patent 9 national institute of standards and certificate for measuring equipment metrology (nism) 10 ministry of interior department of road traffic permit to transport hazardous cargo; permit to trans- port heavily-loaded cargo; permit to modify transport vehicle 11 ministry of interior department of public safety permit to purchase, keep, convey, import and export arms 12 ministry of transport and communications transport inspection various permits and certificates depending on means department of civil aviation of transport (automobile, aircraft, etc) department of international carrier 13 state agency on anti-monopoly policy and certificate of consent development of competition 14 ministry of Justice registration certificate for mass media 15 drug control state agency permit to import drugs and psychotropic agents 16 state committee on migration and Work permit Employment 17 ministry of culture permit to export ‘cultural value’ 18 ministry of industry, Energy and Fuel state inspection on Energy permit to run an energy production facility resources and gas 19 agency for the control of the Financial certificate on state registration of stock securities; market auditor certificate; permit to run a lottery facility 4. pErmits 53 annex 4.2: the imPlementation oF the ConstruCtion Permits’ “one-stoP shoP” is weak, artiCle Published on February 2009 on the investment CounCil website The State Agency for Architecture and Construction under the was streamlined, its duration and tariffs reduced. K. Narbaev Government of the Kyrgyz Republic (Gosstroi) monitored the pointed out that the tariffs had been sharply reduced, by implementation of the “one-stop shop” in the regions of Talas, between 20 and 44 percent compared to previous years. Chui, Issyk- Kul, Batken, Osh, and Jalalabat upon request of the New rules were set up to issue construction permits within 10 Agency’s manager, Kanybek Narbaev, according to Ainura Ka- working days. nimetova, the Agency’s press officer. The field monitoring visits were organized taking into account The Agency made a lot of efforts towards improving the issu- the importance of the implementation of the “one-stop shop”. ance of permits in the construction sector as per the Presiden- The results indicated that in Chui Region, the “one-stop shop” tial Decree No. 164 “On Streamlining of the Construction Permits was well organized in Moscovski district, where transparent System,” adopted May 14, 2008, indicated Mr Narbaev. and timely procedures are guaranteed. However, some gaps were identified in the activity of the Agency for Architecture As Mr Narbaev puts it: “The Decree aims at improving the and Construction of Tokmok city: the information board is not investment climate and at attracting investments in the con- properly designed. struction sector. The “one-stop shop” is implemented across the Republic in order to reduce the duration and costs of In Issyk-Kul region, the implementation of the “one-stop shop” services provided by the city and district departments of the is satisfactory, but the results of the monitoring visits of the State Agency for Architecture and Construction. It aims at Southern regions showed that the district Architecture and reducing the contacts between a permit applicant and repre- Construction departments do not comply with all require- sentatives of permit issuing agencies and at changing the ex- ments. The implementation of the “one-stop shop” in Osh isting system of approval of construction plans and of delivery and Uzgen cities, as well as in Aravan and Kara-Suu districts of documents authorizing the construction and renovation of is smooth. However, implementation in Batken district and in buildings. The system was radically changed based on best other districts is weak. practices implemented in other countries.” K. Narbaev encouraged the managers of cities and districts Ar- The State Agency for Architecture and Construction carried chitecture and Construction Departments to strengthen their out an analysis of the regulatory framework in the construc- efforts towards the implementation of the “one-stop shop” tion sector. As a result, the procedure for permit delivery and improve the shortcomings as soon as possible. annex 4.3: entrePreneurs believe they Chart 4.11: an absolute majority of individual have a good knowledge oF the Permit entrepreneurs and small and medium companies legislation estimate that they know the permit legislation and procedures quite well Overall, the respondents who obtained permits in 2008 as- sessed their knowledge of the legislation regulating the SMEs’ assessment of their knowledge of the permit legislation permit procedure confidently. Some 68 percent of farmers, 84 100% 93% percent of individual entrepreneurs and 93 percent of small 84% Knows the permit legisla- and medium companies estimated that they were either 80% tion quite well 68% “quite well” aware, or aware in “general terms” of the legislation or in general terms (Chart 4.11). Entrepreneurs who estimated the permit proce- 60% dure as “somewhat simple” or “simple” were also those who Knows the 40% permit legisla- tended to estimate their knowledge of the permit procedure 32% tion poorly or do not know it as “good” or “rather good.” 20% 16% 7% 0% Individual Small and medium Farmers entrepreneurs companies 54 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 4.4: total Cost oF obtaining Permits For all smes in 2008 labor costs COdE InPut data data SOuRCE a proportion of individual entrepreneurs companies subject to the permit 26% survey results procedure in 2008 b number of active individual entrepreneurs 145,663 state statistics committee c average time spent by individual entrepreneurs in preparing 7 survey results documentation for one permit (working man-days) d average number of permits obtained 3 survey results E average number of working days 21 F average monthly salary (gross pay) (Kgs) 5,378 state statistics committee g total labor cost of permits, individual entrepreneurs (KgS) 184,159,132 a x B x C x d x (F:E) h total labor cost of permits, individual entrepreneurs ($) 5,035,798 Ex. Rate 36.57 COdE InPut data data SOuRCE a proportion of small and medium companies subject to the permit 25% survey results procedure in 2008 b number of active small and medium companies 10,982 state statistics committee c average time spent by small and medium companies in preparing 7 survey results documentation for one permit (working man-days) d average number of permits obtained 3 survey results E average number of working days 21 F average monthly salary (gross pay) (Kgs) 5,378 state statistics committee g total labor costs of permits, small and medium companies (KgS) 14,846,608 a x B x C x d x (F:E) h total labor costs of permits, small and medium companies ($) 405,978 Ex. Rate 36.57 COdE InPut data data SOuRCE a proportion of farmers subject to the permit procedure in 2008 13% survey results b number of active farmers 280,408 state statistics committee c average time spent by farmers in preparing documentation for one 7 survey results permit(working man-days) d average number of permits obtained 1 survey results E average number of working days 21 F average monthly salary (gross pay), Kgs 5,378 state statistics committee g total labor costs of permits, farmers, KgS 94,242,030 a x B x C x d x (F:E) h total labor costs of permits, farmers, $ 2,577,031 Ex. Rate 36.57 4. pErmits 55 Official and unofficial payments COdE InPut data data SOuRCE a proportion of individual entrepreneurs companies subject to the permit 26% survey results procedure in 2008 b number of active individual entrepreneurs 145,663 state statistics committee c average amount of official and unofficial payments spent by individual 3,674 survey results entrepreneurs to obtain permits d total official and unofficial payments spent during the permit 140,748,622 axBxC procedure by individual entrepreneurs (KgS) E total official and unofficial payments spent during the permit 3,848,745 Ex rate 36.57 procedure by individual entrepreneurs ($) COdE InPut data data SOuRCE a proportion of small and medium companies subject to the permit 25% survey results procedure in 2008 b number of active small and medium companies 10,982 state statistics committee c average amount of official and unofficial payments spent by small and 9,396 survey results medium companies to obtain permits d total official and unofficial payments spent during the permit 25,487,157 axBxC procedure by small and medium companies (KgS) E total official and unofficial payments spent during the permit 696,942 Ex rate 36.57 procedure by small and medium companies ($) COdE InPut data data SOuRCE a proportion of farmers subject to the permit procedure in 2008 13% survey results b number of active Farmers 280,408 state statistics committee c average amount of official and unofficial payments spent by farmers to 2,654 survey results obtain permits d total official and unofficial payments spent during the permit 96,002,165 axBxC procedure by farmers (KgS) E total official and unofficial payments spent during the permit 2,625,162 Ex rate 36.57 procedure by farmers ($) total cost of permits Individual entrepreneurs Small and medium companies Farmers KgS $ KgS $ KgS $ labor cost 184,159,132 5,035,798 14,846,608 405,978 94,242,030 2,577,031 Official and non official payment 140,748,622 3,848,745 25,487,157 696,942 96,002,165 2,625,162 sub total 324,907,753 8,884,543 40,333,766 1,102,919 190,244,195 5,202,193 grand total (KgS) 555,485,714 grand total ($) 15,189,656 Note on cost calculations: The cost of various administration requirements were estimated based on reported official and unofficial payments as well as on time spent preparing to submit documents. 5. Licensing the short validity of licenses and the complexity of the procedures are the main problems with licensing 5.1. key Findings: 5.2. liCensing: the legal Framework • The share of small and medium companies (15 percent) inCludes a number oF good PraCtiCes and of individual entrepreneurs (22 percent) who ob- Recent licensing reforms have reduced the number of ac- tained a license in 2008 is significant (since only 0.1 percent tivities subject to licensing from 32 in 2004 to 30 in 2010, of farmers obtained licenses, they will be left out of the and better explained the requirements to obtain licenses. discussion for the majority of this chapter). However, additional reforms are needed. In particular, license • There are some significant regional disparities in the cover- validity periods could be extended, both de jure and de facto. age of the licensing procedure: the coverage of the proce- dure is highest in Issyk-Kul, where 44 percent of individual A unified legal definition of a license was issued on March 3, entrepreneurs and 21 percent of small and medium com- 1997 in the Law “On Licensing”: “A license is a permit issued by panies obtained a license in 2008, and lowest in Jalalabat, a competent State body that gives individuals or legal entities where no individual entrepreneurs and six percent of small the permission to carry out certain types of activities.” and medium companies obtained a license in 2008. • The validity of the licenses obtained in 2008 is relatively short: an average of 23 months for small and medium box 5.1. whaT is The difference beTween a permiT and companies and 13 months for individual entrepreneurs. a license? • While small and medium companies bear the greatest expense in absolute terms (KGS8,654 against KGS3,802), in- In international practice, there is no difference between permits and licenses. Both word come from Latin and mean “something which is dividual entrepreneurs are the most burdened by licensing allowed”. However, in the former Soviet Union, licenses are understood in relative terms: the cost of the license procedure (includ- as special permits that allow the implementation of an activity that is ing official, unofficial payments and labor costs) for small either potentially risky or involves any limited resources on a regular and medium companies represents 1.4 percent of profit, base. In addition, licenses are often tied to a special knowledge on the but 3.2 percent of profit for individual entrepreneurs. part of the enterprise or entrepreneur (e.g licenses to practice medicine) • In 2008, the total cost of the licensing procedure for indi- whereas permits rarely require special knowledge from the enterprise or vidual entrepreneurs and small and medium companies52 entrepreneur, but are often tied to the particular location of an enterprise. (including official, unofficial payments and labor costs, but In addition, permits are documents that allow the implementation of excluding lost profit due to breaks or transactions delayed a risky activity for a specific period of time. These documents can be in while awaiting licenses) was about KGS134 million ($ 3.7 the form of permit, approval, opinion, certificate, authorization, confor- million), or nearly 0.09 percent of GDP. mity assessment, payment of fees, or any other document issued for the above-mentioned purposes. 52 Farmers were not included in the calculations as the coverage of licensing is low among farmers. 5. licEnsing 57 As a result of the reforms undertaken since 2008 (Box 5.2), licensing legislation in the Kyrgyz Republic includes a box 5.2. Key legislaTion and regulaTion governing number of good practices. In particular, the legislation on The licensing procedure licenses stipulates: • New licenses may be introduced as a tool to protect • Law of the Kyrgyz Republic “On Licensing,” adopted March 3, 1997; • Parliament Resolution No. 1101-I “On the Adoption of the List of Goods the security of the State, to protect State monopolies, to whose Export and Import is Subject to Licensing,” adopted June 8, enforce the law of the Kyrgyz Republic, to protect the en- 1998; vironment, as well as to protect the property, health and • Government Resolution No. 260 approving the regulation “On the Li- life of the citizens of the Kyrgyz Republic. New licenses can censing of some Specific Activities,” adopted May 31, 2001. This resolu- only be introduced by law, not by subordinate legal acts. tion lists the requirements (list of documents, etc.) for the application • Licenses are required only for the types of activities listed to various licenses; in the legislation. • Law No. 55 “On the Streamlining of the Legislative Framework for En- • Licenses can only be issued by Ministries, State agencies trepreneurship,” adopted April 5, 2008. This law forbids the issuance of and other authorities identified by the legislation and the permits and licenses which are not stipulated in the laws and resolu- Government. tions of the Government of the Kyrgyz Republic; • Licenses are issued on a fee basis. The fees associated with • Government Resolution No. 509 “On the Streamlining of the Licenses issuing licenses shall not exceed the actual cost incurred by and Permits Legislative Framework,” adopted September 11, 2008. This resolution approved the action plan for the implementation of the agency issuing the license and shall not exceed three the Law “On Streamlining the Legislative Framework for Entrepreneur- indicators of calculation53 (in 2009, 100 x 3 = 300 soms). ship”. Some amendments to this Government Resolution adopted • Applications should be considered within 30 calendar July 17, 2009, introduced a moratorium on the creation of new days. permits and licenses; • When, in addition to a license, a permit is required to carry • Presidential Decree No. 435 “On the Improvement of the State Regula- out a certain type of activity, such permit(s) shall be issued tion on Entrepreneurship,” adopted December 9, 2008. This decree after the license has been obtained. A permit without the aimed at reducing the number of licenses and permits by 30 percent license shall be considered invalid. and ordering a draft law by the end of 2009. • The grounds on which the issuance of a license can be denied or on which an issued license can be suspended. • Licenses are permanent or temporary (issued for at least A new law on permits and licenses is currently being drafted. two years unless a shorter duration is stated in the legis- It is recommended that the law takes into account best inter- lation). national practices (Box 5.3). In particular, it is recommended • Licenses are valid for activities that are conducted in part that the new law introduces (i) the “silence is consent” prin- of the territory of the Kyrgyz Republic, in the whole terri- ciple, excepting sectors where the risks are too high to allow tory of the Kyrgyz Republic and/or beyond the borders of start-up prior to review of qualifications and (ii) increases the the Kyrgyz Republic. length of license validity, including the number of licenses valid permanently (Annex 5.1). Recent amendments to the licensing legislation reduced the types of activities subject to licensing from 32 in 2004 to 30 in 2010 (Annex 5.1). The production and sale of alcohol are among the activities that were dropped from the list. However, some activities which are neither risky nor involve limited resources are still subject to licensing such as cargo transportation and real estate valuation. 53 The indicator of calculation was introduced by the Law “On Indicator of Calcula- tion” adopted January 27, 2006. It replaces the minimum wage as a basis to calculate the cost of licenses. Decoupling the fees for licenses and other pro- cedures from the minimum wage was a positive reform, since now increases in the minimum wage raise workers’ salaries without also adding to the regula- tory burden for entrepreneurs. In 2008, the indicator of calculation was 100 KGS. The amount of the indicator of calculation is approved by the Parliament. 58 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs box 5.3. characTerisTics of good licensing laws 1. activities subject to licensing should be identified in a framework licensing law or other high-level instrument. The instru- ment should not be vulnerable to capricious amendments that increase regulatory uncertainty. In some legal systems, lesser measures such as Cabinet resolutions may be used to implement administrative procedures called for in the framework law. In such circumstances, the framework law should clearly specify the purposes such measures will be used for, the parameters that shall apply to their contents (e.g. fees not exceeding administrative costs), time limits for promulgating them (e.g. six months after ratification of the law), legal guidance for the period prior to their prolongation and limitations on amendments (e.g. amendments not allowed more than once per year). 2. licenses should be valid in all sub-national jurisdictions. A license attests to the operator’s competency to carry out an activity in a manner that safeguards the public interest. To the degree possible, countries should make such licenses valid throughout the whole of their territories. For example, a business should not be required to acquire a separate license in each sub-national jurisdiction in which it operates.54 That said, there may be sound reasons for creating license applications points close to businesses throughout the country. 3. licenses should be priced to cover administrative costs. Licenses should serve as regulatory instruments rather than fiscal tools. (…). The cost of each license should not exceed the costs to ministries of collecting and reviewing applications. 4. The law should clearly articulate the qualification criteria for each license. The law should clearly state the requirements that applicants must meet to acquire a license, including the exact documents they must submit, credentials they must prove, etc. This information should be made avail- able to the public via the Internet and/or printed publications. 5. The law should contain “silence is consent” provisions. such provisions mandate time limits for the processing of applications. Applications not processed within those time frames receive automatic approval, or “consent.” Silence is consent may not be practical for sectors where the risks are simply too great to allow start-up prior to review of qualifications – for example, sectors in which businesses process radioactive materials. 6. The law should specify clear reasons why applications may be rejected or revoked as well as procedures for appeals. 7. licenses should be valid for unlimited periods, except when periodic review of qualifications is necessary to fulfill regula- tory objectives. Businesses should not have to apply for periodic license renewals unless such renewals are necessary to safeguard the public interest or ensure proper management of scarce resources. Source: World Bank Group (2006) “Business Licensing Reform: A Toolkit for Development Practitioners”. 5.3. liCense Coverage and FrequenCy: the dividual entrepreneurs and of small and medium companies short validity oF liCenses is ProblematiC (respectively 59 percent and 54 percent) said they needed a Thanks to the reforms implemented since 2007, license cover- license to operate and 22 percent of individual entrepreneurs age in the Kyrgyz Republic tends to be lower than in neigh- and 15 percent of small and medium companies obtained boring countries, but it remains significant. The Survey results or renewed their licenses in 2008 (Chart 5.1). The share of showed some regional disparities in license coverage, calling businesses who obtained a license is much higher than in for a streamlining of license issuance throughout the country. countries where extensive licensing reforms took place. For In addition, actual license validity tends to be shorter than in example, in Georgia, in 2005, 6 percent of small and medium neighboring countries such as Tajikistan. enterprises obtained a license or a permit.55 Although close to 15 percent of individual entrepreneurs and 9 percent of The number of businesses who obtained at least one license small and medium companies started their operations in in 2008 is relatively low compared to its neighbors, but it is 2008, 22 percent of individual entrepreneurs and 15 percent however significant (excepting farmers, of whom only 0.1 of small and medium companies went through the licensing percent obtained licenses). Due to the very small share of procedure in 2008, indicating that even businesses which farmers who went through the license procedure in 2008, are already operating need to go through the licensing pro- farmers will not be considered in this chapter. Over half of in- cedure. In countries where comprehensive licensing reforms were implemented, the vast majority of businesses obtaining licenses are start-ups. 54 The same principle does not necessarily hold true for permits. For example, it is reasonable to require businesses to gain permits for construction of buildings 55 IFC (2006) “Business Environment in Georgia”. in each of the sub-national jurisdictions in which they intend to operate. 5. licEnsing 59 The validity of licenses issued in the Kyrgyz Republic is short: Chart 5.1: Over half of small and medium companies and licenses issued to small and medium companies in 2008 individual entrepreneurs are required to have a license were valid for an average of 23 months, while licenses issued Share of SMEs who obtained a license and required to have to individual entrepreneurs were valid for an average of 13 a license in 2008 months. In Tajikistan, licenses issued to small and medium 70% companies in 2007 were on average valid for 44 months, and 59% Individual licenses issued to individual entrepreneurs were valid for 24 60% 54% Entrepreneurs months.56 Although Kyrgyz legislation contends that tempo- 50% Small and medium rary licenses are issued for a minimum of two years, unless a companies 40% shorter duration is stated in the legislation, conversation with Farmers 30% focus groups indicated that the validity of licenses, de facto, is 22% different from the validity of licenses, de jure, which accounts 20% 15% for these Survey results. For example, the legislation indicates 10% that licenses for passenger transportation by road are “tem- 1% 0% porary for at least two years or less if required by licensee”. Yet, Share of SMEs Share of SMEs conversation with focus groups indicated that these licenses who obtained who need to have a license in 2008 a license to operate are issued de facto for a maximum of one year, or less if re- quired by the licensee. In the SME sector, there are less regional disparities in license coverage than in permit coverage. However, the region “ The maximum duration of licenses issued to drive a mini bus is one year. Each year, I have to obtain a having the highest permit coverage (Issyk-Kul) also has the highest license coverage. Likewise, the region that had the lowest permit coverage, Jalalabat, also has the lowest license new license again and gather the relevant documents coverage. Indeed, Issyk-Kul region has the greatest permit such as the 40 hours training certificate. The training and license coverage for individual entrepreneurs. This could certificate is useful for those who just started driving, be partly due to the fact that the share of individual entrepre- but I have been driving for 15 years, I do not need neurs active in license-intensive sectors, such as transporta- to study for 40 hours each year. I understand that tion (Chart 5.2), is high in Issyk -Kul. licenses are necessary for security reasons, but it would be good if licenses were issued for a longer Some 19 percent of the transport sector entrepreneurs duration. It would save us time and money.” interviewed were based in Issyk-Kul. However, the share of individual entrepreneurs active in the transport sector is even Entrepreneur, focus group participant higher in Chui, where 27 percent of all individual entrepre- neurs active in the transport sector are located. Yet the share The short validity of licenses adds instability to the terms of of individual entrepreneurs having obtained licenses in Chui entrepreneurial activity and deters long-term investments. It is lower than the share of individual entrepreneurs having is one of the main problems associated with the licensing pro- obtained licenses in Issyk-Kul. This suggests some regional cedure in the Kyrgyz Republic. However, it must be noted that disparities in the interpretation and/or implementation of the the license renewal procedure is simplified: documents that license legislation. As with permit legislation, implementation were initially submitted for the application need not be resub- in Issyk-Kul seems to be more stringent than in other regions mitted. Unless there has been some change to the operations of the country, which suggests a less than uniform under- of the business, only the application is to be resubmitted. standing of licensing procedures and policies. 56 IFC, (2009) “Business Environment in Tajikistan as seen by SMEs”. 60 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 5.2: Issyk-Kul is the region where the share of entre- Chart 5.3: Close to 70 percent of the individual preneurs who obtained licenses in 2009 is the highest entrepreneurs working in the transport sector obtained a license in 2008 Share of SMEs who obtained a license in 2008, per region 50% Proportion of individual entrepreneurs that obtained at least 44% one license in 2008, per sector 40% 80% 69% 32% 70% 30% 25% 60% 21% 18% 50% 20% 17% 17% 17% 17% 15% 13% 40% 10% 10% 8% 30% 25% 6% 20% 13% 14% 0% Bishkek Issyk- Jalal- Naryn Batken Osh Chui Osh 10% Kul abat Oblast city 0% Wholesale Retail Trade Hospitality Transport Individual entrepreneurs Small and medium companies and catering The transport sector is the most license-intensive for indi- Chart 5.4: Close to 20 percent of small and medium vidual entrepreneurs: over 60 percent of individual entrepre- companies working in the transport and industry/ neurs working in this sector had to obtain at least one license production sectors obtained a license in 2008 in 2008, while over 20 percent of individual entrepreneurs Proportion of small and medium companies that obtained at working in the hospitality and catering sector, and over 10 least one license in 2008, per sector percent of the individual entrepreneurs working in retail and 19% wholesale trade, had to obtain at least one license in 2008 (Chart 5.3). Due to the prevalence of transportation services 18% and retail trade within individual entrepreneurs' activities, the biggest share of individual entrepreneurs having received at least one license in 2008 were engaged in transportation (52 17% percent), followed by retail trade (31 percent). 16% The transport and industry/production sectors are the most license-intensive for small and medium companies: 19 percent 15% and 18 percent of small and medium companies active in Construction Wholesale Industry/ Transport production these sectors, respectively, obtained a license in 2008 (Chart 5.4). The agencies issuing the most licenses to small and medium companies are the Ministry of Health, the Ministry for Agricul- ture, Water and Processing Industry, the State Committee for Architecture and Construction and the State Inspectorate for the Supervision of Industrial Safety and Mining. These agen- cies process close to 70 percent of the licenses issued to small and medium companies. The agencies issuing the most licenses to individual entrepre- neurs are the Ministry of Transport and Communication and the Ministry for Agriculture, Water and Processing Industry. These agencies process over 95 percent of the licenses issued to individual entrepreneurs (Chart 5.5). 5. licEnsing 61 Chart 5.5: top license issuing agencies for individual entrepreneurs and small and medium companies are Chart 5.6: The Kyrgyz Republic performs well on “the number of days to obtain operating license” indicator rather different License coverage and number of days to obtain an operating license in top license issuing agencies selected post-Soviet countries 100% 60 45% 4% 54.9 22% Others 40% 50 80% Ministry of Transport and 35% 8% 53% Communications 40 30% 60% 15% State Inspectorate for the 30.5 25% Supervision of Industrial Safety 30 26.5 16% and Mining 20% 40% 20.6 State Committee for 20 15.8 15% 18% Architecture and Construction 12.9 37% 10.2 10% 20% Ministry of Agriculture, 10 5% 20% Water and Processing 6% Industry 0 0% 0% Georgia Tajiki- Ukraine Kyrgyz Azerbai- Kazakh- Russian Individual Small and medium Ministry of Health stan Republic jan stan Federation entrepreneurs companies Number of days to obtain % of firms who applied for operating operating license license in the last 2 years Source: EBRD-World Bank Business Environment and Enterprise Performance Survey data. 5.4. liCense administration: the kyrgyz rePubliC outPerForms most oF its neighbors, yet smes still bear a big burden The procedure to obtain licenses for individual entrepreneurs in Small and medium companies spent about twice as much the Kyrgyz Republic has been streamlined somewhat in recent time as individual entrepreneurs to prepare the documents years. The time required to obtain an operating license is now to apply for a license, respectively 11 working-man days to six among the lowest of post-Soviet countries (Box 5.4). Yet the working-man days. Small and medium companies also have to procedure for small and medium companies remains relatively wait longer than individual entrepreneurs for the issuance/re- long, taking nearly a month to prepare the license application jection of a license once the documents have been submitted and wait for an answer. The cost of the procedure is also higher to the relevant state agency, respectively 15 to seven calendar for small and medium companies. In addition, 40 percent of in- days. Further, small and medium companies who obtained dividual entrepreneurs and small and medium companies said licenses in 2008 spent an average of KGS5,388 to obtain one they made unofficial payments during the procedure. license, including official and unofficial payments, while indi- vidual entrepreneurs spent an average of KGS2,291. Although the total cost of licensing is higher for small and medium companies than for individual entrepreneurs, the total cost box 5.4: The Time required To obTain an operaTing relative to profit is higher for the latter: the cost of one license license and The overall license coverage in The (including official and unofficial payments, but excluding labor) Kyrgyz republic are among The besT of The posT- represents 0.9 percent of small and medium companies' profit, sovieT counTries but 1.9 percent of individual entrepreneurs’ (Chart 5.7). Recent improvements in the Kyrgyz license procedure are confirmed by the EBRD-World Bank Business Environment and Enterprise Performance Thus, individual entrepreneurs pay eight times the maximum Survey (BEEPS) data. The Kyrgyz Republic is doing better than most of the official fee of KGS300 per license, as per the legislation, while post-Soviet countries on the “number of days to obtain operating license” indicator, as well as on the share of firms who applied for an operating small and medium companies pay 16 times. Although entre- license in the last two years. In the Kyrgyz Republic, it takes an average of preneurs bear other costs in addition to the license fee to obtain 13 days to obtain an operating license – from submission of application a license (e.g. medical certificate, qualification card, 40 hours' to the day the license is granted. Meanwhile, the process takes 16 days training certificate, etc., for individual entrepreneurs involved in in Azerbaijan and 27 days in Kazakhstan. In addition, 24 percent of firms the transport sector), these do not account for the discrepancy applied for a license in the last two years in the Kyrgyz Republic, against between the maximum official fee and the cost actually borne 32 percent in Kazakhstan (Chart 5.6). by entrepreneurs, suggesting that the level of unofficial pay- ments is high, especially for small and medium companies. 62 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Some 40 percent of both small and medium companies and individual entrepreneurs said they made unofficial payments during the licensing procedure. Likewise, nearly 60 percent of small and medium companies and individual entrepreneurs find the procedure either “somewhat complicated” or “very complicated” (Chart 5.8). These data, and the step-by-step to obtain a transportation license (Figure one) suggest that there is still room for simplification and streamlining of the licensing procedure, which would likely represent significant savings. The total cost of the licensing procedure in 2008 for all small and medium com- panies and individual entrepreneurs, including labor cost and official and unofficial payments but excluding lost profit due to breaks or transactions delayed while awaiting licenses, is estimated at KGS134 million ($3.7 million) (Annex 5.2). This represents 0.09 percent of the country’s 2008 GDP. Chart 5.7: the absolute burden of the licensing procedure Chart 5.8: Close to 40 percent of entrepreneurs made is higher for small and medium companies; the relative unofficial payments and close to 60 percent found the burden is greater for individual entrepreneurs procedure complicated duration and cost to obtain licenses for individual unofficial payments and level of difficulty of the license entrepreneurs and small and medium companies in 2008 procedure 30 6,000 70% 5,388 Days to obtain 60% 59% Have used unofficial 25 5,000 license after 57% payments submission 50% Find the procedure number of days 20 4,000 15 Days to prepare complicated 40% 39% 38% documents KgS 15 3,000 2,291 Total cost 30% 10 2,000 including official 7 20% and unofficial 5 11 1,000 payments (KGS) 10% 6 0 0 0% Individual Small and Individual Small and medium entrepreneurs medium Entrepreneurs companies companies Figure 5.1: Step-by-step licensing procedure for an individual entrepreneur driving a vehicle of over eight seats, de facto StEP #/ lISt OF dOCuMEntS tO BE SuBMIttEd/ COSt (InCludIng OutCOME duRatIOn lOCatIOn aCtIvItIES OFFICIal and unOFFICIal PayMEntS) Step 1: Hospital/ • Medical check up 200-300 KGS Medical From half a day to medical certificate two days facility (validity 2 years) Step 2: Municipal • Category D driving license 160 KGS “40 hours Five days (or transport • Driving license certificate” less in case inspection • Itinerary sheet (validity 1 year) of “unofficial • The entrepreneurs is trained on driving solution”) for 40 hours Step 3: Road Police • Driving license 350-400 KGS Qualification One day “Gai” • Vehicle registration certificate card (validity • Category D certificate one year) • 40 hours training certificate 5. licEnsing 63 StEP #/ lISt OF dOCuMEntS tO BE SuBMIttEd/ COSt (InCludIng OutCOME duRatIOn lOCatIOn aCtIvItIES OFFICIal and unOFFICIal PayMEntS) Step 4: Ministry of • Application form 650-800 KGS License Between one Transport • Copy of entrepreneur’s registration hour and 3-4 • Copy of driver’s license days, depend- • Medical certificate ing on whether • Qualification card or not unofficial • 40 hours certificate payments are • Category D certificate made • Patent • Vehicle registration certificate • Vehicle technical compliance • For long distance trips: proof of 3 years’ work experience • The licensor examines the vehicle Source: Ministry of Transport, Municipal Transport Inspection, Road Police and individual entrepreneurs active in the transport sector. 5.5. reCommendations ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS the licensing procedure is reduce the timeframe during which a licensor considers the duration of the licensing procedure would be lengthy. an application and issues an answer from 30 to 15 days. reduced, saving businesses time and money. the percentage of busi- adopt the “silence is consent” principle: if an issuing the duration of the licensing procedure, as well as nesses making unofficial agency fails to respond with a decision regarding a unofficial payments made “to speed up the licens- payments during the license application within the allotted timeframe, the ing procedure,” would be reduced. procedure is high. license is automatically approved. the validity of licenses is legislate a minimum five-year validity for all licenses Extending license duration would reduce the short in comparison to and identify additional permanent licenses (revoked cost of doing business and encourage long-term other post-soviet coun- only in the event of infringements). banking operations, investment while streamlining the work of licen- tries. notary and educational activities, as well as private sors. going by 2008 data, if the average validity detective and security activities, could be subject to of licenses was five years individual entrepreneurs permanent licenses. who require licensing would save an average of Kgs2,397 ($66), whereas small and medium companies that require licensing would save an average of Kgs2,823 ($77) per year. the de facto validity of train licensor staff on license legislation and procedures. license coverage, frequency and procedures will licenses is shorter than the be streamlined and made uniform across the de jure validity, and license country. de facto and de jure validity will concur. coverage varies depending on regions. MEdIuM-tERM RECOMMEndatIOnS some activities that are Exclude cargo transportation and real estate activ- lower license coverage will reduce the cost of neither risky nor involve ity from the list of activities subject to licensing: cargo doing business and will reduce barriers to entry in limited resources are transportation is for example not subject to licensing in relevant sectors. subject to licenses. Kazakhstan, only “hazardous cargo transportation” is. real estate activity needs to be regulated to limit fraud, but alternative methods of regulation should be used. 64 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 5.1: indiCative list oF liCense issuing agenCies and oF tyPes oF aCtivities subjeCt to liCensing (2010) # tyPES OF aCtIvIty SuBJECt tO StatE BOdy ISSuIng duRatIOn OF RECOMMEndatIOnS MandatORy lICEnSIng lICEnSES lICEnSE 1 design, construction and operation of • state inspection for super- valid for two years, Extend validity to five hazardous production entities, except for vision of industrial safety or less if requested by years operation of dangerous production entities • mining supervision of the licensee. using fixed and mobile lifting mechanisms, ministry of Emergency escalators and funiculars situations 2 construction of dams on rivers and valid for period of Extend minimal validity reservoirs construction, but no to five years less than two years 3 hunting and fowling according to the list state agency of Environ- permanent approved by the government of the Kyrgyz mental protection and republic Forestry 4 production and sale of vaccines and ministry of health valid for no less than serums, medicine, medical equipment and five years chemical substances, except when stated otherwise in the legislation 5 private medical practice ministry of health valid for at least two Extend validity to five years years 6 private veterinary practice • veterinary department permanent • regional veterinary departments • bishkek veterinary department 7 Establishment and maintenance of gambling ministry of Finance valid for 10 years houses, organization of gambling games 8 all types of aviation works, certification of department of civil aviation valid for two years, Extend validity to five aircraft, technical maintenance of aircraft under the ministry of trans- or less if required by years and their equipment carried out on the port and communication licensee territory of the Kyrgyz republic 9 city planning, design and survey of state agency of permanent residential, public and production buildings architecture and and constructions construction 10 construction and installation, excluding the state agency of architec- permanent construction of individual residential houses ture and construction 11 private detective and security activities ministry of interior three years validity for make license permanent first issuance; five years for all subsequent 12 banking operations, currency exchange national bank One year validity make license permanent transactions, activity related to electronic payments, activity of pawns. activity of credit unions and attraction of funds from the population by legal entities on the conditions of fixed term, recovery and profitability 13 professional activity on securities Financial market supervi- permanent sion and regulation service of the Kyrgyz republic 14 insurance activity Financial market supervi- permanent sion and regulation service of the Kyrgyz republic 5. licEnsing 65 # tyPES OF aCtIvIty SuBJECt tO StatE BOdy ISSuIng duRatIOn OF RECOMMEndatIOnS MandatORy lICEnSIng lICEnSES lICEnSE 15 activities of non-government pension Financial market supervi- permanent funds sion and regulation service of the Kyrgyz republic 16 activity in the field of posts and telecom- state communications permanent munication, data transmission, television and agency radio broadcasting, use of radio frequency spectrum including design, production, con- struction, installation of relevant networks, lines, facilities, systems and devices (except for the organization of technological and internal production communication) 17 production, transmission, distribution, sale state Energy agency under permanent of electricity and thermal energy, process- the ministry of industry, ing of oil and natural gas Energy and Fuel resources 18 construction of power stations, state Energy agency under permanent substations and electric transmission lines the ministry of industry, Energy and Fuel resources 19 auditing activities agency for the control of permanent Financial market 20 Educational activity (except for state state inspection on valid for five years make license permanent educational institutions implementing licensing, attestation and curricula of pre-school, primary, basic, and accreditation of Educa- secondary education) tion institutions under the ministry of Education 21 import, development, production and sale ministry of interior valid for at least two Extend validity to five of explosives and pyrotechnical substances years years and products 22 production, repair, trade in arms and ministry of interior valid for at least two Extend validity to five ammunition years years 23 design, production and sale of military ministry of defense valid for at least two Extend validity to five items and services years years 24 disposal, storage, elimination and burial state agency of Environ- valid for at least two Extend validity to five of toxic wastes, including radioactive mental protection and years years materials Forestry 25 transportation (including cross-border state agency of Environmen- valid for at least two Extend validity to five transportation) of toxic waste tal protection and Forestry years years 26 activities of administrators of the bankruptcy department permanent bankruptcy procedure under the state committee on the management of state property 27 private notary and lawyer activities ministry of Justice notary: valid for five make notary license years permanent lawyers: permanent 28 passenger and cargo transportation by ministry of transport and valid for two years, cancel license require- road, air, sea and railway except for special communications or less if required by ment for cargo transport; business and technological transport, bus licensee extend other licenses’ stations, and armored transport validity to five years 29 activities in the area of customs-related state customs committee permanent services (owner of a temporary warehouse, owner of a custom warehouse, owner a duty-free store, customs broker) 30 real estate activity the legislation does not not defined in the cancel license specify a licensor legislation requirement 66 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 5.2: total Cost oF obtaining liCenses For all smes in 2008 labor costs COdE InPut data data SOuRCE a proportion of individual entrepreneurs subject to the licensing procedure in 22% survey results 2008 b number of active individual entrepreneurs 145,663 state statistics committee c time spent by individual entrepreneurs in preparing documentation 5.9 survey results (working-man days) d average number of licenses obtained 1 survey results E average number of days in a month 21 F average monthly salary (gross pay) (Kgs) 5,378 state statistics committee g total labor cost of licenses, individual entrepreneurs (KgS) 47,539,709 a x B x C x d x (F: E) h total labor cost of licenses, individual entrepreneurs ($) 1,299,965 Ex. Rate 36.57 COdE InPut data data SOuRCE a proportion of small and medium companies subject to the licensing procedure 15% survey results in 2008 b number of active small and medium companies 10,982 state statistics committee c time spent by small and medium companies in preparing documentation 10.9 survey results (working-man days) d average number of licenses obtained 1.2 survey results E average number of days in a month 21 F average monthly salary (gross pay) (Kgs) 5,378 state statistics committee g total labor cost of licenses, small and medium companies (KgS) 5,523,521 a x B x C x d x (F: E) h total labor cost of licenses, small and medium companies ($) 151,040 Ex. Rate 36.57 Official and unofficial payments COdE InPut data data SOuRCE a proportion of individual entrepreneurs subject to the licensing procedure in 2008 22% survey results b number of active individual entrepreneurs 145,663 state statistics committee c average amount of official and unofficial payments to obtain licenses (Kgs) 2,290 survey results d total official and unofficial payments, licenses, individual entrepreneurs 72,050,746 axBxC (KgS) E total official and unofficial payments, licenses, individual entrepreneurs 1,970,215 Ex rate 36.57 ($) 5. licEnsing 67 COdE InPut data data SOuRCE a proportion of small and medium companies subject to the licensing procedure in 15% survey results 2008 b number of active small and medium companies 10,982 state statistics committee c average amount of official and unofficial payments to obtain licenses (Kgs) 5,388 survey results d total official and unofficial payments, licenses, small and medium 9,112,735 axBxC companies, (KgS) E total official and unofficial payments, licenses, small and medium 249,186 Ex rate 36.57 companies ($) total costs IndIvIdual EntREPREnEuRS SMall and MEdIuM COMPanIES KgS $ KgS $ labor cost 47,539,709 1,299,965 5,523,521 151,040 Official and non official payment 72,050,746 1,970,215 9,112,735 249,186 Sub total 119,590,455 3,270,179 14,636,256 400,226 grand total (KgS) 134,226,711 grand total ($) 3,670,405 Note on cost calculations: (i) the cost of various administration requirements were estimated based on reported official and unofficial payments as well as on time spent preparing to submit documents; (ii) the total cost of the licensing procedure for farmers was not calculated, as the number of respondents was not high enough to be meaningful. 6. Technical Regulations reform is being implemented at a slow pace 6.1. key Findings: 6.2. teChniCal regulations: legislation • The mandatory certification procedure is most common has evolved Positively Following among small and medium companies: 3 percent of indi- aCCession to the wto membershiP , vidual entrepreneurs and 17 percent of small and medium but imPlementation is slow companies went through the procedure in 2008, in con- The Kyrgyz Republic became a World Trade Organization trast to only 1 percent of farmers. member on December 20, 1998, the only Central Asian • Over 40 percent of small and medium companies in the country to do so thus far. Before and after its accession, the industry/production and wholesale sectors went through Kyrgyz Republic brought its economic and trade legislation the certificate procedure in 2008. in conformity with WTO rules and obligations. The changes • Small and medium companies who went through the made included a decrease in custom tariffs, the elimination procedure obtained an average of 7 certificates of confor- of non-tariffs barriers to trade, including import and export mity. quotas, and a decrease in the number of commodities • The mandatory certification procedure is the most ex- subject to import/export licensing. In addition, changes to pensive regulatory procedure for small and medium the technical regulation legislation passed in 2004 and 2005 companies: those small and medium companies who helped ensure conformity with the Sanitary and Phytosani- went through the procedure in 2008 spent an average tary Measures and Technical Barriers to Trade Agreements. of KGS24,340 ($666), including official and unofficial pay- ments and labor costs. This represents 4.1 percent of small As a result of the reforms undertaken since 2004 (Box 6.3), the and medium companies’ profit. Kyrgyz Republic is currently in a transition phase: adoption of • The total cost of the procedure for all SMEs57 of the country technical regulations establishing mandatory requirements in 2008 was approximately KGS73.8 million ($2 million), or related to products, processes of manufacture, storage, trans- 0.045 percent of GDP. portation, sale, operation and disposal of products should be completed by December 2012. Requirements that will not have been adopted by then will either stop being effective or will become voluntary, as per the “guillotine” principle em- bedded in the Technical Regulation Law. Meanwhile, during the transition period, state standards related to safety issues remain mandatory. 57 Farmers were not included in the calculations as the coverage of the certifica- tion procedure is low among farmers. 6. tEchnical rEgulatiOns 69 box 6.1: The Technical barriers To Trade and The box 3: Key legislaTion and regulaTion governing saniTary and phyTosaniTary measures agreemenTs Technical regulaTions and The conformiTy The Agreement on Technical Barriers to Trade (TBT) recognizes countries’ assessmenT procedure rights to adopt the technical regulations and standards they consider ap- • Law “On the Fundamentals of Technical Regulation in the Kyrgyz Re- propriate, as long as they do not constitute unnecessary barriers to trade. public,” adopted May 22, 2004; It seeks to ensure that technical regulations and standards, as well as • Presidential Decree No. 149 “On Institutional and Structural Changes in testing and certification procedures, do not create unnecessary obstacles the Technical Regulation area,” adopted April 30, 2005; to trade. However, it recognizes that countries have the right to establish • Government Resolution No. 639 “On the Mandatory Certification of protection at levels they consider appropriate (for human, animal or plant Products’ Conformity,” adopted December 30, 2005. This Resolution in- life or environmental health for example), and that they should not be cludes a list of products subject to mandatory certification and defines prevented from taking steps to ensure those protection levels are met. The the procedure for mandatory certification; agreement therefore encourages countries to use international standards • Government Resolution No. 512 approving the Regulation “On order of when appropriate. issuing declaration of conformity,” adopted October 23, 2007. The Agreement on the Application of Sanitary and Phytosanitary Mea- sures (SPS) ensures that SPS measures (food safety and animal and plant health regulations) do not represent unnecessary, arbitrary, scientifically The law limits the development of technical regulations only unjustifiable, or disguised restrictions on international trade. The agree- for products having a negative impact on health, safety and ment recognizes that governments have the right to take sanitary and the environment and for which none of the other regulating phytosanitary measures but that they should be applied only to the options is applicable. Technical regulations should contain extent necessary to protect human, animal or plant life or environmental only minimal safety requirements. These provisions are in line health and should not arbitrarily or unjustifiably discriminate between with international best practices. members. In order to harmonize sanitary and phytosanitary measures on as wide a scale as possible, members are encouraged to base their The Technical Regulation Law adopted the guillotine principle measures on international standards, guidelines and recommendations whenever possible.58 to reduce the number of requirements: technical regulations establishing mandatory requirements related to products' processes (methods) of manufacture, storage, transporta- tion, sale, operation and disposal should be adopted within technical regulations establishing mandatory a transition period of eight years from the date the Technical requirements related to products should be Regulation Law came into effect (May 22, 2004). Require- adopted by the end of 2012 ments not adopted within that window will either stop being effective or will become voluntary. However, the adoption of technical regulations is moving forward slowly. As of the end box 6.2: whaT is a Technical regulaTion? of 2009, three technical regulations had been adopted60 and A technical regulation is a document adopted by an authority that pro- two more were pending.61 vides binding technical requirements, either directly or by referencing or incorporating the content of a standard, technical specification or code of The procedure to require technical regulations for certain practice. Technical regulations may specify the type of product that is not products is transparent and requires the notification of the allowable, the type of product that is allowable, or the outcome that is WTO and its members (as per WTO requirements). The reform required. By their very nature, technical regulations have an effect on the has already allowed for a significant reduction of the number type of products that can be manufactured. Technical regulations are the of products subject to mandatory certification from 7,000 in most stringent form of governmental control and should ideally be used 2004 to 2,000 in 2009. As per the provisions of the Law on only in situations where none of the other options for the regulation of product, outlined above, will ensure the adequate protection of health, safety and the environment.59 60 Law “Technical Regulation on Ecological Safety,” adopted May 08, 2009”; Law “Technical Regulation on Safety of Transport,” adopted May 29, 2009; Law “Techni- cal regulation on Safe Exploitation and Utilization of Machinery and Equipment,” adopted December 29, 2009. 61 Draft Law “Technical regulation on Safety of Construction Materials, Items and 58 Summary of the WTO agreements. Structures”; draft Law “Technical regulation on Safety of Buildings and Construc- 59 APEC (2000) “Information Notes on Good Practice for Technical Regulation”. tions”. 70 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Technical Regulation, the list may be revised on a yearly basis if needed. Despite the fact that the list of products subject box 6.5: whaT are sTandardizaTion and sTandards? to mandatory certification and declaration of conformity is revised regularly, some low risk products are still on the Standardization is the activity of establishing, with regard to actual or potential problems, provisions for common and repeated use aimed at list (shoes, glass bottles, etc.). Additional revisions to the list the achievement of the optimum degree of order in a given context. In should be made as soon as possible. In addition, all food particular, the activity consists of the processes of formulating, issuing items should be excluded from the list of products subject to and implementing standards. Important benefits of standardization are mandatory certification. Indeed, the Kyrgyz Republic should improvement of the suitability of products, processes and services for harmonize its food standards with the Codex Alimentarius their intended purposes, prevention of barriers to trade and facilitation of standards, which includes (i) the implementation of continu- technological cooperation.62 ous quality control approaches such as the “Hazard analysis A standard is a document, established by consensus and approved by and critical control point” and the “Good hygiene practices, a recognized body, that provides, for common and repeated use, rules, good manufacturing practices” approaches, as well as (ii) guidelines or characteristics for activities or their results, aimed at the food traceability. achievement of the optimum degree of order in a given context. Stan- dards should be based on the consolidated results of science, technology and experience, and aimed at the promotion of optimum community benefits.63 box 6.4: whaT is The codex alimenTarius? The Codex Alimentarius Commission (CAC) was established in 1963 by the Food and Agriculture Organization of the United Nations (FAO) The Technical Regulation Law adopted May 22, 2004, draws and the World Health Organization (WHO) to protect the health of a clear distinction between standards, where compliance consumers and ensure fair practices in food trade. The Codex Alimen- tarius (“food code” in Latin) is the result of the work of the Commission is voluntary, and technical regulations, where compliance is and its technical committees: a collection of internationally adopted mandatory and defines that: food standards, guidelines and codes of practice. Codex standards are • “Standardization is an activity to establish rules, general voluntary and non-binding recommendations and their implementa- principles, characteristics designed for repeated use on a tion is not controlled but many governments believe their adoption voluntary basis, directed to achieving orderliness, increas- benefits their consumers and trade. Codex standards and guidelines ing competitiveness in the field of manufacturing and are available, along with additional information, on the Codex web site: circulating products, performing works and rendering http://www.codexalimentarius.net services.” • “A standard is a document established by consensus in which are established rules, general principles, character- standards related to safety issues remain istics of products, processes (methods) of manufacture, mandatory until the end of 2012 storage, transportation, sale, operation and disposal, An important sub-set of technical regulations are standards. works or services for voluntary repeated use. A standard According to WTO and the Kyrgyz Law on Technical Regula- can also contain requirements to terminology, symbols, tion, standards should be voluntary. However, state standards packages, marking and/or labeling.” As of the end of related to safety issues including protection of life and health 2009, there were close to 22,000 standards in use in the of humans, animals and plants and protection of the environ- Kyrgyz Republic (639 Kyrgyz national standards, 20,000 ment remain mandatory until the end of 2012. The list of stan- Inter State- governmental standards and 1,000 Russian dards that remain mandatory until 2012 is included in the list standards adopted as national standards). of products subject to mandatory certification. However, this list is not comprehensive. However, during the transition period (extended on Novem- ber 16, 2009, until December 201264) and pending the advent of appropriate technical regulations, the safety standards of products and their processes (methods) of manufacture, 62 ISO/IEC “Guide 2 Standardization and related activities – General vocabulary, 1.1” 63 ISO/IEC “Guide 2 Standardization and related activities – General vocabulary, 3.2” 64 Amendments to the Technical Regulation Law, adopted November 16th 2009. 6. tEchnical rEgulatiOns 71 storage, transportation, sale, operation and disposal are enables NISM to fully support the Ministry of Economic subject to mandatory compliance. State standards (“GOST Regulation to develop technical regulations. It is envisioned standards”) related to safety therefore remain mandatory for that NISM will become a Kyrgyz Center for Standards once the time being. its regulations, which are currently under development, are solidified. During the transition period, the Kyrgyz Republic’s technical regulations should be harmonized with international stan- the list of products subject to compulsory dards (ISO, etc) and EU requirements. It is recommended that certification of conformity is too long the Kyrgyz Republic, whenever possible, fully adopts these Either by undergoing a certification process or by declaring standards using the “cover letter” or translation method- their compliance, businesses are required to demonstrate ologies. This would ensure that Kyrgyz companies who export compliance with mandatory technical regulations and stan- their products to the EU and other advanced economies do dards for 2,000 different products.67 The process used should not have to comply with both international and national stan- depend on the product and the business developing it, but dards that would decrease both production and compliance in practice, however, all businesses use the more costly certi- costs. fication process. institutional structure: the standardization, The list of products subject to mandatory certification was last accreditation and conformity assessment revised on February 18, 2009, which resulted in the shifting of functions are now separated, in line with some products from the mandatory certification list to the international best practices list of products subject to a “declaration of conformity.” For The National Institute for Standards and Metrology (NISM) is these products (plastic tubes, contact lenses, children clothes since 2005 the official standardization body for the Kyrgyz Re- made of cotton, various types of shoes, glass bottles, ceram- public, in charge of the development, coordination, promo- ics, electrical pumps, etc), manufacturers no longer need to tion and dissemination of standards.65 NISM replaced the State obtain a mandatory certificate from a third party certifying Inspectorate for Standardization and Metrology (Kyrgyzstan- body, but can themselves declare conformity, certifying that dart), which exercised several conflicting functions, including: the products they manufacture meet the requirements of (i) development of mandatory standards and regulations, (ii) the technical regulations, the provisions of standards or the accreditation and monitoring of certification agencies, and (iii) conditions of contracts. Declaring conformity increases busi- provision of conformity assessment services through testing ness responsibility and accountability for their products and and certification. NISM, meanwhile, is a non-regulatory, decreases the costs linked to certification. non-enforcement and non-conformity assessment services provider. The separation of the functions pertaining to (i) the Certification is defined in the Technical Regulation Law as development of standards, (ii) accreditation of monitoring the process of “assuring conformity during which a certifica- and certification agencies and (iii) conformity assessments is tion body certifies that the product, processes (methods) of part of the country's progress towards meeting the WTO re- manufacture, storage, transportation, sale, operation and dis- quirements and international best practices and international posal, works or services meets the established requirements best technical regulations practices as it prevents conflict of of technical regulations, the provisions of standards or condi- interest, even if in practice NISM still influences conformity tions of contracts.” assessment bodies. As a general principle, no single body should be responsible for developing standards, accrediting Certification is carried out based on an application to a third certification agencies and certifying conformity. party certification body whose accreditation scope includes the products which the applicant intends to certify. Certifica- Whereas NISM used to be independent, it is since Novem- tion bodies, which may be state or private enterprises, are ber 2009 under the Ministry of Economic Regulation.66 This accredited by an independent accreditation body. The Kyrgyz Republic currently has 18 certification bodies. 65 Government Resolution No. 546 “On National Institute for Standards and Metrology,” adopted November 30, 2005. 66 Presidential Decree No. 425, “On Measures to Implement the Law On Approval of the 67 The declaration of conformity is an option for some products only. Government Structure,” adopted October 26, 2009. 72 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs The certification process often involves the testing of the Alternatively, for some products, manufacturers may issue a product to be certified in an accredited laboratory. If suc- “declaration of conformity.” A declaration of conformity is a cessful, a certification process results in the issuance, by the document by which the manufacturer certifies that the prod- certification body, of a certificate of conformity. There are ucts they manufacture meet the requirements of the techni- currently 67 accredited laboratories in the Kyrgyz republic (31 cal regulations. However, in practice, the declaration is more a private laboratories and 36 State laboratories), 16 of which are “simplified permit” than a declaration, as it must be registered accredited to test food. All laboratories were accredited by in the state agency responsible for the state surveillance of the national accreditation body. Some 24 laboratories comply the type of product for which conformity is being declared. with ISO/IEC 17025:2006 standard (updated version of ISO/IEC Best international practices indeed do not involve the regis- 17025) and 42 comply with ISO/IEC 17025:2000 standard. This tration of a declaration of conformity. structure is in accordance with international and WTO best practices. As of the end of 2009, no Kyrgyz business had declared con- formity for any product. Businesses prefer to obtain certifi- Because the credibility of Kyrgyz laboratories is low, however, cates instead, although the procedure is more complex. Con- the majority are not recognized by foreign trading partners. versation with focus groups have indicated that businesses As a result, Kyrgyz entrepreneurs looking to export have to were reluctant to declare conformity as this would most likely test their products again in the importing country (which not be accepted during inspections, although the procedure doubles the administrative burden of exporting). In addition, is de jure acceptable. the number of laboratories in the Kyrgyz Republic is high “ compared to the population (66 laboratories for 5.24 million people). A decrease in quantity and improved quality of labo- Our inspectors are not used to declarations of ratories (through better equipment and staff training) is thus conformity, and we would have trouble convincing recommended. It is also recommended that the laboratories them that this document is acceptable during are accredited by international accreditation bodies. inspections. Therefore, we prefer to continue using certificates rather than issue declarations of Figure 6.1: the technical regulation system in the Kyrgyz conformity. It would be much better if our products Republic were not subject to any conformity assessment at all. In Europe, producers of glass bottles are not subject to Technical Prime Minister any conformity assessment.” regulations Entrepreneur, producer of glass bottles (adopted either by the reports table 6.1: Step by step, declaration of conformity Government or the Parliament) StEP 1 accreditation Body (independent) the entrepreneur verifies conformity on the basis of (i) his/her own verifications and (ii) on the basis of the verifications done by a third accredits and monitors party (e.g., an accredited laboratory). StEP 2 Standards Certification Laboratories the entrepreneur fills the declaration. (adopted by Bodies (18 (66). the National certification Test products. StEP 3 bodies in total, Institute for 13 private and the entrepreneur registers the declaration in the state agency Standards and 5 state owned). responsible for the state surveillance of the type of product for Metrology) Issue certificates which conformity is being declared. of conformity based on the the declaration should be registered within a day. registration is results of la tests free of charge. laboratories. 6. tEchnical rEgulatiOns 73 recognition of conformity assessment results 6.3. mandatory CertiFiCates hinder the for exported products is inefficient develoPment oF small and medium Rules and procedures for technical regulation and product ComPanies certification apply both to domestic and imported products The current system of mandatory certification mostly hinders alike: imported products subject to mandatory certification the development of small and medium companies because must be certified before they enter the market of the Kyrgyz they are the category of respondents for whom the coverage Republic. De jure, the Kyrgyz Republic accepts certificates and of the certificate procedure is highest. Although the number testing results issued in foreign countries including:68 of products subject to mandatory certificates decreased (i) bilaterally from Azerbaijan, Georgia, China, Armenia, sharply from 2004 to 2008, some five percent of individual en- Belarus, Kazakhstan, Moldova, Russia, Tajikistan, Turkmeni- trepreneurs and 27 percent of small and medium companies stan and Ukraine. were still subject to mandatory certification in 2008 (Chart 6.1). (ii) unilaterally from Iran, Slovakia, Turkey and EC countries. As the percentage of farmers whose products are subject to mandatory certification is around one percent, they will not In addition, conversations with focus groups indicate that cer- be discussed in this chapter. tificates of conformity issued in the Kyrgyz Republic are often not recognized internationally, even by countries having In 2008, 17 percent of small and medium companies and three signed bilateral recognition agreements (see list above). In percent of individual entrepreneurs obtained mandatory cer- such cases, Kyrgyz products have to go through re-assess- tificates. Small and medium companies who obtained man- ment, increasing export costs and procedures. International datory certificates obtained an average of seven certificates accreditation of Kyrgyz laboratories would help Kyrgyz certifi- (indicating that those who received certificates of conformity cates of conformity gain international recognition. certified an average of seven products – as certificates are issued per product), whereas individual entrepreneurs who “ obtained certificates obtained an average of two certificates. I have to certify my products in the Kyrgyz Republic, before they are exported, and I often have to re-certify The difference between the share of businesses whose prod- them in Russia. I do not understand the purpose of this ucts had to comply with mandatory certificates and the share double-certification. It is a loss of time and money. It of those who obtained mandatory certificates in 2008 (10 would be much better if our certificates of conformity percent for small and medium companies and two percent for individual entrepreneurs) is likely due to the fact that some were always accepted in Russia.” businesses obtained mandatory certificates earlier than 2008, Entrepreneur producing dairy products and these certificates were still valid in 2008. Certificates may be valid for up to three years. the post-market surveillance system must be strengthened Chart 6.1: the products of close to 30 percent of small and The conformity assessment system currently relies mostly on medium companies are subject to mandatory certification, pre-market surveillance (testing, inspections, etc). However, and close to 20 percent of small and medium companies it is also important to develop a post-market surveillance obtained a certificate of conformity in 2008 system to ensure that products which have been placed on Coverage and frequency of the mandatory certification procedure the market comply or continue to comply with the relevant 30% 8 requirements. 27% Percentage of SMEs 7 7 whose products are 25% 6 subject to mandatory It is therefore recommended to strengthen the post-market 20% certification 17% 5 surveillance system by adding significant penalties for non- Percentage of SMEs who obtained in 15% 4 conformity and ensuring that non-compliant products are 2008 certificates of conformity identified. 10% 2 3 Average number of 2 5% certificates received 5% 3% (among those who 1 received certificates) 68 Government resolution No. 8 “On Importation of Products Subject to Mandatory 0% 0 Certificates of Conformity and Recognition of Conformity Assessment Results Issued Individual Small and medium Outside the Kyrgyz Republic,” adopted January 11, 2006. entrepreneurs companies 74 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Businesses that either go through the certification procedure Not only is the industry/production sector most affected or want to improve the quality of their products may pur- by the mandatory certificates burden, but it is also the most chase documents related to the description of standards. In affected by the economic crisis: in 2009, production in the 2008, some seven percent of small and medium companies sector dropped by 7.8 percent compared to the previous purchased documents related to the description of a given year.69 The need to ease the regulatory burden is therefore standard (Chart 6.2). Small and medium companies, who urgent. purchased these documents, purchased an average of 2.3 documents. These documents can be purchased from the Frequent on-site inspections make the mandatory certifica- office of the Bishkek based National Institute for Standards tion system all the more burdensome. Small and medium and Metrology and its branches. A Russian-language version companies active in the industry/production sector had of ISO 22000 standard, for example, costs KGS165 ($4.5) while respectively the highest and second highest inspection cov- a Kyrgyz national standard costs approximately KGS180 ($5). erage by the Sanitary and Epidemiological Service and the Fire Safety Department in 2008: 47 percent of the small and Chart 6.2: Close to seven percent of small and medium medium companies active in the industry/production sector companies purchased at least one document describing were inspected by the Sanitary and Epidemiological Service standards in 2008 in 2008, and 53 percent were inspected by the Fire Safety Department. Survey results indicate that inspectorates often Share of SMEs who obtained a standardization document in 2008 do not use risk criteria for the planning of inspections (see Individual chapter on inspections). entrepreneurs Small and medium mandatory certificates of conformity hamper companies the development of the food industry 0% 1% 2% 3% 4% 5% 6% 7% The food processing industry (part of the industry/production The highest share of small and medium companies who ob- sector) is an important part of the Kyrgyz economy. In 2007, tained certificates of conformity in 2008 is to be found in the the agriculture, hunting and forestry sector amounted to 26.9 industry/production and wholesale sectors: respectively 42 percent of GDP.70 In 2009, nearly two-thirds (65 percent) of the percent and 41 percent of all small and medium companies Kyrgyz population lived in rural areas.71 active in these sectors obtained certificates of conformity in 2008 (Chart 6.3). The industry/production sector was also the Yet the food processing sector performs well below its po- sector where certificates were the most prevalent for indi- tential. One of the reasons for this under-performance has to vidual entrepreneurs: 20 percent of individual entrepreneurs do with the failure of the Kyrgyz Republic to comply with in- active in the industry/production sector received mandatory ternational food quality and safety standards. Kyrgyz firms are certificates of conformity in 2008. only allowed to export most livestock products (meat, milk) to a very limited number of countries (mainly Russia and Ka- Chart 6.3: Over 40 percent of small and medium zakhstan), while safety issues prevent Kyrgyz companies from companies in the industry/production and wholesale trading with the EU and other advanced economies (Box 6.6). sectors obtained certificates of conformity in 2008 Proportion of small and medium companies whose products are subject to mandatory certification, per sector 50% 42% 41% 40% 30% 20% 10% 9% 9% 69 Statistics Committee (2010) “Express Bulletin”, January 16. 4% 70 National Bank of the Kyrgyz Republic (2008) “Yearly Report”. 2% 0% 71 State Statistic Committee of the Kyrgyz Republic Bishkek (2009) “Kyrgyzstan in Industry/ Wholesale Retail Construction Trans- Services, except Figures”. production trade trade port nancial services 6. tEchnical rEgulatiOns 75 box 6.6: ouTdaTed sTandards hamper The box 6.7: food TraceabiliTy in The eu developmenT of The livesTocK secTor Legal framework A 2007 World Bank assessment identified outdated standards as a key Food traceability has been compulsory in the EU since the General Food obstacle in the development of the livestock sector. Law entered into force in 2002. “Although a member of the WTO, the Kyrgyz Republic has been slow to What is traceability? harmonize its standards with those of the Codex Alimentarius. It should be Under EU law, “traceability”means the ability to track any food, feed, food- a priority for the government to expedite the harmonization of standards producing animal or substance that will be used for consumption, through for those products that are exported or expected to be exported from the all stages of production, processing and distribution. Kyrgyz Republic. Meeting the WHO health and safety provisions for food Why is traceability needed? products is of critical importance for the development of any export– Traceability is a way of responding to potential risks that can arise in food oriented business. Both Kazakhstan and Russia, traditional Kyrgyz export and feed, to ensure that all food products in the EU are safe to eat. When markets, are moving rapidly to harmonize their domestic standards for a risk is identified, traceability allows tracing it back to its source in order food products with the Codex Alimentarius. Once these countries have to swiftly isolate the problem and prevent contaminated products from done so, Kyrgyz exporters will face the same high standards whether they reaching consumers. As a result, traceability allows targeted withdrawals are trying to export to Russia, to Kazakhstan, or to the EU.” of affected products from the market and the provision of accurate infor- mation to the public, thereby minimizing disruption to trade. Past food Source: World Bank (2007) “Kyrgyz Republic, Livestock sector review: embracing the new challenges,” January. crises, such as dioxin contamination and bovine spongiform encephal- opathy (BSE, commonly known as mad-cow disease), have illustrated the importance of being able to swiftly identify and isolate unsafe foodstuffs in Kyrgyz legislation requires food products to conform to order to prevent them from reaching the consumer. sanitary norms and rules (called “SAN PINS”) and/or manda- How is traceability implemented? tory standards (“GOST standards”). Best international practices Food operators are required to document the names and addresses of the also require food products to conform to sanitary norms and supplier and customer for each transaction (“one step forward and one rules (e.g. threshold levels of contaminants, microbiological step back”), as well as the nature of the product and date of delivery. Op- requirements, etc). However, best international food safety erators are also encouraged to keep information on the volume or quantity practices rarely rely on mandatory certification or rigid stan- of a product, the batch number if there is one, and a more detailed descrip- dards to ensure food safety (apart from labeling, packaging, tion of the product, such as whether it is raw or processed. In the case of and testing methods) – in part because the testing of one animals, producers must “tag” every animal with details of their origin and food product sample does not guarantee the safety of the when animals are taken for slaughter, stamp each with the traceability rest of the production. stamp of the abattoir. The tools used (ear tags, passports, bar codes) may vary from one country to another, but must carry the same information. On the contrary, best food safety practices usually include: Source: Health and Consumer Protection Directorate-General (2007) “Food Traceability Factsheet,” June (i) a continuous safety management and control based on the Hazard Analysis and Critical Control Points (HACCP) system, which is grounded on the Good Hygiene Prac- The step-by-step certification of cooked sausages (Figure 6.2) tice and Good Manufacturing Practices (GHP GMP). These indicates the complexity of the procedure. The procedure mechanisms ensure that businesses have appropriate in- is not only costly (minimum KGS3,000 for official payments ternal control and risk-based control systems for verifica- only), but also involves at least two visits to a certification tion of compliance with safety requirements throughout body and another to a laboratory, as well as a follow-up visit the production process. to the production facility by the certification body. In addi- (ii) assurances of food product traceability, according to the tion, international experience has shown that random sample “from farm to fork” approach, so that unsafe products testing does not guarantee overall food safety, as it does not can be recalled promptly and non-compliant producers guarantee the safety of the products that were not tested. identified and sanctioned for any violations (Box 6.7). (iii) Producers are given the primary responsibility for safety, using tools such as traceability and HACCP. Governments take on advisory, oversight and rule-making roles. 76 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs It is therefore recommended that the Kyrgyz Republic moves away from the requirements, for food products, to conform with sanitary norms, rules and standards and ensures instead (i) that all food business operators implement and adhere to HACCP, GMP and GHP and (ii) the traceability of all food products, starting with meat and milk. These approaches are in line with Codex Alimentarius food safety practices. Figure 6.2: Step by step for the certification of cooked sausages Step #/ location List of documents Official cost Outcome Duration to be submitted/ activities Step 1: Accredited certification body, • Application form None The applicant chooses the One day chosen by the applicant certification scheme “3a” or among the 18 accredited cer- “4a“ (see annex 1, certifica- tification bodies of the Kyrgyz tion schemes) as instructed Republic in the list of products subject to mandatory certifi- cates of conformity Step 2: Accredited laboratory, chosen • Sampling and testing Beetwen KGS Result of testing Up to among the 16 food laborato- of the sausage to be 2,000 ($55) seven ries accredited in the Kyrgyz certified and KGS 3,000 working Republic ($82) days Step 3: Accredited certification body • Payment of the KGS 500 ($14) Issuance of certificate One hour chosen during step one certificate fee Step 4: Production facility (this • The certification KGS 500 Inspection control report One day step may take place several body verifies that months after the previous the sausages are steps) still complying with requirements Source: Sanitary and Epidemiological Service. The mandatory certificate system poses substantial barriers endar days to obtain all their certificates. In 2008, small and to business development. In 2008, it took an average of 24 medium companies that obtained mandatory certificates working days for small and medium companies to prepare spent an average of KGS14,583 ($399), including official and their certification documents to obtain all certificates (seven unofficial payments but excluding labor costs, to obtain certificates on average). After submitting the documents, those certificates (Chart 6.4). This cost represents 2.4 percent small and medium companies waited an average of 47 cal- of small and medium companies’ profit. Individual entre- 6. tEchnical rEgulatiOns 77 preneurs who obtained mandatory certificates needed an Because mandatory certificates are the most expensive regu- average of 10 working days to prepare the certification docu- latory procedure for small and medium companies (for those ments. After document submission, they waited an average who went through this regulatory procedure in 2008), they of 10 calendar days to obtain all certificates. In 2008, individual represent a main hindrance to business development. It is entrepreneurs who obtained mandatory certificates spent therefore important to further reform technical regulations in an average of KGS4,414 ($121) including official and unofficial order to promote the growth of small and medium compa- payments but excluding labor costs to obtain all mandatory nies. Small and medium companies should be the backbone certificates, or 3.7 percent of average profit. In 2008, the total of the economy, they create the highest number of jobs cost of the certification procedure for all Kyrgyz SMEs72 was (employing an average of 20 employees, while individual en- approximately KGS73.8 million ($2 million) (Annex 6.2), or trepreneurs employed four74) and they contribute the biggest about 0.05 percent of GDP. tax revenues to the state budget (per enterprise). Chart 6.4: Certification is the most costly procedure for Survey data shows that about one-third of all individual small and medium companies entrepreneurs and small and medium companies (33 percent and 32 percent, respectively; Chart 6.5), reported duration and cost of the certificate procedure to obtain all making unofficial payments to obtain mandatory certificates. certificates in 2008 80 16,000 Meanwhile, some 21 percent of individual entrepreneurs 14,583 Number of calendar and 33 percent of small and medium companies said the 70 14,000 days to obtain procedure to obtain mandatory certificates was either 60 12,000 certificate after submission “somewhat” or “very” complicated (Chart 6.6). 50 47 10,000 Number of working 40 8,000 days to prepare documents Chart 6.5: One third of those SMEs who went through 30 6,000 4,414 Total cost including the certification procedure made unofficial payments 20 4,000 official, unofficial 10 Proportion of SMEs who made unofficial payments during the 10 24 payments for all 2,000 10 certificate (KGS) mandatory certification procedure 0 0 Individual Small and Individual entrepreneurs medium entrepreneurs companies Small and medium companies Furthermore, there are substantial indirect costs resulting from 31% 32% 33% the technical regulation procedure, such as delayed market entry, reduced innovation, reduced competitiveness and hindered integration with international trade. In particular, the Chart 6.6: One third of small and medium companies found the procedure complicated system restricts innovation and makes it difficult to launch new products. Some mandatory “GOST” standards are pre- Proportion of SMEs who found the mandatory certification scriptive rather than performance based, meaning that they procedure rather complicated or very complicated specify the means for attaining the specified result rather than Individual 21% allow businesses to determine their own means for achieving entrepreneurs the result. As a result, businesses are unable to find alternative Small and medium 33% companies means to achieve the necessary result, which hampers innova- 0% 5% 10% 15% 20% 25% 30% 35% 40% tion. The level of innovation in the Kyrgyz Republic is low, and may be decreasing: 46 enterprises introduced innovations in 2008, as opposed to 50 in 2004 .73 It should be noted, however, that the creation of new products is easier than in some post- Soviet countries: it is possible to launch products that conform to Russian or international standards. 72 Farmers were not included as the coverage (one percent) is low enough to be negligible. 73 Source: State Statistics Committee. 74 Source: Survey results. 78 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs 6.4. the share oF small and medium Com- Panies obtaining voluntary CertiFiCates box 6.8: iso cerTificaTion is developing in The Kyrgyz oF ConFormity remains very small republic A scant two percent of individual entrepreneurs and some three percent of small and medium companies obtained The vast majority of ISO standards are highly specific to a particular product, material, or process. However, ISO 9001 (quality) and ISO 14001 voluntarily certificates of conformity in 2008 (Chart 6.7), (environment) are “generic management system standards.”These generic usually in an effort to boost sales and improve the quality standards can be applied to any organization in any sector of activity, of their products. This indicates that the market incentive for whether it is a business, a public administration, or a government depart- product certification in the Kyrgyz Republic is still low. Small ment. ISO 9001 contains a generic set of requirements for implementing and medium companies in the retail trade and industry/ a quality management system and ISO 14001 for an environmental production sectors were the most likely to obtain a voluntary management system. certificate: respectively eight percent and seven percent Some of the requirements in the ISO 9001 quality management system of small and medium companies active in these sectors include: a set of procedures that cover all key processes in the business; obtained a voluntary certificate. monitoring processes to ensure they are effective; keeping adequate records; checking output for defects, with appropriate and corrective action In more advanced market economies, it is usually in the where necessary; regularly reviewing individual processes and the quality interest of producers to comply with set standards, which system itself for effectiveness; and facilitating continual improvement. As enables them to do business with larger companies requiring of May 15th 2009, 15 companies were ISO 9001 certified in the Kyrgyz minimum standard levels. Knowledgeable consumers then Republic (Annex 6.3). have the choice between certified and non-certified prod- Some of the requirements of the ISO 14001 environmental management ucts, which then encourages producers to self-certify their system include (i) the development of a business statement that includes products. commitments on prevention of pollution, continual improvement of the environmental management system and compliance with all applicable statutory and regulatory requirements, (ii) the setting of performance Chart 6.7: Only three percent of small and medium objectives to reach the commitments listed in the business statement companies certified their products on a voluntary basis and (iii) the implementation of activities aiming at reaching this objective Proportion of SMEs who voluntarily obtained a certificate of (training of staff, establish work instructions and practices, etc.). As of conformity May 15th 2009, three companies were ISO 14001 certified in the Kyrgyz Republic (Annex 6.3). Individual entrepreneurs ISO 22000 is an international certification standard that defines the Small and medium requirements for effective food safety management systems. It can be companies used by organizations throughout the supply chain – from farmers and in- 0% 1% 2% 3% 4% gredient suppliers, to food services, processors, transportation and storage companies, retailers and packaging companies. As of May 15th 2009, two Likewise, the share of companies who conformed to interna- companies were ISO 22000 certified in the Kyrgyz Republic (Annex 6.3). tional standards remains low. As of May 15, 2009, 20 compa- Most companies were ISO certified by foreign certification bodies. nies in the Kyrgyz Republic had been ISO certified (Box 6.8). However, one Kyrgyz certification body is accredited to certify companies However, the number of ISO-certified companies is increasing: applying for quality management systems. as of May 2007, only 12 Kyrgyz companies had been certified. 6. tEchnical rEgulatiOns 79 6.5. reCommendations ISSuES RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS the list of products subject to mandatory remove low risk products and food products this will reduce costs, make it easier to place certification includes some low risk products from the list of products subject to mandato- new goods on the market and foster innova- and food products. ry certification and declaration of conformity tion. this in turn will lead to lower prices for (shoes, glass bottles, etc.). goods and a wider choice for consumers. MEdIuM-tERM RECOMMEndatIOnS Food safety relies on “ex-ante” testing of provide legal requirements to progressively Food products’ safety practices will be in food products. move towards (i) better control of the food line with best international practices, which production process via the “hazard analysis will improve consumer safety and facilitate and critical control points” (haccp), gmp, international trade, including export of ghp and (ii) food traceability, so that the food products. in addition, food processing causes of potential problems can be tracked businesses will be relieved from unneces- if necessary, starting with the most hazard- sary costs related to mandatory conformity ous food products, milk and meat. assessment, leading again to lower product prices and wider consumer choice. Only three technical regulations have been speed up the process of adoption and this will make it easier to place new goods adopted. implementation of technical regulations in on the market, simplify innovation, reduce line with best international safety standards, trade barriers and ease the export of Kyrgyz norms and rules as per the provisions of the products. 2004 technical regulations law. some standards are outdated. speed up the introduction of international businesses will use voluntary standards to standards and the review of national stan- comply with the World trade Organization’s dards to ensure their harmonization with agreement on technical barriers to trade. international standards using the “cover this will encourage innovation, reduce trade letter” and “translation” methods (original barriers and make the export of Kyrgyz standards are adopted by simple attachment products easier. of a national cover letter to these standards; international standards are translated into the national language and then adopted). the post-market surveillance system is weak. strengthen the post-market surveillance these steps will ensure that products comply system, including (i) significant penalties for or continue to comply with the relevant non-conformity and (ii) an expectation by regulatory requirements. businesses will suppliers that non-compliant products will take fewer risks in regard to product compli- eventually be detected. ance. 80 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 6.1: CertiFiCation sChemes Government Resolution No. 639 "On the Mandatory Certification of Products’ Conformity," adopted December 30, 2005. Mandatory Certification Schemes (as) amended by Government Resolution No. 512, adopted October 23, 2007 SChEME COnFORMIty aSSESSMEnt OthER StagES OF CERtIFICatIOn InSPECtIOn OF CERtIFIEd gOOdS nO. COndItIOnS 1 testing type 2 testing type testing of samples taken from seller. 2a testing type Facility performance analysis testing of samples taken from seller. Facility performance analysis. 3 testing type testing of samples taken from manu- facturer. 3a testing type Facility performance analysis testing of samples taken from manu- facturer. Facility performance analysis. 4 testing type testing of samples taken from seller. testing of samples taken from manu- facturer. 4a testing type Facility performance analysis testing of samples taken from seller. testing of samples taken from manu- facturer. Facility performance analysis. 5 testing type Quality certification system, availability testing of samples taken from manu- of certified quality system facturer and/or from seller. 6 testing type 6a testing type testing of samples taken from lot. 7 testing type 8 review of documents provided small lot 6. tEchnical rEgulatiOns 81 annex 6.2: total Cost oF the CertiFiCation ProCedure For all smes in 2008 IndIvIdual SMall and FaRMERS SOuRCE EntREPREnEuRS MEdIuM COMPanIES a number of active smEs 145,663 10,982 280,408 state statistics committee b proportion of smEs obtained 3% 17% 1% survey results certificates in 2008 c time spent by smEs in preparing 5.0 5.7 n/a survey results documentation for OnE certificate (working man-days)* d average number of certificates 1.8 6.7 survey results obtained E average monthly salary (gross 5,378 5,378 state statistics committee pay) (Kgs) F total labor costs of certificates, 9,719,900 18,216,605 a * b * c * d * (E/21) smEs (Kgs) g average amount of official and 4,414 14,583 survey results unofficial payments spent to obtain all certificates h total official and unofficial pay- 18,644,605 27,225,963 a*b*g ments, certificates (Kgs) i total (Kgs) 28,364,505 45,442,569 F+h J grand total (KgS) 73,807,074 K grand total ($) 2,018,241 Note on cost calculations: (i) the cost of various administration requirements were estimated based on reported official and unofficial payments as well as on time spent preparing to submit documents; (ii) the total cost of the certification procedure for farmers was not calculated, as the number of respondents was not high enough to be meaningful. 82 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 6.3: list oF iso CertiFied ComPanies in the kyrgyz rePubliC nO. ORganIzatIOn PROduCtS (SERvICES) CERtIFyIng authORIty 1. avtomash-radiator ltd. design, development and manufacture of center for certification of smc and heat-transfer devices (radiators) for different personnel ltd., Kyrgyz republic. purposes and manufacture (assembling) of tractors 2. national institute of standards and standardization, metrology, testing of goods center for certification of smc and metrology of the Kyrgyz republic (services) and data support personnel ltd., Kyrgyz republic. "Kyrgyz standard" 3. center for certification ltd. (certificate certification of aircrafts center for certification of smc and no.1) personnel ltd., Kyrgyz republic. center for certification ltd. (certificate certification of aircrafts moody international certification ltd., no.2) great britain. 4. center for professional development additional professional education center for certification of smc and and retraining, nism Kr personnel ltd., Kyrgyz republic. 5. ak tel ltd., "Fonex" trade mark mobile communication services center for certification of smc and personnel ltd., Kyrgyz republic. 6. cJsc coca-cola bishkek bottlers production of soft drinks sgs international certification services EEsv, belgium. 7. bemoKom ltd., "megacom" trade mobile communication services certification authority for "Euro-regis- mark ter" system, russia. 8. cJsc Kyrgyz petroleum company processing of oil-products «tuv», germany. 9. OJsc mailuu-suu Electric bulb Factory design, manufacture and sale of electric bulbs «KEma» Quality b.v., netherlands 10. information and Financial solutions ltd. software development, implementation and certification authority for management maintenance, etc systems «dQs gmbh», germany. 11. OJsc Kant cement plant cement production and sale bm trada certification, great britain. 12. OJsc «reemtsma-Kyrgyzstan» production of cigarettes «burEau vEritas certification», great britain 13. «alex stewart assay and Environmen- analytical and metallurgical research services «burEau vEritas certification», great tal laboratories ltd» britain 14. OJsc bishkeksut milk and milk products: production and sale certification authority for Quality systems "rOstEst – mOscOW", russia, no. РОСС ru.0001.13ИСО4. 15. tansu ltd. manufacture and sale of heating equipment Qp projects ab, sweden. 6. tEchnical rEgulatiOns 83 As of May 15, 2009, environmental management systems were implemented in compliance with the requirements of ISO 14001 in the following enterprises of the Kyrgyz Republic: nO. ORganIzatIOn PROduCtS (SERvICES) CERtIFyIng authORIty 1. ОАО «reemtsma-Kyrgyzstan» production of cigarettes «burEau vEritas certification», great britain. 2. cJsc coca-cola bishkek bottlers production of soft drinks sgs international certification services EEsv, belgium. 3. tansu ltd. manufacture and sale of heating equipment Qp projects ab, sweden. As of May 15, 2009, “Food Safety Management Systems: Requirements for Organizations Involved in Creation of the Food Chain” were implemented in compliance with the requirements of ISO 22000 in the following enterprises of the Kyrgyz Republic: nO. ORganIzatIOn PROduCtS (SERvICES) CERtIFyIng authORIty 1. Osko ltd. production of fruit and vegetables certification authority det norske veritas, norway 2. ailana ltd. production of fruit and vegetables certification authority det norske veritas, norway 7. Inspections implementation of the Inspections Law must be improved: additional reforms are also needed 7.1. key Findings: • Those inspectorates most active in investigating individual • Seventy three percent of individual entrepreneurs, 69 entrepreneurs and small and medium companies (January percent of small and medium companies, and 29 percent 2008-March 2009) were: of farmers were investigated by at least one inspectorate – the State Tax Service, visiting 71 percent of individual between January and December 2008. entrepreneurs and 65 percent of small and medium • Of those organizations inspected, individual entrepreneurs companies; were inspected, on average, six times, small and medium – the Social Fund, visiting 38 percent of individual entre- companies five times, and farmers twice, in the period preneurs and 45 percent of small and medium compa- from January to December 2008. nies; • The average labor costs incurred as a result of inspections – the Sanitary and Epidemiological Service, visiting 33 were KGS2,743 ($75) for every individual entrepreneur, percent of individual entrepreneurs and 25 percent of KGS4,582 ($125) for each small and medium company, and small and medium companies; and KGS1,106 ($30) for every farmer. This represents 2.3 percent – the Fire Safety Department, visiting 24 percent of of individual entrepreneurs’ total profit, 0.8 percent of individual entrepreneurs and 31 percent of small and small and medium companies’, and 2.5 percent of farmers’ medium companies. annual profit. • Despite a moratorium75 on inspections being implement- ed between April 25 and December 31, 2008, the total equivalent labor cost of all inspections of SMEs conducted throughout the Kyrgyz Republic during that year nonethe- less amounted to KGS281.2 million ($7.7 million) or 0.19 percent of total gross domestic product (GDP). 75 Presidential Decree No. 145 “On the Moratorium on Inspections by the Tax Authori- ties of the Kyrgyz Republic, and Reduction of Inspections of Business Entities Imple- mented by Other Authorized Inspectorates of the Kyrgyz Republic,” adopted April 22, 2008 and implemented between April 25 and December 31, 2008. 7. inspEctiOns 85 7.2. desPite reCent reForm, the legislative Framework is not based on box 7.1: Key legislaTion and regulaTion governing ContemPorary PraCtiCe in the ConduCt inspecTions procedures oF insPeCtions • Law of the Kyrgyz Republic No. 72 “On Procedures for Inspecting Busi- ness Entities,” adopted May 25, 2007, implemented May 1, 2008; the legislative framework has shown positive • Government Resolution No. 533 “On the Procedures for Inspecting Busi- development in recent years ness Entities,” adopted November 6, 2007. This resolution prescribes Inspections are essential components of any regulatory the mandatory registration of planned and unplanned inspections by system, and are essential to ensuring that business activities the Ministry of Economic Regulation, prior to their being conducted. are conducted in a way that protects human health and Planned and unplanned inspections that have not been registered safety, and the environment. Inspections should be conduct- are illegal; ed in a way that (i) optimizes compliance with clear govern- • Parliamentary Resolution No. 553-IV “On Approval of the List of Au- ment regulation; (ii) incurs minimal costs to businesses; and thorized Bodies Having the Right to Inspect Business Entities,” adopted (iii) achieves the optimum outcome for regulators. June 20, 2008; • The Tax Code of the Kyrgyz Republic, adopted October 17, 2008, imple- The reform of legislation governing inspections was begun in mented January 1, 2009; the Kyrgyz Republic much later than in other countries of the • Presidential Decree No. 237 “On Introduction of Registration of Inspec- tions of Business,” adopted May 14, 2009. This decree introduced the region, commencing in 2005. Prior to the adoption of the Law mandatory registration in the prosecutors’ offices of all inspections by “On Procedures for Inspecting Business Entities” (the “Inspections all state inspectorates, tax authorities, and law enforcement agencies; Law”) in 2007,76 no single piece of legislation existed govern- • The inspections process and the work of the state inspectorates is ing the conduct and regulation of inspections. Each state governed by more than 40 pieces of legislation (Annex 2). inspectorate maintained its own procedures, with businesses having only limited protection and recourse against such agencies’ potential abuse of authority. While the implementa- tion of the Inspections Law was a marked improvement, it fell box 7.2: Key feaTures of The InspectIons Law of 2007 short of establishing contemporary, recognized principles in the conduct of inspections, including: (i) the risk-based selec- Types of inspections The Inspections Law identifies four types of inspections: tion of businesses for inspection; and (ii) the introduction of • planned inspections are performed by inspectorates in accordance checklists to be used during inspections to determine a busi- with pre-approved plans; unplanned inspections are performed (i) at ness’s level of compliance on a clear and transparent basis. the request of individual businesses; or (ii) on an inspectorate receiv- ing information of a violation by a business or legal entity; As well as other secondary regulation (shown in Box 7.1), • control inspections are held to verify that previous violations have inspections procedures are now predominantly regulated been corrected; and by the provisions of the Inspections Law, which defines the • re-inspections are performed in the event that a business or legal various types of inspections, the principles of and the general entity disputes the outcome of a previous inspection. procedures for the conduct of inspections, and the rights and Frequency of inspections responsibilities of state inspections agencies and business Planned inspections are limited to no more than one inspection per year entities (Box 7.2). The Inspections Law applies to those state in- per inspectorate.77 However, the frequency of other inspections (including spectorates listed in Parliamentary Resolution No.553-IV “On Ap- unplanned, control and re-inspections) is not limited. proval of the List of Authorized Bodies Having the Right to Inspect Duration of inspections Business Entities,” adopted June 20, 2008 (Annex 7.1). All inspections are limited to a duration of 30 days, and may be extended by no more than 10 days. 76 Law of the Kyrgyz Republic No. 72 “On Procedures for Inspecting Business Entities”, 77 With the exception of sanitary and veterinary inspections of high-risk objects. adopted May 25, 2007, implemented May 1, 2008. 86 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs the mandatory registration of inspections by the ministry of economic regulation and box 7.2: Key feaTures of The InspectIons Law of 2007 the office of the general Prosecutor aims to Stages of the inspection process reduce excessive and illegal inspections State inspectors are required to give at least 10 days’ prior written notice The purpose of inspections being regulated by the Ministry of of any planned inspection. Inspectors are required to show official iden- tification and a “management” order authorizing an inspection prior to its Economic Regulation and the Office of the General Prosecu- being conducted. tor is to reduce the occurrence of excessive and illegal inspec- tions and to exert greater control over inspectorates. Registra- All inspections must be registered in the logbook maintained for this tion by the Ministry of Economic Regulation applies only to purpose by all businesses. The outcomes of all inspections must be docu- authorized state inspection agencies,79 and only to planned mented in a report made in two copies, one of which must be given to a and unplanned inspections. Registration by the Office of representative of the business under inspection. the Prosecutor General applies to all types of inspections Sanctions against abusive practices conducted by authorized inspections agencies as well as by Penalties for the violation of current legislation have recently been the State Tax Service and law enforcement agencies, and thus strengthened, as follows: (i) any inspector or inspectors found to be provides greater protection to businesses (Table 7.1). However, guilty of a violation of the Inspections Law is subject to dismissal and inspections by local government agencies are not subject to barred from employment as a state employee or civil servant for a period any registration requirements, and are not subject to registra- of three years; and (ii) in the event that the outcome of an inspection is later invalidated by a court ruling, this may constitute grounds for the tion with either the Ministry of Economic Regulation or local dismissal of the inspector or inspectors conducting such inspection. offices under the Office of the Prosecutor General. table 7.1: types of inspections and corresponding registration requirements box 7.3: The legal basis for inspecTions conducTed by thE PROSECutOR By thE OFFICE OF By thE MInIStRy law enforcemenT and local governmenT agencies REgIStRatIOn REgIStRatIOn OF ECOnOMIC REgulatIOn InSPECtIOn Pursuant to the Law of the Kyrgyz Republic No. 131 “On Investigative gEnERal Activities,” adopted October 16, 1998 (the “Law on Investigative tyPE OF Agencies”), certain investigative agencies (including the police, the nO. National Security Agency and the financial police) are authorized to: • request verbal or written information from individuals and organizations; state planned yes yes • enter private and business premises; inspections agencies unplanned yes yes • remove original private and business documents and copies thereof; • access private and business electronic and postal correspondence, and control inspection no yes conduct surveillance of telecommunications; and re-inspections no yes • conduct other activities for the purpose of investigating alleged crimi- nal activity or to collect information on persons and/or organizations state tax service no yes believed to be involved in criminal activity. law enforcement agencies no yes However, the Law on Investigative Agencies offers little protection local government no no against abusive inspections by law enforcement agencies. Inspections conducted by local government agencies are governed by the provisions of Law of the Kyrgyz Republic No. 99 “On Local Self- governance and Local State Administration” adopted May 29, 2008, under which local government agencies have authority to control compliance with environmental, construction, land, and sanitary regulations. Such “control”, in practice, equates to the conduct of inspections. The Law “On Status of Local Kenesh Deputies”78 also authorizes elected deputies to make “recommendations” to state inspectorates on the inspection of 78 entities located within the jurisdiction of such local Kenesh (elected local The Law of the Kyrgyz Republic No. 3 “On Status of Local Kenesh Deputies,” adopted January 13, 2000. legislative assembly or council). 79 Pursuant to Parliamentary Resolution No. 553-IV “On Approval of the List of Autho- rized Bodies Having the Right to Inspect Business Entities,” adopted June 20, 2008. 7. inspEctiOns 87 some important legislative shortcomings not subject to the provisions of either the Inspections Law, remain nor Parliamentary Resolution No. 533, again representing a Despite recent reform, some legislative shortcomings remain. significant shortcoming in current legislation. • Since April 2009, the Sanitary and Epidemiological Service • Although the mandatory registration of inspections at and the State Veterinary Department have had the right local offices under the Office of the Prosecutor General to inspect businesses perceived to be “high risk” up to represents an additional guarantee for businesses against four times per year. However, high-risk businesses have abusive inspections, the double registration of planned been only very broadly defined by the Sanitary and Epi- and unplanned inspections by these agencies as well as demiological Service,80 and the State Veterinary Depart- by the Ministry of Economic Regulation would appear ment has no formal definitions in place. to represent an unnecessary duplication of activities, • The Law “On Introduction of the Tax Code” was adopted at unnecessary additional cost. Moreover, the need for on October 17, 2008,81 with the result that tax inspections inspectorates to secure registrations from both agencies were henceforth excluded from regulation under the In- can make it difficult for inspectorates to conduct urgent spections Law. Since January 1, 2009 tax inspections have inspections when necessary. An effective inspections been governed only by the provisions of the new Tax system should allow the selection of businesses for in- Code. However, although the new Tax Code introduced spection on the basis of perceived risk while also allowing the progressive principle of the risk-based selection of the conduct of genuinely urgent and necessary inspec- businesses to be inspected, it regulates tax inspections tions where appropriate. in a manner that does not provide the same degree of protection for businesses as the Inspections Law: the Tax Code does not, for example, stipulate 10 days’ advance notice for any business to be inspected. Pursuant to the Tax Code, a list of those businesses selected for tax audits “ It is great that inspections now have to be registered by the prosecutor’s offices. It is an additional protection for us against illegal inspections. But the fact that they are on a random basis must be published through the web site of the authorized tax body, and made available at the also registered by the Ministry of Economic Regulation information desks of local tax offices prior to such audit seems to be a duplication of activities.” being conducted. The Tax Code does not make reference Entrepreneur, focus group participant to advance notice for those businesses selected for tax audits on the basis of risk criteria. Furthermore, sanctions against abusive inspectors are more strict under the In- implementation of the inspections law must spections Law than under the Tax Code. be improved • Parliamentary Resolution No. 1037/IV “On Amending the List Not only is current legislation not based on contemporary of State Inspections Agencies Approved by Parliamentary practice and principles (for example, in providing for the se- Resolution of March 12, 2009 No. 553” excluded the State lection of businesses for inspection on the basis of perceived Tax Service, the Department of Civil Aviation, and the risk), but Survey results indicate that those inspectorates com- Chamber of Accounts from the list of authorized inspec- pelled to abide by the provisions of the Inspections Law were tion agencies, with the result that these agencies are no frequently in breach of this. The most common breaches in longer subject to the provisions of the Inspections Law: an this respect involved inspectorates failing to send advance additional shortcoming of current legislation. notification, to show inspection order or identification, to • In addition to those state inspectorates (“authorized produce reports, and to complete log books (Charts 7.1-7.4). inspection agencies”) listed in Parliamentary Resolution No. 553, other government agencies (including local gov- ernment agencies, local offices under the Office of the 80 The list of such high-risk business categories was approved by Government on Prosecutor General, the financial police, the police, and October12, 2009. 81 the National Security Agency) have the right to conduct Law of the Kyrgyz Republic No. 231 “On Introduction of the Tax Code,” adopted October 17, 2008, implemented January 1, 2009. “checks” on businesses on the basis of other legislation 82 Law of the Kyrgyz Republic No. 131 “On Investigative Activities,” adopted October including: the Law “On Investigative Activities”;82 the Law 16, 1998. “On Local Self-Governance and Local State Administration”;83 83 Law of the Kyrgyz Republic No. 99 “On Local Self-Governance and Local State Ad- ministration,” adopted May 29, 2008. the Law “On Prosecutors”;84 and others. Such “checks” are 84 Law of the Kyrgyz Republic No. 224 “On Prosecutors,” adopted July 17, 2009. 88 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 7.1: Forty nine percent of individual entrepreneurs Chart 7.4: Inspections were not recorded in logbooks did not receive advance notification of planned for 29 percent of individual entrepreneurs (January inspections (January 2008 to March 2009)85 2008 to March 2009)88 Percentage of 100% 4% 1% 3% Percentage of 100% 4% 3% SMEs receiving SMEs for whom 20% 26% 26% advance notice 80% inspections 80% 29% 40% of inspections 49% were recorded in 60% logbooks* 60% 15% 40% 40% 77% 73% 71% 67% Sometimes 47% Sometimes 20% 20% 45% No No Yes Yes 0% 0% Individual Small and Farmers Individual Small and Farmers entrepreneurs medium * Of those smEs having entrepreneurs medium companies a logbook companies Chart 7.2: twenty eight percent of farmers were not The failure of inspectors to complete the appropriate entries shown any inspections order or identification (January in logbooks is even more serious in light of the fact that close 2008 to March 2009)86 to 60 percent of individual entrepreneurs and 90 percent of farmers inspected in 2008 did not have a logbook (Chart 7.5). Percentage of 100% 1% 2% 5% This indicates that businesses do not realize the value of the in- SMEs shown and 21% 18% inspection order 28% spections logbook and do not use it effectively. Research con- 80% or identification ducted among focus groups suggests that businesses in rural 60% areas prefer to maintain informal relations with inspectors. 40% 78% 80% “ 67% Sometimes 20% Asking inspectors to fill logbooks is the best way to No Yes spoil your relationship with inspectors. In rural areas, 0% things are solved in a different way.” Individual Small and Farmers entrepreneurs medium Entrepreneur, focus group participant companies Chart 7.3: Inspectors did not produce reports for 43 percent of inspections conducted among farmers (January 2008 to March 2009)87 Percentage of 100% 2% 2% 6% SMEs receiving 18% inspection 80% 33% reports 43% 60% 85 The financial police, local offices under the Office of the Prosecutor General, 40% 80% 65% and local government are not included in this chart since these are not re- Sometimes 51% quired to give advance notification of inspections. 20% 86 No All inspectorates are included in this chart since all are required to show orders Yes for inspections as well as identification. 0% 87 Local government agencies are not included in this chart since these are not Individual Small and Farmers required to produce an inspections report detailing the results of an inspection. entrepreneurs medium companies 7. inspEctiOns 89 Chart 7.5: almost 60 percent of individual entrepre- technical requirements and inspections neurs and over 90 percent of farmers did not have a procedures are not always registered by the logbook in 2008 ministry of justice The legislation and regulation shown in Box 7.1 concerns only Percentage 100% the regulation of general issues related to inspections. Other of SMEs having 88% issues, particularly relating to procedures and businesses’ a logbook* 80% compliance with technical requirements, are often governed by specific specialist agencies. These requirements and pro- 60% cedures are often not registered by the Ministry of Justice 42% 40% – although this is a mandatory requirement under the Law “On Regulatory Acts,”89 with the result that reference to these 20% requirements and procedures by such agencies during the 6% course of inspections may not be legal. This indicates a clear * of smE inspected 0% Individual Small and Farmers shortcoming in current legislation, and it is therefore necessary entrepreneurs medium for all legislation which might be used or referred to during companies the course of an inspection to be registered by the Ministry of Justice – an approach adopted successfully in resolving a similar situation in the Republic of Tajikistan (Box 7.4). Breaches of the Inspections Law were found to be most common in inspections of farming businesses. This could be because: (i) farmers do not, in general, have a good knowl- edge of the provisions of the Inspections Law and are thus less box 7.4: world banK and ifc supporT for The able to defend their rights; and (ii) rural inspectors themselves regisTraTion of inspecTions agencies’ manuals and do not have a good knowledge of the provisions of the Inspec- checKlisTs by The minisTry of jusTice, TajiKisTan tions Law and are thus more likely to infringe its provisions. Pursuant to the Law of the Republic of Tajikistan No. 54 “On Normative Breaches of the Inspections Law were least frequent (although, Acts,” adopted December 8, 2003,90 normative acts must be registered nonetheless, significant) among small and medium com- by the Ministry of Justice in order to be valid. However, until recently, in- panies. This may be due to the fact that small and medium spectorates’ legal acts were often not registered by the Ministry of Justice, companies have a better knowledge of the provisions of the meaning that the legitimacy of the inspections conducted by these inspectorates was questionable. Inspections Law – borne out by Survey results which indicate that 67 percent of farmers believe themselves to be “well In Tajikistan, the World Bank and IFC supported the registration by the Minis- aware of aware in general terms” of inspections legislation, in try of Justice of 23 inspection agencies’ manuals and checklists by including comparison with 92 percent of small and medium compa- the registration of these documents as one of the prior actions necessary to receive a $20 million World Bank Policy Development grant. This po- nies believing themselves to be so (Annex 7.4). Such frequent litical support proved very valuable not only in ensuring the registration of breaches of the requirements of the Inspections Law indicate manuals and checklists, but also in hastening their development. a clear need for inspectors to be trained on the provisions of current inspections legislation, and the need for entrepreneurs In addition, IFC trained those Ministry of Justice officials responsible for the review and registration of legal acts on the key principles of such to be better informed, particularly in rural areas. checklists, as well as on best practice in their development. Inspectors also reported that entrepreneurs in some cases All inspection agencies in Tajikistan now have manuals and checklists avoid inspections by closing their businesses on those dates registered by the Ministry of Justice, with the result that these documents can now be used in all legality during inspections. and times for which inspections are scheduled. This is clearly not only a waste of an inspector’s time, but may also have neg- ative consequences for health, safety, and the environment in 88 Local offices under the Office of the Prosecutor General, the financial police, preventing appropriate action being taken against those and local government are not included in this chart since these are not re- businesses that are in breach of safety and other standards. It quired to record inspections in logbooks. is, therefore, recommended that legislation be amended to 89 Law of the Kyrgyz Republic No. 34 “On Regulatory Acts,” adopted July 1, 1996. This law was in force during the reference period of the Survey and was superseded by the ensure that businesses are penalized for intentionally avoiding Law of the Kyrgyz Republic No. 241 “On Regulatory Acts,” adopted July 20, 2009. inspections of which they have been notified in advance. 90 This was later superseded by the Law of the Republic of Tajikistan No. 506 “On Normative Acts,” adopted March 26, 2009. 90 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs 7.3. PerCeived risk is not a Criterion in the Chart 7.6: Individual entrepreneurs are proportionally seleCtion oF businesses For insPeCtion more likely to be subject to inspection — indicating inspections are not conducted on the basis of perceived the incidence of inspections in the kyrgyz risk (January–december 2008 data) republic is high in comparison with Incidence of inspections accross the SME sector, international best practice January–december 2008 Survey results indicate that risk factors are not appropriately 80% 7 73% considered in selecting those businesses to be inspected, 70% 69% Share of inspected 6 meaning that inspections are unlikely to target those 60% 6 5 SMEs 5 businesses representing the greatest risk to society, health, and 50% Average number 4 the environment. This not only results in an excessive burden 40% of inspections being placed on low-risk businesses, but also in inspectorates 30% 29% 3 being forced to stretch resources too far, and being unable to 20% 2 2 focus effectively on those businesses presenting the greatest 10% 1 risk. The inspections burden on low-risk businesses is thus 0% 0 Individual Small and Farmers excessive, while the inspections process, as a whole, delivers entrepreneurs medium only limited benefit in protecting public health and the companies environment. The percentage of businesses inspected between January The percentage of businesses in the Kyrgyz Republic subject and December 2008 was very high, and highest for individual to inspections is high in comparison with levels in other entrepreneurs, with 73 percent being inspected during that countries. Data on OECD countries is not readily available, period, as well as 69 percent of small and medium companies however, since, with no perceived problem associated with and 29 percent of farmers (Chart 7.6). The average number of inspections, statistics are not recorded. However, in general, inspections to which businesses were subjected during this less than 10 percent of businesses are inspected each year in period was also higher for individual entrepreneurs than for OECD countries – far fewer than in the Kyrgyz Republic. The small and medium companies and farmers, at six, five, and percentage of businesses inspected in the Kyrgyz Republic two inspections, respectively. Individual entrepreneurs do not is also much higher than in other post-Soviet countries that typically represent the greatest risk to society, health, and the have reformed their business inspections systems. environment. The fact that this category was subjected to the greatest number of inspections in 2008 is a clear indication Investment Climate surveys regularly conducted by the IFC that inspections are conducted “across the board” regardless in several post-Soviet countries allow comparisons to be of: (i) the risk a business may pose to society, health, and the made of the regulatory burden on businesses throughout environment; and (ii) the risk a business may pose in terms the region. Despite including data sourced during the eight- of tax evasion (in the case of tax inspections). Research con- month inspections moratorium announced in 2008, Survey ducted among focus groups indicates that one reason why results indicate inspections coverage in the Kyrgyz Republic individual entrepreneurs are inspected more frequently than to be among the highest of any post-Soviet country. Further small and medium companies may be because individual reform is therefore necessary to reduce this to the levels of entrepreneurs are, in general, less knowledgeable than small those countries that have done most to introduce interna- and medium companies of applicable legislation and of their tional best practice – notably Uzbekistan and Georgia, which rights in this respect, and are thus more likely to make unof- began reforms in 2004 and 2005, respectively (Chart 7.7). ficial payments. Individual entrepreneurs were subject to the lowest proportion of planned inspections (at 40 percent of all inspections undertaken) between January 2008 and March 2009. Farmers and small and medium companies enjoyed a higher proportion of planned inspections, at 60 percent and 64 percent respectively, of all inspections undertaken. This data clearly indicates that individual entrepreneurs bear the greatest burden in terms of unplanned inspections. 7. inspEctiOns 91 Chart 7.7: additional reforms are needed to reduce inspections coverage in the Kyrgyz Republic to that of the most progressive post-Soviet countries Percentage of SMEs inspected at least once 100% 87% Individual 81% Entrepreneurs 80% 75% 73% Small and medium 69% 70% companies 61% 61% 60% Farmers 50% 40% 34% 31% 29% 20% 20% Source: IFC “Investment Climate/ Business Environment Surveys”; year of each survey as 0% indicated in the chart. Uzbekistan (2007) Georgia (2005) Kyrgyz Republic Ukraine (2008) Azerbaijan Tajikistan (2007) (2008) (2007) box 7.5: world banK business environmenT and enTerprise performance survey (beeps) daTa confirm inspecTions coverage in The Kyrgyz republic To be high Other surveys confirm the disproportionate burden borne by businesses in the Kyrgyz Republic in comparison with other countries in the region. BEEPS data (Chart 7.8) demonstrates the proportion of companies throughout the region not subject to any form of inspection during the 2007 fiscal year. The proportion of companies in the Kyrgyz Republic that were not inspected, at nine percent, is the lowest in the region. This means that 91 percent of the firm population in the Kyrgyz Republic was subjected to at least one inspection in 2007. The difference between the results obtained by the 2008 Investment Climate Survey and BEEPs data may be linked to the 2008 inspections moratorium and to the different sample structure used in the latter. Chart 7.8: Inspections coverage is higher in the Kyrgyz Republic than in other post-Soviet countries Percentage of respondents reporting zero inspections in 2007 80% 73% 70% 64% 60% 60% 60% 50% 45% 43% 40% 38% 30% 30% 26% 24% 21% 20% 18% 17% 15% 16% 16% 12% 10% 9% 10% 10% 9% 10% 8% 9% 5% 6% 4% 5% 0% Small Medium Large Total Belarus Georgia Tajikistan Ukraine Uzbekistan Kyrgyzstan Azerbaijan Source: EBRD-World Bank Business Environment and Enterprise Performance Survey data 92 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs The high coverage of inspections of both individual entre- preneurs and small and medium companies indicates a clear box 7.6: inTernaTional besT pracTice – fire safeTy need for inspections to be based solely on perceived risk to reform in The uniTed Kingdom health, safety and the environment. Some inspectorates, such The Regulatory Reform (Fire Safety) Order came into effect in October 1, as the Fire Safety Department, already apply some of the prin- 2006 and replaced over 70 pieces of pre-existing fire safety law. Reform ciples of such risk-based analysis in selecting premises to be had been prompted by (i) the recognition that much existing legislation inspected. Indeed, in keeping with an established Soviet-era was contradictory; and (ii) pressure from businesses complaining of excessive compliance costs under previous legislation. practice, premises are categorized on the basis of their value and the potential risk (if any) to human life. Those buildings Under this new legislation, the primary responsibility for ensuring the of highest value and presenting the greatest potential risk fire safety of business premises no longer rests with the Fire and Rescue to human life are inspected most frequently. Such a system Authority, but with such businesses themselves, whose owners are has limitations, however. With only three categories, criteria held accountable. Businesses are responsible for providing local Fire and Rescue Authorities with fire risk assessment reports, to be filed either by for classification can be approximate and out-of-date, and no that businesses or an authorized third party. Premises are inspected on system exists for the recording of historical compliance with receipt of such risk assessment reports in order to assess their risk and directives arising from previous inspections. Also, despite the compliance with fire safety regulations. existence of such classifications, these can be inefficiently applied in selecting premises for inspection. Risk-based criteria Fire inspections are carried out using checklists. These checklists allow were also previously used in determining health and sanitary fire inspectors, on completion of inspections, to calculate the level of compliance and the level of overall risk recorded at the inspected busi- inspections, but no longer apply. For example, the Sanitary ness premises. Factors such as a building’s occupants, (e.g., in multiply and Epidemiological Service currently places excessive em- occupancy residential buildings), fire warning system, access for rescue phasis on checking nitrate levels in fruits and vegetables. This personnel, water supply, any history of previous fires, and any particular stems from previous practice to use a high level of fertilizers. features which might cause a fire to spread, are taken into consideration As that practice is now far less prevalent, the need to check in calculating the level of overall risk. On that basis, premises are then as- for nitrates (and strict observance of limits) is certainly not as sessed against a risk matrix which prescribes the level of risk attributable acute, nevertheless there is no review of this targeting. It is to that building and, accordingly, the frequency of inspections to which thus suggested to move towards an inspections system based they may be subject. Assessing the degree of compliance on a scale of on risk analysis, as was successfully done in other countries one to five allows fire safety officers to determine impartially any action (Box 7.6). to be taken. Such actions may range from education on fire safety (level 1) to prohibiting the continued use of such premises (level 5). businesses operating in osh city bear the As a result of these reforms, during 2008-09 Fire and Rescue Authorities greatest inspections burden in England inspected 26 percent of all care homes, and 22 percent of Analysis of inspections by region indicates a high incidence of hotels, in comparison with only six percent of all retail premises.91 The inspections across all regions of the country, with an average number of incidents to which Fire and Rescue Services were called to of 60 percent of all small and medium companies and indi- respond decreased from 336,100 in 2005–06 to 293,800 in 2007–08.92 vidual entrepreneurs reporting inspections during the period of the Survey. The incidence of inspections was particularly high, however, in Osh city, where almost 100 percent of all small and medium companies and individual entrepreneurs reported having undergone an inspection. The incidence of inspections is lowest in Bishkek city, but even there remains onerous, with 68 percent of all small and medium companies and 71 percent of all individual entrepreneurs reporting in- spections (Chart 7.9). The result of the greater burden on busi- nesses in Osh city may indicate greater opportunity for unof- ficial payments – with possible consequences for the quality of inspectors’ work and business development in this region. 91 Fire and Rescue Services (2009) “Operational Statistics Bulletin for England 2008/09”. 92 Fire and Rescue Services (2009) “Operational Statistics Bulletin for England 2008/09”. 7. inspEctiOns 93 Chart 7.9: the incidence of inspections is particularly high in Osh city Percentage of businesses subject to inspections, by region 99% 99% 97% 97% 100% 95% 93% 90% 90% 87% 85% Individual 79% Entrepreneurs 80% 71% 68% Small and medium 64% 65% companies 60% Farmers 44% 40% 30% 26% 24% 19% 20% 16% 16% 0% Osh city Issyk-kul Jalalabat Naryn Batken Osh oblast Chui oblast Bishkek city Talas oblast oblast oblast oblast oblast 7.4. the FrequenCy oF insPeCtions droPPed 25 to December 31, 2008) in comparison with pre-moratori- during the moratorium, but this resPite um levels (i.e., January–April 2008). Not only did those state was not used to initiate reForm inspectorates listed under Parliamentary Resolution No. 553-IV Moratoriums have become popular tools in reducing the fre- reduce the number and frequency of their inspections, but so quency of inspections in several post-Soviet countries. In the did other agencies, including local government. For example, Kyrgyz Republic, Presidential Decree No. 145, adopted April 22, during the moratorium, local government agencies inspected 2008 outlined the terms of the moratorium on inspections two percent of farmers in any given month, as opposed to 13 effective from April 25 to December 31, 2008. The purpose of percent before the moratorium (Annex 7.3). In addition, the this moratorium was to eliminate excessive interference in en- duration of inspections during the moratorium was shorter trepreneurial activity, to create favorable conditions for invest- during the moratorium than prior to it (Chart 7.10). The mora- ment, and to increase tax revenue through the anticipated torium was therefore successful in decreasing the inspection boost in business growth. burden on businesses. During the moratorium, those state inspectorates listed in However, although 2007 was not included in the reference Parliamentary Resolution No. 553-IV were to reduce by 70 period of the Survey, pre-moratorium 2008 data suggest that percent (in comparison with 2007 levels) the number of in- the moratorium did not quite reach its target of a 70 percent spections undertaken. All inspections by the State Tax Service decrease on 2007 levels. Most importantly, inspectorates did were covered by the moratorium with the exception of: (i) not use the moratorium as a way to kick-start deeper reform inspections of businesses operating under the voluntary tax such as the introduction of risk-based assessments in the patent regime; (ii) inspections requested at the initiative of selection of businesses to be inspected – on the contrary, in- businesses themselves; (iii) inspections requested by the tax spections were simply deferred, and thus the activity of these authorities of other countries; (iv) inspections conducted as inspectorates increased as soon as the moratorium was over part of criminal proceedings; and (v) inspections conducted (Chart 7.11). The incidence of inspections after the moratorium for the purpose of investigating alleged or actual tax evasion. was indeed higher than had been the case prior to it, for both small and medium companies and individual entrepreneurs. Survey results (Chart 7.11) indicate that the percentage of busi- For example, 15 percent of individual entrepreneurs were in- nesses inspected in any given month was reduced by more spected in any given month prior to the moratorium, whereas than half during the moratorium (i.e., during the period April 18 percent were subject to inspections after it had ended. 94 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 7.10: the duration of inspections was shorter 7.5. the majority oF insPeCtions are during the moratorium PerFormed by the Four most aCtive insPeCtorates average duration of inspections before, during, and after the The most active inspectorates (in terms of coverage and fre- moratorium* quency of inspections) were found to be as follows. 2.5 Individual • In terms of inspections of individual entrepreneurs and entrepreneurs small and medium companies, the most active inspec- 2.0 Small and medium torates are the State Tax Service, the Social Fund, the Sani- companies tary and Epidemiological Service, and the Fire Safety De- 1.5 Farmers partment. These agencies were responsible for 58 percent 1.0 of all inspections of individual entrepreneurs, and 62 percent of all inspections of small and medium companies 0.5 * Working days (Chart 7.12). The incidence of inspections by these agen- Before During After cies ranged between 24% and 71% for individual entrepre- Moratorium Moratorium Moratorium neurs and small and medium companies (Chart 7.13). • Local government agencies, the State Tax Service, and the Social Fund are the most active inspectorates in respect Chart 7.11: the incidence of inspections was higher of farmers, being responsible for 75 percent of all inspec- after the moratorium than prior to it, for small and tions in this sector (Chart 7.12). medium companies and individual entrepreneurs Proportion of SMEs inspected each month before, during, Chart 7.12: the State tax Service is the most active and after the moratorium inspectorate 20% top inspecting agencies Individual 100% entrepreneurs 13% 15% Small and medium 27% Local government companies 80% 39% Electric inspection services 10% Farmers 15% 40% Sanitary and 60% 12% Epidemiological Service 5% 12% 11% Fire Safety Department 40% 13% 12% 0% Social Fund 14% 11% Before During After State Tax Service Moratorium Moratorium Moratorium 20% 33% 25% 24% Others 0% Individual Small and Farmers entrepre- medium neurs companies In addition, these inspectorates conducted, on average, more than one inspection per business during the reference period of the Survey. For example, the State Tax Service conducted inspections of individual entrepreneurs, on average, three times during the reference period of the Survey, while the Sanitary and Epidemiological Service inspected small and medium companies, on average, twice during the same period (Chart 7.14). Because the State Tax Service, the Social Fund, the Sanitary and Epidemiological Service, and the Fire Safety Department create the greatest inspections burden for businesses in the Kyrgyz Republic (as is the case in most post- 7. inspEctiOns 95 Soviet countries), these agencies should be priority targets for 7.6. inFormation on teChniCal reform. In countries where inspections are conducted on the requirements is not always readily basis of perceived risk, the proportion of businesses subject available to entrePreneurs to inspections is lower: for example, in France, less than two Information on the many technical requirements with which percent of businesses are inspected by tax authorities each businesses must comply is not always made readily available year.93 The targeting of a smaller proportion of businesses, but publicly. For example, information on the 220 health and sani- on the basis of stringent risk-assessment criteria, is an effective tary regulations with which businesses must comply is not means of ensuring that resources are directed to those areas available from the Ministry of Justice. Although these regula- in which they are likely to have the greatest impact. tions are listed on the website of the Sanitary and Epidemio- logical Service,94 their content is not displayed. In addition, not Chart 7.13: the incidence of inspections by the most all health and sanitary legislation and regulation is available active agencies remains high despite the moratorium on “TOKTOM” or the “Adviser” database (electronic databases containing certain legislation and regulation): indeed, only 57 Inspections of SMEs by the four most active inspectorates (January 2008 – March 2009) of the 220 pieces of legislation and regulation on health and sanitary issues are available on TOKTOM, while certain others 80% 71% are only available in hard copy – and even these are not 70% 65% always available for sale. Thus, businesses are not offered any 60% facility through which to obtain (or, indeed, buy) information 50% 45% on the full range of legislation and regulation to which they 40% 38% 33% 31% are subject. 30% 25% 24% 20% Such restricted access means that business (often inadver- 10% 10% 6% tently) fail to comply with regulation, and are more vulnerable 1% 0% to corrupt practices. Risk to human health and to the environ- State Tax Social Sanitary and Fire Safety Service Fund Epidemiological Department ment are also increased as a result of such low compliance. It Service is therefore recommended that inspection agencies work to improve businesses’ awareness of those requirements with Individual entrepreneurs Farmers which they need to comply. In countries that have imple- Small and medium companies mented reform of their inspectorates and investigating agen- cies, such organizations are known not as “inspectorates” Chart 7.14: the most active agencies also inspected but “regulators,” and their core activity is understood to be certain businesses several times the communication of technical compliance regulations and requirements in a simple, readily accessible way (through average number of SME inspections by the four most active inspectorates (January 2008 – March 2009) brochures, web sites and so on). It is recommended that such an approach be adopted in the Kyrgyz Republic. The use of 4 checklists during inspections would also raise entrepreneurs’ awareness of the key rules and regulations to be observed 3 3 (Box 7.7). 2 2 2 2 2 2 2 2 2 2 2 1 0 State Tax Social Sanitary and Fire Safety Service Fund Epidemiological Department Service 93 General Directorate for Taxes, France (2007) “Rapport Annuel de Performance”. Available at http://www2.impots.gouv.fr/documentation/rapports/activites/ Individual entrepreneurs Farmers dgi/2007/dgi_rapport_performance_2007.pdf and http://www.insee.fr/fr/ themes/tableau.asp?reg_id=0&id=219 Small and medium companies 94 Further information on this organization is available at: http://www.dgsen.kg/ 96 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs system encourages the imposition of sanctions rather than preventing the violation of regulation and ensuring compli- box 7.7: whaT is an inspecTions checKlisT and how is ance. In countries where the inspections system has been iT helpful? subject to reform, sanctions typically result in subsequent An “inspections checklist” is a legal document developed by an inspecting inspections rather than the imposition of a fine. Efficient agency for use in all inspections. Such checklists typically contain all those enforcement systems should, therefore, reward the fast cor- questions an inspector is likely to cover to determine an organization’s rection of problems and use coercion only on a gradual basis compliance with regulation in force. Such checklists are used routinely in countries as diverse as France, Germany, Great Britain, Latvia, Mexico, and and as a last resort. Uzbekistan. Despite the frequency of fines imposed (and the subsequent Checklists benefit both the government and the private sector, by: overall burden on many small and low-risk businesses as a • reducing the time required to carry out an inspection; result), the low value of individual fines is not sufficient to act • making it easier for an inspectorate to train staff in investigating various types of businesses; as a deterrent. On average, fines range in value from KGS300 • reducing the degree of variability between individual inspectors and ($8) to KGS10,000 ($273). Accordingly, in some cases busi- the investigations they conduct; nesses prefer to pay a fine rather than incur the costs and • increasing the transparency of the inspections process; inconvenience of compliance. • raising entrepreneurs’ awareness about the key regulation that must be observed; and The incidence of unofficial payments made during the course • resulting in a clear record of infringements found during an inspection. of an inspection is also high. Between 24 and 35 percent of Survey respondents indicated that they had engaged in this practice, indicating that non-compliance is dealt with on an 7.7. the sanCtions used do not enCourage informal basis in this number of cases (Chart 7.16). ComPlianCe Survey results indicate that the majority of inspections un- Small and medium companies constitute the only category dertaken do not result in any sanctions being imposed (Chart of respondents for whom inspections occasionally result 7.15). This data does not necessarily reflect a high level of in the suspension of their operations: six percent of those compliance with regulation, however, but rather indicates small and medium companies that were imposed sanctions the absence of any risk-based analysis in the selection of indicated that they had been subject to such suspension of businesses to be inspected. Article 11 of the Inspections Law operations, although the threat of suspension may be more stipulates that, during planned inspections, a fine may not be widespread. imposed on a business in the event of non-compliance, and that any business found to be in breach of regulation must be Chart 7.15: the majority of inspections do not result in given a period of between three days (in the event of non- official sanctions compliance presenting a risk to safety, health, or human life) Proportional imposition of sanctions to 30 days to correct such breach. However, Survey results (across planned, unplanned, control and re-inspections) indi- 100% 87% 87% No sanctions cate that, where sanctions are imposed these involve, in the 83% 80% Sanctions majority of cases, the payment of fines. As shown in Chart 7.17, 100 percent of sanctions imposed on farmers involved 60% the payment of fines. Subsequent inspections undertaken to verify measures taken to rectify non-compliance occur 40% less frequently than the imposition of fines – for example, 32 percent of farmers indicated that they had undergone subse- 20% 17% quent inspections as a result of an earlier sanction. This would 13% 13% appear to suggest that the provisions of Article 11 of the 0% Inspections Law are not always observed, and that the current Individual Small and medium Farmers entrepreneurs companies 7. inspEctiOns 97 Chart 7.16: the proportion of respondents reporting Current legislation provides for appeals to be filed as follows. unofficial payments, gifts, or entertainment suggests (i) At a higher authority within the inspectorate that con- some violations are resolved informally ducted the inspection (although it should be borne in mind that inspectorates may be biased in favor of their Proportion of 40% inspectors). SMEs making 35% unofficial 35% 32% (ii) In court (although it should be borne in mind that this payments during 30% procedure is costly, time consuming, and complex; nor inspections 25% 24% are courts perceived as being entirely impartial). 20% (iii) At a branch of the Office of the Prosecutor General (again, 15% however, since these offices do not have a reputation of 10% traditionally protecting the interests of businesses, com- mercial entities are reluctant to approach them). 5% 0% Individual Small and Farmers In addition, regulation governing appeal procedures is com- entrepreneurs medium plicated and difficult for businesses to understand without companies legal support. As a result, the percentage of businesses ap- pealing against the result of an inspection is low. Chart 7.17: non-compliance generally leads to the impo- sition of sanctions rather than subsequent inspections95 7.8. the existing system is Costly, For both businesses and insPeCtorates types of sanctions imposed as a result of violations Between January 2008 and March 2009, small and medium 100% 100% companies were subject to inspections lasting, on average, a total of 11 working days. Individual entrepreneurs were 80% subject to inspections lasting, on average, a total of nine 70% working days, and farmers three (Chart 7.18). 60% 56% 46% This represents a significant burden on businesses in terms of 40% 33% 32% the labor costs incurred by such inspections. Survey results indicate the total average labor cost associated with inspec- 20% tions (for those businesses subject to inspections in 2008) 6% to be KGS2,743 ($75) for individual entrepreneurs, KGS4,582 0% Individual Small and medium Farmers ($125) for small and medium companies, and KGS1,106 ($30) entrepreneurs companies for farmers. This represents a total of KGS281.20 million ($7.70 million) for all SMEs nationwide, despite the moratorium of Repeat inspection Payment of penalty Suspension of operations April–December 2008. In addition to the labor costs of inspections, businesses also appeals procedures are biased in favor of bear other costs – such as the official payments and fines inspection agencies imposed on them as a result of inspections, as well as unof- The proportion of businesses appealing against the result ficial payments. of an inspection is low: only five percent of both individual entrepreneurs and small and medium companies receiving a The current system requires an inspectorate to allocate valu- penalty or sanction appealed that decision. able human and financial resources, and efficiency is low. International best practice has demonstrated that the use of a risk-based approach to the selection of businesses for inspec- tion is the most appropriate means of ensuring that resources are directed to those areas in which they are likely to have the greatest impact. 95 The total is higher than 100 percent due to the opportunity for multiple answers. 98 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 7.18: Small and medium companies were subject to Chart 7.19: the Kyrgyz Republic has a higher mortality inspections totaling 11 working days, and individual entre- rate from diarrheal diseases than most countries in the preneurs nine, between January 2008 and March 2009 region average duration of inspections and number of employees Mortality 30 involved 27.7 rate, diarrheal 12 diseases per 25 2.5 22.2 10.5 Duration 100,000* 10 of one 20 9.2 2.0 2.1 inspection 8 15 Duration 1.5 1.5 1.5 of all 6 inspections 10 1.0 4 # of employees 5 2.5 who 2.0 0.5 0.6 0 2 worked on * 2004 data 0 1.1 1.0 inspections Kyrgyz Kazakhstan Russian Latvia 0 0 Republic Federation Individual Small and medium Farmers entrepreneurs companies Source: World Health Organization (2009) Department of Measurement and Health Information, February. 7.9. Frequent insPeCtions do not guarantee saFety In 2009, the Sanitary and Epidemiological Service was ex- empted from some of the provisions of the Inspections Law due to the high incidence of infectious diseases in the Kyrgyz Republic. However, while it is certainly the case that greater use needs to be made of risk-based systems in determin- ing those venues to be visited, and while certain higher-risk venues probably warrant more frequent supervision than once a year, a high incidence of inspections per se has never been proved to be an effective tool in promoting public health. Rather, data on mortality rates from infectious diseases tend to show no correlation between a higher incidence of inspections and a lower incidence of infectious disease: in anything, those countries subject to more frequent inspec- tions appear to suffer from a higher incidence of infection. Survey results indicate that the Sanitary and Epidemiologi- cal Service inspected 33 percent of individual entrepreneurs and 25 percent of small and medium companies between January 2008 and March 2009. However, mortality rates from diarrheal diseases in the Kyrgyz Republic are much higher than in other countries with a far lower incidence of inspections: for example, in Latvia, the risk of dying from diarrheal diseases is 27.7 times lower than in the Kyrgyz Republic (Chart 7.19). 7. inspEctiOns 99 7.10. reCommendations ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS the provisions of the Inspections Law are submit inspectors to regular training programs and profes- inspectors’ professional skills and the frequently ignored sional tests on the provisions of inspections legislation and efficiency of the inspections process inspections procedures, as well as communication skills, will be enhanced. compliance with the and so on inspections law will improve Ensure the widest possible dissemination of the provisions greater awareness of the provisions of the inspections law throughout the business community of the inspections law will allow busi- nesses to engage more effectively with inspectors, will reduce opportunities for the soliciting of unofficial payments, and will reduce the cost of inspections to businesses businesses are often denied access Ensure that full information on all current regulation, and greater awareness of the provisions to full information on regulation and the means of ensuring full compliance with it, is made of current regulation, and the means compliance readily available to the business community of ensuring full compliance with it, will allow businesses to engage more develop checklists containing all potential questions that effectively with inspectors, will reduce might be used during an inspection and/or in investigating opportunities for the soliciting of unof- the degree of regulatory compliance within a business ficial payments, and will reduce the cost of inspections to businesses some businesses intentionally avoid amend legislation to ensure that businesses are penalized the incidence of businesses inspections of which they have received for intentionally avoiding inspections intentionally avoiding inspections advance notification will decrease. as a result, the level of compliance will increase and the resources of inspectorates will be used more effectively planned and unplanned inspections abolish duplication by maintaining a single, unified avoiding duplication of activities will conducted by state inspection agencies registration system allow the more effective use of public must be registered both with branches resources of the Office of the prosecutor general and the ministry of Economic regulation businesses currently face a substantial limit the total number of inspections to which a business limiting the number of inspections to burden in terms of the extent, may be subject in a single year (with due exceptions for which a business may be subject will frequency, and duration of inspections higher-risk businesses); limit the number of inspections reduce the overall burden on smEs that may be conducted simultaneously by different inspectorates businesses which have only recently received a permit or license should not be checked on the requirements pertaining to such permit or license for a period of at least six months after the date of issue — except in the case of high-risk businesses and pending a review of permits and licenses currently in force: an initiative likely to reduce their scope and number and result in their being issued only in respect of high-risk businesses MEdIuM-tERM RECOMMEndatIOnS the basis on which businesses are develop risk-based selection mechanisms for the selection (i) the protection of human health and selected for inspection is not sufficiently of businesses to be inspected: such criteria will, of course, safety, and the environment, will be en- based on an assessment of perceived vary according to the specific risk parameters applicable hanced; (ii) inspection coverage among risk to each business and/or each market sector, as well as the low- and medium-risk businesses will regulation in force be greatly reduced and the overall burden of inspections for businesses will Once risk-based assessment practices have been estab- decrease; and (iii) public resources will lished cancel the current requirement for inspections to be directed to those areas in which they be registered by the ministry of Economic regulation and are likely to have the greatest impact branches of the Office of the prosecutor general 100 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) businesses are often not aware of all inspectorates should develop manuals outlining the development of checklists and inspections procedures the procedures applicable to each inspectorate. such manuals will increase entrepreneurs’ inspections manuals should include: (i) the criteria used awareness of compliance requirements in determining risk categories or the selection of those and inspections procedures, as well as business to be inspected; (ii) the checklists to be used by increasing the transparency and fairness that inspectorate in identifying the criteria against which of the inspections process businesses are to be inspected; and (iii) any forms and/ or data collection mechanisms to be used during the inspection process. all manuals and checklists should be made available to businesses online some technical requirements and Ensure all technical requirements and inspections proce- inspections will be conducted on an inspections procedures developed by dures (including checklists and manuals, once these are entirely legal basis individual agencies are not registered by developed) are registered by the ministry of Justice the ministry of Justice, meaning that the use of these documents during inspec- tions may not be legal inspectors’ salaries are low and are not inspectorates should review incentives for inspectors, inspectors’ professional skills and the based on performance so that they are rewarded on the basis of knowledge, efficiency of the inspections process adherence to good practice, and overall performance will be enhanced. compliance with the Inspections Law will improve annex 7.1: state insPeCtorates and insPeCtion agenCies96 1. State Customs Committee; 11. State Inspectorate for Energy and Gas, under the Ministry 2. State Agency for Architecture and Construction, under for Industry, Energy, and Fuel Resources; the Government of the Kyrgyz Republic; 12. State Inspectorate for Mineral Resources Management 3. State Agency for Antimonopoly Policy and the Develop- of the State Agency for Geology and Mineral Resources, ment of Competition; under the Government of the Kyrgyz Republic; 4. State Agency for Environmental Protection and Forestry, 13. State Department for the Regulation of the Fuel and under the Government of the Kyrgyz Republic; Energy Complex, under the Ministry for Industry, Energy, and Fuel Resources; 5. State Agency for the Production, Storage, and Sale of Alcohol and Beverages, under the Ministry for Agricul- 14. Department for the Supply of Medicines and Medical ture, Water, and Processing Industry; Equipment, under the Ministry of Health; 6. State Inspectorate for the Quarantine of Plants, under the 15. State Veterinary Department, under the Ministry for Agri- Ministry for Agriculture, Water, and Processing Industry; culture, Water, and Processing Industry; 7. Department for Precious Metals, under the Ministry of 16. Department for Sanitary and Epidemiological Supervi- Finance; sion, under the Ministry of Health; 8. State Inspectorate for the Supervision of Industrial Safety 17. State Fire Service, under the Ministry for Emergencies; and Mining, under the Ministry of Emergencies; 18. National Communications Agency; 9. State Labor Inspectorate of the Kyrgyz Republic, under 19. Financial Market Supervision and Regulation Service; and the Ministry of Labor and Social Development; 20. Social Fund. 10. Kyrgyz Transport Inspectorate, under the Ministry of Transport and Communications; 96 On March 12, 2009 the State Committee for Taxes and Duties, the Department of Civil Aviation of the Ministry of Transport and Communications was excluded from the list of state inspectorates. At the time of Survey was conducted, however, this agency was included in the list of inspectorates. 7. inspEctiOns 101 annex 7.2: legislation governing insPeCtions as oF deCember 2009 1. Law of the Kyrgyz Republic No. 1360-XII “On Internal Affairs Authorities in the Kyrgyz Republic,” adopted January 11, 1994 2. Law of the Kyrgyz Republic No. 1362-XII “On National Security Authorities in the Kyrgyz Republic,” adopted January 11, 1994 3. Law of the Kyrgyz Republic No. 1372-XII “On Urban Construction and Architecture in the Kyrgyz Republic,” adopted January 11, 1994 4. Law of the Kyrgyz Republic No. 1480-XII “On Non-Tax Payments,” adopted April 14, 1994 5. Law of the Kyrgyz Republic No. 26 “On Plant Quarantine,” adopted June 27, 1996 6. Law of the Kyrgyz Republic No. 56 “On Electric Power Industry,” adopted October 30, 1996 7. Law of the Kyrgyz Republic No. 12 “On Licensing,” adopted March 3, 1997 8. Law of the Kyrgyz Republic No. 105 “On State Protection Service in the Kyrgyz Republic,” adopted December 29, 1997 9. Law of the Kyrgyz Republic No. 27 “On Commercial Secrets,” adopted March 30, 1998 10. Law of the Kyrgyz Republic No. 31 “On Electronic and Mail Communication,” adopted April 2, 1998 11. Law of the Kyrgyz Republic No. 131 "On Investigative Activities,” adopted October 16, 1998 12. Law of the Kyrgyz Republic No. 139 “On Antidumping,” adopted October 31, 1998 13. Law of the Kyrgyz Republic No. 155 “On Advertising,” adopted December 24, 1998 14. Law of the Kyrgyz Republic No. 51 “On Atmospheric Air Protection,” adopted June 12, 1999 15. Law of the Kyrgyz Republic No. 53 “On Environmental Protection,” adopted June 16, 1999 16. Law of the Kyrgyz Republic No. 54 “On Environmental Impact Assessment,” adopted June 16, 1999 17. Law of the Kyrgyz Republic No. 58 “On the Radiological Safety of the Population of the Kyrgyz Republic,” adopted June 17, 1999 18. Law of the Kyrgyz Republic No. 3 “On Status of Members in Local Keneshes,” adopted January 13, 2000 19. Law of the Kyrgyz Republic No. 35 “On Rescue Services and Status of Rescuers,” adopted January 21, 2000 20. Law of the Kyrgyz Republic No. 15 “On the Protection of Entrepreneurs' Rights,” adopted February 1, 2001 21. Law of the Kyrgyz Republic No. 53 “On Flora Protection and Use,” adopted June 20, 2001 22. Law of the Kyrgyz Republic No. 93 “On Industrial Safety of Hazardous Industrial Objects,” adopted November 19, 2001 23. Law of the Kyrgyz Republic No. 30 “On Export Control,” adopted January 23, 2003 24. Law of the Kyrgyz Republic No. 51 “On Anticorruption Activities” adopted March 6, 2003 25. Law of the Kyrgyz Republic No. 91 “On Pharmaceuticals,” adopted April 30, 2003 26. Law of the Kyrgyz Republic No. 16 “On Administrative Procedures,” adopted March 1, 2004 27. Law of the Kyrgyz Republic No. 67 “On Technical Regulation Principles in the Kyrgyz Republic,” adopted May 22, 2004 28. Law of the Kyrgyz Republic No. 70 “On Cooperatives,” adopted June 11, 2004 29. Law of the Kyrgyz Republic No. 103 “On the Social Fund of the Kyrgyz Republic,” adopted August 2, 2004 30. Law of the Kyrgyz Republic No. 116 “On Health-care Organizations in the Kyrgyz Republic,” adopted August 13, 2004 31. Law of the Kyrgyz Republic No. 117 “On the Chamber of Accounts of the Kyrgyz Republic,” adopted August 13, 2004 32. Law of the Kyrgyz Republic No. 121 “On the Procedure for the Jogorku Kenesh of the Kyrgyz Republic to Exercise its Control Functions” of August 13, 2004 33. Law of the Kyrgyz Republic No. 6 “On Health-care for the Citizens of the Kyrgyz Republic,” adopted January 9, 2005 34. Law of the Kyrgyz Republic No. 61 “On Veterinary Medicine,” adopted April 12, 2005 35. Law of the Kyrgyz Republic No. 82 “On the Prevention of Delinquency in the Kyrgyz Republic,” adopted June 25, 2005 36. Law of the Kyrgyz Republic No. 67 “On Procedure for the Consideration of Appeals from Citizens,” adopted May 4, 2007 37. Law of the Kyrgyz Republic No. 14 “On Ensuring Uniformity of Measurements,” adopted August 10, 2007 38. Law of the Kyrgyz Republic No. 99 “On Local Self-government and Local State Administration,” adopted May 29, 2008 39. Law of the Kyrgyz Republic No. 24 “On the State Tax Service of the Kyrgyz Republic,” adopted January 23, 2009 40. Law of the Kyrgyz Republic No. 151 “On General Technical Regulation to Ensure Environmental Safety in the Law of the Kyrgyz Republic,” adopted May 8, 2009 41. Law of the Kyrgyz Republic No. 166 “On the Development of Agriculture in the Kyrgyz Republic,” adopted May 26, 2009 42. Law of the Kyrgyz Republic No. 178 “On General Technical Regulations of the Kyrgyz Republic on Land-based Vehicle Safety,” adopted May 29, 2009 43. Law of the Kyrgyz Republic No. 248 “On Public Healthcare,” adopted July 24, 2009 44. Law of the Kyrgyz Republic No. 251 “On the Securities Market,” adopted July 24, 2009 45. Law of the Kyrgyz Republic No. 269 “On State Regulation of the Production and Sale of Ethyl Alcohol and Alcohol Products,” adopted October 13, 2009 102 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 7.3: inCidenCe oF insPeCtions by state insPeCtorates and other agenCies beFore, during, and aFter the moratorium Chart 7.20: Inspections coverage of individual entrepreneurs was higher after the moratorium than prior to it, indicating that the moratorium simply delayed inspections Monthly percentage of individual entrepreneurs inspected each each month by the main inspection agencies before, during, and after the moratorium 20% 18% Before Moratorium 16% 15% During Moratorium After Moratorium 10% 10% 9% 8% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 4% 4% 3% 3% 3% 2% 1% 0% State Tax Service Social Fund Sanitary and Electric inspection Fire Safety Local government Other Epidemiological service Department Servis Chart 7.21: the incidence of inspections of small and medium companies was similar both before and after the moratorium Monthly percentage of small and medium companies inspected each month by the main inspection agencies before, during, and after the moratorium 15% 14% Before 13% Moratorium 12% During Moratorium 9% 9% 9% After 8% Moratorium 7% 6% 6% 6% 6% 5% 5% 5% 5% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 1% 1% 0% State Tax Service Social Fund Fire Safety Sanitary and Electric State Agency of Financial Other Department Epidemiological inspection Environmental police Servis service Protection and Forestry 7. inspEctiOns 103 Chart 7.22: Farmers were the only category for which the incidence of inspections was lower after the moratorium than prior to it Monthly percentage of farmers inspected by the main inspections agencies before, during, and after the moratorium 15% 13% Before Moratorium 12% During Moratorium 9% After Moratorium 7% 7% 6% 4% 4% 3% 3% 2% 2% 2% 2% 2% 1% 1% 1% 1% 0% Local government State Tax Service Social Fund State Veterinary Other Department of the Ministry of Agriculture annex 7.4: small and medium enterPrises’ estimations oF their knowledge oF insPeCtions legislation Chart 7.23: Small and medium companies were the category most confident of their knowledge of inspections legislation SMEs estimate 100% 8% their knowledge 34% 33% of the inspection 80% legislation 60% 92% Poorly aware or 40% not aware 66% 67% Well aware or 20% aware in general terms 0% Individual Small and Farmers entrepreneurs medium companies 104 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 7.5: the labor Cost oF insPeCtions labor costs of State tax Service inspections IndIvIdual SMall and FaRMERS SOuRCE EntREPREnEuRS MEdIuM COMPanIES a total number of enterprises 145,663 10,982 280,408 state statistics committee b proportion of smEs subjects to 66% 59% 10% survey results tax inspections in 2008 c no. of enterprises inspected by 96,720 6,446 27,200 a*b the state tax service d duration of all tax inspections in 2.98 4.68 2.25 survey results 2008 per business E 50% of time 1.49 2.34 1.13 hypothesis: smEs staff spend 50% of their time with inspectors during tax inspections F average number of staff involved 1.5 2.2 1.5 survey results g avarage salary 5,378 5,378 5,378 state statistics committee h total, KgS 55,412,699 8,497,319 11,754,588 C * g * F * (E/21) I grand total, KgS 75,664,607 J grand total, $ 2,069,035 labor costs of Social Fund inspections IndIvIdual SMall and FaRMERS SOuRCE EntREPREnEuRS MEdIuM COMPanIES a total number of enterprises 145,663 10,982 280,408 state statistics committee b proportion of smEs subjects to 34% 41% 5% survey results social Fund inspections in 2008 c no. of enterprises inspected by 49,817 4,448 14,301 a*b social Fund d duration of all social Fund 2.02 1.67 1.40 survey results inspections in 2008 per business E 50% of time 1.01 0,8 0.70 hypothesis: smEs staff spend 50% of their time with inspectors during social Fund inspections F average number of staff involved 1.50 2.20 1.40 survey results g avarage salary 5,378 5,378 5,378 state statistics committee h total, KgS 19,298,184 2,097,179 3,589,121 C * g * F * (E/21) I grand total, KgS 24,984,484 J grand total, $ 683,196 7. inspEctiOns 105 labor costs of other inspections IndIvIdual SMall and FaRMERS SOuRCE EntREPREnEuRS MEdIuM COMPanIES a total number of enterprises 145,663 10,982 280,408 state statistics committee b proportion of smEs subject to 54% 48% 22% survey results inspections in 2008 c number of inspected enterprises 78,221 5,293 62,251 a*b by other authorities d duration of all other inspections 4.64 4.83 1.18 survey results in 2008 per business E average number of staff involved 1.50 2.26 1.40 survey results F average salary 5,378 5,378 5,378 state statistics committee g total, KgS 139,454,759 14,782,480 26,336,310 C * F * E * (d/21) h grand total, KgS 180,573,549 grand total, $ 4,937,751 total labor cost of inspections IndIvIdual EntREPREnEuRS SMall and MEdIuM FaRMERS COMPanIES state tax service 55,412,699 8,497,319 11,754,588 social Fund 19,298,184 2,097,179 3,589,122 Others 139,454,759 14,782,480 26,336,310 total 214,165,643 25,376,978 41,680,019 grand total (KgS) 281,222,639 grand total ($) 7,689,982 8. Taxation tax legislation and compliance requirements hinder business growth 8.1. key Findings: 8.2. legal Framework: the new tax Code • Survey results (collected in 2008 and reflecting the impact is an imPortant steP in imProving the tax of the old Tax Code),97 together with a preliminary analysis system, but additional reForms are needed of the new Tax Code,98 indicate that the tax system does not encourage the graduation from the patent regime to Positive reforms under the new tax Code the simplified tax regime. This has serious consequences include a decrease in the number of taxes and a for both business growth and tax revenue collection. Ad- decrease in the rate of the single tax on turnover ditional reforms to both the patent and the simplified tax The new Tax Code was adopted on October 17, 2008 and regime are therefore needed. became effective on January 1, 2009. It replaces the Tax Code • The total average labor cost associated with tax account- that had previously been in force since 1996. Some of the main ing and mandatory reporting in 2008 was KGS11,740 ($321) changes that were gradually introduced during the period per individual entrepreneur, KGS79,054 ($2,162) per small of 1996–2008 included the creation of the simplified taxation and medium company and KGS6,010 per farmer ($164). regime, the decrease of the profit tax rate from 20 to 10 percent, This represents approximately 10 percent of individual en- and the switch from a progressive to a flat income tax. trepreneurs’ total profit, 13 percent of small and medium companies’, and 14 percent of farmers’. • The labor cost to SMEs in fulfilling their tax compliance box 8.1: Key legislaTion regulaTing TaxaTion and reporting obligations in 2008 (including tax account- ing and mandatory reporting, but excluding tax audits) • Law of the Kyrgyz Republic No. 76 “On Accounting,” adopted April 29, 2002; • The Customs Code of the Kyrgyz Republic, adopted July 12, 2004; amounted to over KGS4 billion ($116 million), representing • The Tax Code of the Kyrgyz Republic, adopted October 17, 2008, in 2.9 percent of the country’s gross domestic product (GDP). effect since January 1, 2009; This is higher than the cost of other main regulatory pro- • Government Resolution No. 736 “On the Registration and Sealing of cedures altogether (registration, permits, licensing, techni- Cash Register Machines,” adopted December 30, 2008; cal regulations and inspections). • Government Resolution No. 733 “On Approving Amount of Voluntary Patent • Inspections are a heavy burden and are not risk-focused: Tax by Type of Entrepreneurial Activity,” adopted December 30, 2008; 66 percent of individual entrepreneurs, 59 percent of small • Government Resolution No. 58 “On Mandatory Patent Rates,” adopted and medium companies and 10 percent of farmers were January 28, 2009. inspected by the State Tax Service in 2008, despite an inspection moratorium being in place between April and December 2008. The cost of tax audits to SMEs in 2008 97 The Tax Code of the Kyrgyz Republic, adopted June 26, 1996, implemented July 1, was close to KGS48 million ($1.3 million), representing 0.03 1996. 98 The Tax Code of the Kyrgyz Republic, adopted October 18, 2008, implemented percent of the country’s GDP. January 1, 2009. 8. taxatiOn 107 The new Tax Code was developed between 2005 and 2008 tax regime decreased from 15 (comprising eight national by a working commission (the “Commission”) that included and seven local taxes) to eight (six national and two local representatives of the government and the business com- taxes).99 Most previously existing local taxes, in particular, were munity, as well as independent tax experts. Members of the cancelled, which considerably simplified the tax system for public were also given the opportunity to contribute, and the majority of SMEs and drastically reduced administrative more than 5,000 comments and suggestions were received costs for tax authorities. In addition, the decrease of between by the Commission between 2004 and 2008. one and four percent in the rate of the single tax on turnover made the simplified tax regime more attractive for business- The new Tax Code was designed to streamline the existing es. The rate of VAT was also decreased, from 20 to 12 percent tax system (for example, in reducing the total number of (Table 8.1). taxes in force), and to introduce modern taxation principles (risk-based tax management, the principle of good faith, and However, additional reforms of the tax system are needed as: so on) as well as modern tax administration management • the combination of VAT and of the new sales tax imposes with a view to reducing the tax burden on businesses while both an excessive financial burden on businesses, as well optimizing efficiency. The principle of risk-based audit was in- as a greater burden in terms of tax compliance; and troduced into the Tax Code, including a provision stating that • the tax patent regime and the simplified tax regime taxpayers be rated according to their estimated “risk,” and tax should be further reformed in order to encourage gradu- audits planned accordingly. ation from the former to the latter, thus encouraging busi- ness growth, with positive impacts on the economy and With the enactment of the new Tax Code, the total number of employment; and taxes paid and/or collected by businesses under the general • tax administration remains complex and time consuming. table 8.1: SMEs are subject to fewer taxes, but additional reforms are needed ChangES lIKEly tO havE a POSItIvE IMPaCt ChangES lIKEly tO havE a nEgatIvE IMPaCt the new Tax Code introduced fundamental principles of: – fairness (all taxpayers are treated equally); – transparency (all legal acts regulating taxation must be made public); – the presumption of good faith; and – certain elements of risk-based tax audit new tax regimes were introduced, including: – the “contract-based tax payment” regime (box 2); and – taxation in free economic zones the following national taxes were eliminated: higher rates of land tax (variable, depending on the region in which – road use tax; and such land is held) – contribution to Emergency situations Fund the following local taxes were eliminated: – health resort tax; – tax on advertising; – hotel tax; and – tax on retail sales and consumer services the vat rate was reduced from 20 to 12 percent a sales tax (of 1.5–3.5 percent) was introduced: the simultaneous use of two indirect tax instruments (i.e., the vat and the cascading sales tax), poses a higher effective tax rate and tax compliance burden than the original 20 percent vat rate100 the price of the tax patent was increased 99 The tax on immovable property existed under the old Tax Code, but was not 100 This is particularly true for the manufacturing sector, due to the high number of enforced and is not included in this calculation. transactions involved between the purchase of raw materials and retail sale. 108 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs ChangES lIKEly tO havE a POSItIvE IMPaCt ChangES lIKEly tO havE a nEgatIvE IMPaCt the rate of the simplified tax on turnover (“single tax”) was reduced from its previous levels of: – five percent of turnover for businesses in agricultural processing, manufacturing, and public catering; – six percent of turnover for business in trade and transportation services; and – 10 percent of turnover for businesses in other sectors rates are now: – four percent of turnover for businesses in manufacturing, trade, and processing; and – six percent of turnover for businesses engaged in other activities taxes previously levied on owners of vehicles and immovable property (although this latter tax was not enforced under the old tax code) were combined into the “property tax” short-term patents were introduced (of one, two, and 15 days’ duration) an additional facility for tax returns to be filed online was introduced (not yet implemented) Following the implementation of the new tax entrepreneurs) engaged in any of seven prescribed types Code, businesses in the kyrgyz republic now of activity.102 have a choice of five tax regimes • The simplified tax regime targets both individual en- In addition to the reforms outlined above regarding changes trepreneurs and small and medium companies and is in the number of taxes and applicable tax rates, the new Tax intended to be an intermediary regime between the Code saw the introduction of two new tax regimes. As of late patent tax regime (a very simple mechanism, suitable 2009, the tax regime for free economic zones was used by for the smallest businesses) and the general tax regime 580 businesses in four free economic zones throughout the (which is more onerous in terms of administration and Kyrgyz Republic.101 In addition, a new regime, the “contract- compliance (as well as cost), and is targeted at larger busi- based tax payment” regime, was introduced (Box 8.2). Tables nesses). Businesses operating under the simplified tax 2 and 3 outline entrepreneurs’ eligibility for each of these tax regime pay up to four taxes, as well as making payments regimes, the operational limitations associated with them, to the Social Fund. and the taxes applicable under each regime. More informa- • The general taxation regime targets both individual tion on applicable taxes under each regime is given in Annex entrepreneurs and small and medium companies and is 8.2. Due to the geographical limitations of the tax regime for intended to apply to larger businesses. Businesses operat- free economic zones, this regime is not included in Tables 8.2 ing under the general tax regime pay up to eight taxes, as and 8.3, nor in Annex 8.2. well as making payments to the Social Fund. • The newly introduced “contact-based tax payment” regime In addition to the tax regime for free economic zones, the involves the payment of an amount fixed in advance in lieu Kyrgyz Republic currently has four other tax regimes in force. of payment of VAT, the sales tax, and profit tax. • The voluntary tax patent regime is targeted at individual entrepreneurs, and applies to 124 types of business activ- ity. Under the patent regime individual entrepreneurs pay 101 The free economic zones of “Naryn,” “Karakol,” “Bishkek,” and “Maimak” were created in 1991, 1994, 1995, and 1997, respectively. However, the old Tax Code a fixed amount for a pre-determined period (Annex 8.1). contained no provisions governing free economic zones, and tax exemptions The administration of the voluntary tax patent regime for businesses operating in free economic zones were regulated by the Law of the Kyrgyz Republic No. 1076-XII “On Free Economic Zones,” adopted December16, is very simple and requires a maximum of one report to 2002. be submitted to the tax authorities. The mandatory tax 102 Mandatory patents are necessary for the operation of saunas and public baths, patent regime applies to all businesses (not just individual billiard halls, casinos and slot halls, money exchange offices, and 24-hour parking facilities. 8. taxatiOn 109 table 8.2: Eligibility and operational limitations of enterprises under various tax regimes gEnERal SIMPlIFIEd tax REgIME PatEnt COntRaCt- tax (SInglE tax) BaSEd tax REgIME MandatORy vOluntaRy PayMEnt REgIME ElIgIBIlIty small and medium yes yes yes n/a yes companies individual entre- yes yes yes yes yes preneurs Farmers yes n/a n/a yes yes OPERatIOnal lIMItatIOnS no op- up to Kgs4 million annual turnover applies to up to Kgs4 million annual available to erational seven types of turnover businesses limitations applicable to all activities except: activities that have – financial and insurance services; applicable to 124 types of been – investment fund activity; business activity103 operational – professional activity on securities for at least valid only in the region in three years businesses liable for excise tax which it was issued cannot register under the simplified tax regime import–export operations are ineligible businesses with more than 30 employees cannot register under the business with more than simplified tax regime 30 employees are ineligible table 8.3: taxes payable under the four tax regimes gEnERal SIMPlIFIEd tax COntRaCt-BaSEd tax PayMEnt REgIME tax REgIME tax PatEnt REgIME necessary to submit tax reports yes yes no yes to the State tax Service? documents to be maintained accounting accounting patent and no requirement to keep tax accounting records by businesses records records patent receipt for taxes pertaining to the tax contract (profit tax, vat, and sales tax) personal income tax yes yes yes yes profit tax 10% n/a n/a included in the amount covered by the contract sales tax yes n/a n/a included in the amount covered by the contract vat yes n/a n/a included in the amount covered by the contract land taxes (on agricultural and yes yes yes yes non-agricultural land) Excise tax yes n/a n/a n/a property tax yes yes yes yes tax on the use of mineral resources yes yes n/a yes single tax on turnover n/a yes n/a n/a contributions to social Fund yes yes yes yes Note: Farmers are exempt from the profit tax, sales tax, and VAT. VAT registration is obligatory for companies and individual entrepreneurs with turnover in excess of KGS4 million. 103 Government Resolution No. 733 “On Approving Amount of Voluntary Patent Tax by Type of Entrepreneurial Activity,” adopted December 30, 2008. See Annex 8.1 for the list of activities. 110 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs in the rate of the single tax on turnover under the new Tax Code, and due to the introduction of the sales tax, to be paid box 8.2: The new “conTracT-based Tax paymenT” only by businesses operating under the general tax regime, regime is associaTed wiTh high Tax paymenTs the simplified tax regime is now more advantageous for A new tax regime, the “contract-based tax payment” regime, was intro- businesses than it was under the old Tax Code. Since the new duced under the new Tax Code. Tax Code came into force, the profit margin thresholds above Eligibility which the simplified tax regime is more profitable for busi- All businesses operational for at least three years are eligible to be taxed nesses than the general tax regime have decreased. under this regime, except for those that have a mandatory patent, that pay the excise tax, or that pay the tax on the use of mineral resources. In addition, taxpayers engaged in credit, financial, and insurance activities, or in activities linked to investment, pension funds, and securities, are also box 3: comparaTive liabiliTies due under The new ineligible. and under The old tax code, for Two hypoTheTical Guidelines companies The tax contract replaces three taxes – the profit tax, VAT, and the sales The case studies below, based on (i) a small and medium company in tax. Taxpayers operating under the contract regime must pay all other the retail trade located in Osh; and (ii) a small and medium company in taxes as defined in the Tax Code. The amount of tax due under the tax the service sector based in Tokmok, the turnover, profit and number of contract shall be at least 25 percent higher than the highest annual tax employees of which are hypothetical in both cases (Table 8.4), compares payment made by the business during the past three years. Businesses how far the general tax regime was/is more financially advantageous operating under this regime are exempt from business inspections, which than the simplified tax regime, under the old and the new Tax Code. is one of the main advantages of the regime. The main disadvantage of These two case studies consider only those taxes applying differing the regime is the sharp increase in tax payments, regardless of a busi- amounts under the old and the new Tax Code. For example, the case ness’s results. studies do not consider the land tax, since the amounts due under this tax are the same under both regimes. In addition, the case studies do not The tax contract regime had been introduced for a few months at the take into account differences in tax administration (mostly the labor costs time the Survey was conducted.104 On that basis, respondents were asked of complying with tax accounting requirements), although these do, of to identify what they perceived to be the main advantages and disadvan- course, affect the overall compliance burden. The costs of complying with tages of the contract-based tax payment regime. Survey results show tax administration are higher for companies operating under the general that over 60 percent of small and medium companies and individual tax regime than for companies operating under the simplified tax regime. entrepreneurs were not aware of all aspects of this regime at the time of the Survey. As at the end of November 2009, 1,344 entrepreneurs had For the two hypothetical companies examined in these case studies, subscribed to the contract-based tax payment regime. the general tax regime was considerably more advantageous than the simplified tax regime, in 2008. The hypothetical company in Case Study 1 would have had to pay KGS14,438 more in taxes under the simplified the simplified tax regime is more than under the general tax regime:105 and the company in Case Study 2 would have had to pay KGS36,715 more in taxes under the simplified advantageous under the new tax Code than tax regime than under the general tax regime. In 2009, under the new under the old tax Code Tax Code, the amount of taxes to be paid by the hypothetical companies Whether or not the general tax regime is more beneficial chosen for the purpose of this study is the same under both regimes for businesses than the simplified tax regime depends on (Table 8.5). Tables 8.6 and 8.7 show the profit margin thresholds above the profit margin of the business concerned: the lower the which the simplified tax regime is more profitable for businesses than profit margin, the more financially advantageous the general the general tax regime, under the new Tax Code. tax regime; and, conversely, the higher the profit margin, the This reflects the fact that the simplified tax regime is now more advanta- more financially advantageous the simplified tax regime. This geous than it was under the old Tax Code, since the rate of the single tax is due to the fact that the single tax applicable under the on turnover was reduced under the new Tax Code from six to four percent simplified tax regime is based on turnover, whereas the profit for companies in the retail trade sector, and from 10 to six percent for tax applicable under the general tax regime is, as its name companies in the service sector (other than public catering). indicates, on profit. Box 3 indicates that, due to a decrease 104 The new Tax Code became effective from January 1, 2009. The Survey was con- 105 Only the profit tax, the personal income tax, the sales tax, and the simplified tax ducted between May and August 2009. regime tax are considered here. 8. taxatiOn 111 table 8.4: Main characteristics of the hypothetical small and medium company used in Case Study 1 and Case Study 2 CaSE Study 1 CaSE Study 2 SOuRCE region Osh tokmok hypothesis minimal income set by tax authorities 3,500 4,100 tax authorities sector of activity retail trade services hypothesis annual turnover (Kgs) 1,000,000 1,000,000 hypothesis net profit (Kgs) 33,343 141,595 hypothesis profit margin 3.33% 14.16 % net profit/ annual turnover *100 average number of employees 5 5 hypothesis average salary (Kgs/month) 5,378 5,378 state statistics committee table 8.5: Comparative taxes paid under the general and simplified tax regimes, under the old and the new tax Codes — Case Study 1 (a retail trade business in Osh) 2008 (Old tax COdE) 2009 (nEW tax COdE) RatE gEnERal SIMPlIFIEd RatE gEnERal SIMPlIFIEd REgIME (KgS) REgIME (KgS) REgIME (KgS) REgIME (KgS) profit tax 10% 3,705 – 10% 3,705 simplified regime tax rate 6% n/a 56,604 4% n/a 38,462 personal income tax 10% 25,787 25,787 10% 25,787 15,420 retail sales tax 4% 38,462 n/a – – – sales tax – – – 2.5% 24,390 n/a total amount of taxes paid (KgS) 67,952.83 82,390.33 53,881.54 53,881.54 difference: general tax regime – -14,437.50 0 simplified tax regime table 8.6: Comparative amount of taxes paid by the hypothetical company under the general and simplified tax regimes, under the old and the new tax Code — Case Study 2 (a service business in tokmok) 2008 (Old tax COdE) 2009 (nEW tax COdE) RatE gEnERal SIMPlIFIEd RatE gEnERal SIMPlIFIEd REgIME REgIME REgIME REgIME profit tax 10% 15,733 – 10% 15,733 simplified regime tax rate 10% n/a 90,909 6% n/a 56,604 personal income tax 10% 25,787 25,787 10% 25,787 18,732 vat 20% n/a n/a 12% n/a n/a Excise tax n/a n/a n/a n/a n/a n/a land tax tax on the use of mineral n/a n/a n/a n/a n/a n/a resources property tax n/a n/a n/a n/a n/a n/a retail sales tax 4% 38,462 n/a – – – sales tax – – 3.5% 33,816 n/a total taxes paid (KgS) 79,980.88 116,695.65 75,335.76 75335.77 difference general regime -36,715 0 – simplified tax regime 112 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Tables 8.7 and 8.8 indicate the profit margin thresholds above Chart 8.1: the tax burden on incremental investment is which the simplified tax regime is more beneficial for business- much higher than the 10 percent corporate tax es than the general tax regime, under the new Tax Code, insofar Comparison of MEtRs under the old and the new tax Code as this applies to the two hypothetical companies in the case studies – an Osh-based small and medium company active in 70% the retail trade sector (Table 8.7) and a Tokmok-based small and 60% 59% medium company active in the service sector (Table 8.8). 50% 48% Below these profit margin thresholds, the general tax regime is more profitable; above these thresholds, the simplified tax 40% regime is more profitable. 32% 36% 30% 28% 24% table 8.7: Profit margin thresholds above which the 20% simplified tax regime is more profitable than the general 15% 15% tax regime, for a (hypothetical) business active in the retail 10% trade in Osh 0% annual 1,000,000 2,000,000 3,000,000 4,000,000 tuRnOvER Manufacturing Tourism Agriculture Finance (KgS) Old Tax Code New Tax Code profit 3.33% 8% 9.55% 10.33% margin Source: World Bank staff calculations, based on official data. table 8.8: Profit margin thresholds above which the The METR analysis for the Kyrgyz Republic reveals that the simplified tax regime is more profitable than under the overall burden of the tax system on investment is quite dif- general tax regime, for a (hypothetical) business active in ferent from the statutory corporate rate of 10 percent, being the service sector in tokmok higher for all sectors, including agriculture (which, overall, annual 1,000,000 2,000,000 3,000,000 4,000,000 enjoys a lower rate than other sectors). The METRs for the ag- tuRnOvER (KgS) riculture, tourism, and finance sectors are the same or lower under the new Tax Code, whereas the METR for the manu- profit 14.16% 17.33% 18.39% 18.92% margin facturing sector is higher under the new Tax Code, due to the cascading effect of the new sales tax. The METR analysis indicates that enterprises face a high burden on investment, marginal effective tax rate (metr) analysis and that this limits their growth. confirms that the tax burden remains high under the new tax Code treatment of leasing is unclear in the new tax An IFC study undertaken in September 2008106 considered Code the Marginal Effective Tax Rate (METR), which focuses on the The law on leasing was passed in the Kyrgyz Republic in 2002, impact of business taxes on marginal investment decisions, creating a framework for the growth of the leasing industry, and thus provides a measure of how a business tax regime which, by some estimates107, has generated $1.7 million in may affect investment trends in the country, its competitive- new leasing transactions in 2008 alone. However, with the ness vis-à-vis alternative investment locations, or the relative introduction of sales tax in the new Tax Code, treatment of tax penalty (or subsidy) on different sectors of the economy leasing is unclear. As a result, private lessors suspended almost and different types of assets. all leasing transactions, effectively shutting down the private leasing market. Losing the option of leasing will increase operational costs for businesses that depend on leasing for financing their physical assets. 106 Foreign Investment Advisory Service (FIAS) (2008) “The Tax System and the Business Enabling Environment in the Kyrgyz Republic: Preliminary Results 107 IFC Azerbaijan-Central Asia Leasing Facility advisory services project. from the Initial Mission,” September. 8. taxatiOn 113 “ Since the new tax code came into effect on January 1, 2009, I have suspended all leasing activity because The ratio of tax revenue to GDP in the Kyrgyz Republic has increased from 15.8 percent in 2001 to 23.3 percent in 2008 we cannot be certain of how we will be taxed on (Chart 8.3). This ratio is average in comparison with other post- these transactions. It is not very clear how these Soviet countries (Chart 8.4). operations will be charged with various taxes. As a result, in 2008 we did 44 leasing transactions with Chart 8.3: the ratio of tax revenue to gdP has grown a total value of 300000 USD while in 2009 we continuously since 2000 did zero.” Losing the option of leasing will increase Ratio of tax revenue to gdP operational costs for businesses that in depend on 30% leasing for financing their physical assets. 25% 24.4% 22.6% 23.3% The general manager of a leading financial institution in the Kyrgyz Republic 20.0% 20% 18.3% 17.6% 17.7% 15.8% To address this issue, the World Bank and IFC work jointly on 15% recommendation of comments and introduction of changes 10% to the tax code that will bring leasing operations back to life, and back to benefiting Kyrgyz businesses. 5% 0% 8.3. Context: tax revenues in the kyrgyz 2001 2002 2003 2004 2005 2006 2007 2008 rePubliC are growing Source: IMF reports. Tax revenues in the Kyrgyz Republic have grown strongly since 2001. Growth was especially strong in 2007 and 2008, at 28.1 percent and 42.7 percent, respectively, in real terms Chart 8.4: the ratio of tax revenue to gdP is average in comparison with other post-Soviet countries (Chart 8.2). Growth in tax revenues has largely outpaced GDP growth over the 2000–2008 period: GDP has increased by 37.8 Ratio of tax revenues to gdP in post-Soviet countries percent (in real terms), while tax revenues have increased by 40% 38.5% 164.5 percent. Although GDP declined in 2005, tax revenues 35% increased even during that year. Tax collection has improved 30% 29% in recent years as the result of “improved customs administra- 25% 23.3% 24.9% tion and streamlined tax procedures, including better arrears 20% 18.7% 16.4% management.”108 15% 10% Chart 8.2: tax revenues have increased by far more 5% than gdP over the 2000–2008 period 0% Armenia Tajikistan Kyrgyz Georgia Kazakhstan Ukraine Evolution of tax revenues and gdP (2000-2008) Republic 40000 45% Source: IMF (2009) “Country Reports”. 35000 40% 35% 30000 30% Taxes on consumption, as well as income tax, are the main Million KgS 25000 25% sources of revenue. VAT collection accounted for 46 percent of 20000 20% total taxes in 2008, while income tax and profit tax accounted 15000 15% for 17 percent of total taxes in 2008. The single tax on turnover 10% 10000 accounted for only 0.2 percent of total tax revenues in 2008. 5% 5000 0% 0 -5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Real tax revenues Real tax revenues growth rate Real GDP growth rate Source: Real GDP sourced from IMF country reports; information on tax revenues sourced from the State Statistics Committee and calculated in real terms on the basis of World Bank World 108 IMF (2009) “Kyrgyz Republic Country Report,” 09/209. Development Indicators data. 114 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 8.5: vat contributed nearly 46 percent of total tax revenues in 2008 (under the old tax Code) Contribution of each tax to overall tax revenue, 2008 (%) Others income tax 4% 9% in come tax non-residents tax on international trade and operations 2% 13% profit tax 7% tax on the use of natural resources single tax on turnover 2% % 0. 2 patent 3% Excise tax 4% tax on property 1% 2% land tax contribution to Emergency 5% situations Fund 3% road-use tax 46% vat Source: State Statistics Committee (2008). Available at http://www.stat.kg/rus/part/fin.htm 8.4. survey results: tax aCCounting and tax under this regime replaces corporate income tax and ComPlianCe Cost businesses an estimated the sales tax only, with the result that enterprises operating kgs3.3 billion ($88 million) in 2008 under the simplified tax regime are, nonetheless, required to The labor cost born by SMEs in maintaining the accounting maintain full bookkeeping and reporting for all other taxes for procedures necessary for tax compliance is high, amounting which they are liable.109 As a result, tax accounting and com- to KGS3.3 billion ($88 million) in 2008 – approximately two pliance remains complex, and small and medium companies percent of the country’s GDP. Such significant costs call for a operating under the simplified tax regime are often obliged simplification of the tax accounting obligations on businesses, to rely on the assistance of accountants. under both the general and the simplified tax regimes. The vast majority of individual entrepreneurs (83 percent) The majority of small and medium companies (75 percent) fulfill all tax accounting requirements themselves (Chart 8.6). hire part- or full-time accountants for this purpose, while This is due to the fact that the majority of individual entre- 11 percent of the owners or managers of such small and preneurs operate under the patent regime, which does not medium companies fulfill these requirements themselves. require any bookkeeping. Ten percent of individual entrepre- Small and medium companies are more likely than individual neurs engage either a full-time or a part-time accountant to entrepreneurs to hire part-time or full-time accountants for meet their tax accounting and compliance obligations. These the purposes of tax accounting because (i) turnover in these individual entrepreneurs, for the most part, operate under businesses tends to be higher than for individual entrepre- the general or simplified tax regimes: 81 percent of those neurs, necessitating the maintenance of more extensive individual entrepreneurs that engage accountants full-time records; and (ii) such small and medium companies operate under both the general and the simplified tax regimes, both of which are associated with high compliance requirements. 109 In 2008 such other taxes included: personal income tax; land tax; contribu- The turnover-based simplified tax regime reduces compli- tions to the Social Fund; and, where applicable: the tax on the use of mineral resources; hotel tax; resort tax; advertisement tax; and vehicle taxation. In 2009 ance costs by lowering the complexity and frequency of such other taxes included: personal income tax; land tax; property tax; contri- accounting and reporting requirements. However, the single butions to the Social Fund; and, where applicable, the tax on the use of mineral resources. 8. taxatiOn 115 are working under the general tax regime, while 53 percent bookkeeping skills do not constrain of those individual entrepreneurs that engage part-time ac- “graduation” to the simplified tax regime countants operate under the simplified tax regime. Respondents indicated that the bookkeeping systems they maintained were more sophisticated than necessary to meet The vast majority of farmers (99 percent) fulfill all tax account- the reporting requirements of the Tax Code, particularly for ing requirements themselves, while one percent engage a those businesses operating under the patent regime: this full-time accountant for this purpose. This low percentage is would suggest that bookkeeping skills are not, necessarily, a due to the fact that farmers are exempt from most taxes and deterrent in “graduating” to the simplified tax regime. thus have limited compliance obligations. Legislation under both the old and the new Tax Code requires In general, it is rare for tax accounting and reporting to be patent holders to maintain minimal financial documentation sub-contracted to a firm of accountants; only two percent of (in those cases where businesses do not maintain a cash small and medium companies and individual entrepreneurs registers, they are required to maintain ledgers recording all do so. This may be the result of under-developed business cash receipts), while individual entrepreneurs and small and and consulting services in the Kyrgyz Republic, or due to medium companies operating under the simplified and the complexity of current tax accounting and compliance general tax regimes are required to maintain full financial requirements. documentation in respect of all taxes for which they are liable. Bookkeeping requirements are greatest for small and Chart 8.6: Most small and medium companies engage medium companies operating under the general tax regime. accountants for bookkeeping, while individual entrepre- neurs and farmers generally do this themselves Half of all individual entrepreneurs (50 percent) maintain full financial documentation, either through a computer system, Persons reponsible for tax compliance within SMEs or manually (Chart 8.7). Over 57 percent of those individual 120% entrepreneurs operating under the patent regime maintain 100% 99% either full or partial financial documentation. These data may 83% indicate that larger and/or more complex entities arrange 80% their corporate structure in such a way as to be eligible to 60% 56% operate under the patent system. The lack of a suitable inter- mediate regime between the patent and general tax regime 40% incentivizes entrepreneurs to over-utilize the patent system, 19% compromising business growth and revenue collection. 20% 11% 12% 7% 5% 1% 3% 2% 2% 0% A clear majority of small and medium companies (93 percent) Owner/ Staff Staff Non-staff Accounting maintained full financial documentation, which is a require- manager accountant, accountant, accountant rm only full time part time ment for companies working under the simplified and the general tax regimes. Farmers have the lowest bookkeeping Individual entrepreneurs Small and medium companies Farmers standards of the three categories of respondents: 37 percent maintained original receipts and/or bills but did not maintain The average labor costs involved in meeting tax accounting logs to record these; 29 percent maintained informal records and compliance obligations in 2008 were KGS8,500 ($232), or logs without retaining any confirmatory documents (such KGS48,300 ($1,321), and KGS5,300 ($145), respectively, for in- as payment receipts or bills); and 21 percent of farmers main- dividual entrepreneurs, small and medium companies and tained informal records or logs and also retained confirmatory farmers. documents. Farmers were, in 2008, exempt from both profit tax and VAT, and were thus not subject to any mandatory ob- ligation to maintain full financial documentation. Lower levels of accounting skills in rural areas may also account for farmers’ lower standards in bookkeeping. 116 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 8.7: the bookkeeping standards of individual entrepreneurs exceed those required by law Bookkeeping standards by category of respondent 50% 49% 44% Individual 42% Entrepreneurs 40% 37% Small and medium companies 30% 29% Farmers 21% 20% 19% 17% 12% 11% 10% 8% 4% 2% 2% 2% 1% 0% No accounting Informal log, Kept original Maintained Full nancial Full nancial no supporting receipts and/or informal log and documentation documentation documents bills, no kept con rming manually in the computer informal log documents 8.5. small and medium ComPanies bear (i) the tax regime under which the business operates. Small the greatest burden in FulFilling and medium enterprises operating under the patent mandatory rePorting requirements regime have the lowest burden in terms of the number In addition to tax accounting, businesses are required to of reports to be submitted, and SMEs operating under submit mandatory reports to (i) the State Tax Service; (ii) the the general tax regime the highest; Social Fund; and (iii) the State Statistics Committee. The pro- (ii) the taxes for which a business is liable (Table 8.1). The duction of these reports is time-consuming and represents more taxes an SME is obliged to pay, the more reports it an additional burden on small and medium companies, to must submit to the State Tax Service; and the point that they are sometimes referred to as an “informa- (iii) the type of activity in which a business is engaged. Small tion tax” with which businesses must comply. Total labor and medium enterprises are required to submit reports costs associated with mandatory reporting amounted to KGS to the State Statistics Committee depending on the 1 billion ($28 million) across the SME sector in 2008, close to activities in which they are engaged, while individual 0.7 percent of national GDP. The average labor cost of fulfill- entrepreneurs engaged in certain activities are exempt ing mandatory reporting requirements in 2008 was KGS3,240 from submitting reports. ($89), KGS30,754 ($841), and KGS710 ($19), respectively, for those individual entrepreneurs, small and medium compa- The number of reports that a SMEs is, under the new Tax nies and farmers responding to the Survey. Code, required to submit each year varies from one (for indi- vidual entrepreneurs employing fewer than two employees Mandatory reports for submission to the State Tax Service and operating under the patent regime in a sector for which consist mostly of tax returns; reports to the Social Fund statistical reporting is not required) to 139 (for an SME op- consist mostly of information on a business’s number of em- erating under the general tax regime and engaged in the ployees, and payments to the Social Fund, etc.; and reports to production of beer).110 The reporting burden for SMEs under the State Statistics Committee consist mostly of information the simplified tax regime is lower than under the general tax about the specific activities in which that SME is engaged. regime, under both the old and the new Tax Code. In addi- tion, the frequency of reports to be submitted by businesses The number of mandatory reports that SMEs are required to submit to the State Tax Service, the Social Fund, and the Statistics Committee, as well as the frequency on which they 110 This comprises: 12 income tax returns; one corporate income tax return; 12 VAT must be returned, depend on several factors including: returns; 12 sales tax returns; 12 excise tax returns; one property tax return; one land tax return; 12 Social Fund contribution returns; and 76 statistical reports. 8. taxatiOn 117 working under the simplified tax regime has decreased since Compliance among farmers is the lowest of all three cat- the new Tax Code came into force: the number of reports to egories of respondents. Although all farmers are required to be submitted in respect of the single tax on turnover was submit reports to the State Tax Service and to the Social Fund, reduced from 12 (monthly filings) to four (quarterly filings), only 26 percent of farmers indicated that they had submitted resulting in a significant contribution to the alleviation of the mandatory reports to the State Tax Service, 21 percent had reporting burden for businesses operating under the simpli- submitted reports to the Social Fund, and 15 percent had fied tax regime (Annex 8.3). submitted reports to the State Statistics Committee (Chart 8.8). Survey results indicate that the degree of compliance with reporting requirements varies significantly across the three box 8.4. The submission of vaT reTurns is Time categories of respondents. consuming • Small and medium companies are subject to the greatest burden in terms of reporting compliance. Close to 100 Since January 1, 2009, businesses in the Kyrgyz Republic have been required to submit a VAT return consisting of one form and five attach- percent of small and medium companies have submitted ments amounting to 12 pages in total. The VAT return must be submitted mandatory reports to the State Tax Service and the Social in three copies. The form contains the information necessary to calculate Fund, and close to 97 percent have submitted reports the amount of VAT due (i.e., volume of sales, volume of sales exempted to the State Statistics Committee (Chart 8.8). On average, from VAT, amount of VAT to be reimbursed, etc.) and taxpayers are re- those small and medium companies that had submitted quired to provide more detailed information in the attachments. mandatory reports in 2008 had submitted 17 reports to Although these attachments may help taxpayers calculate the VAT due the State Tax Service, 16 reports to the Social Fund, and by providing a framework for the calculation of their liabilities, and 10 reports to the State Statistics Committee (Chart 8.9). although a 17-page instruction booklet is available giving advice on the That is, a total of over 43 reports, on average, for those completion of the VAT return, completing these attachments is a time- businesses that had submitted reports to these three consuming process and the volume of information required can lead to agencies in 2008. The majority of these reports consisted mistakes and, subsequently, sanctions or penalties. In addition, taxpayers of tax returns. Some of the reports that businesses are are requested to submit a monthly report listing all VAT invoices received obliged to file are somewhat complicated and lengthy. and issued. Both the VAT return and the monthly invoice report place a For example, the VAT return consists of a one-page form heavy VAT compliance burden on businesses, quite apart from the burden that also includes five attachments comprising 11 pages of the 12 percent VAT rate. in total (Box 8.4); the property tax return consists of five It is therefore recommended that the filing of attachments to the VAT forms comprising 14 pages in total; and the return for the return be made voluntary, and that VAT submissions be made in one copy single tax on turnover is unclear and too detailed for the instead of three, as is the case currently. It is further recommended that, purpose it serves. in the short term, the returns for the sales tax and VAT be merged, since • Compliance among individual entrepreneurs is lower. the tax base is the same in both cases and that, thereafter, the sales tax Although all individual entrepreneurs are required to be abolished in favor of a higher rate of VAT – an initiative which would submit reports to the State Tax Service and to the Social result in a reduction of taxpayers’compliance costs. Fund, in practice only 65 percent of individual entrepre- These recommendations are based on international best practice: in Eu- neurs responding to the Survey indicated that they had ropean Union countries, for example, VAT returns are quite simple. In the submitted reports to the State Tax Service; 45 percent Netherlands, the VAT return consists of a two-page form, and only one had submitted reports to the Social Fund; and 28 percent copy of the VAT return is required by the tax authorities. In addition, VAT is had submitted reports to the State Statistics Committee the only tax levied on the supply of goods and services, and no additional (Chart 8.8). The average number of reports submitted by sales tax is levied. individual entrepreneurs was also lower than the number returned by small and medium companies, with respon- dents returning an average of 10 reports to the State Tax Service, 11 reports to the Social Fund, and seven reports to the State Statistics Committee (Chart 8.9). 118 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 8.8: the reporting burden is greatest for small and have greater tax liabilities; (ii) employ more personnel; and (iii) medium companies tend to be bigger producers and have thus more information to report to various agencies. Small and medium companies Proportion of businesses having submitted reports to the three also have greater capacity than individual entrepreneurs and main agencies farmers (at least in terms of human resources) to prepare and 120% submit mandatory reports, which may also account for their 100% 100% 100% 97% better compliance. 80% The high costs incurred by small and medium companies 65% 60% in meeting their reporting obligations, and the low level of 45% compliance by individual entrepreneurs and farmers, sug- 40% gests that current mandatory reports represent both a signifi- 26% 28% 20% 21% 15% cant burden (at least on small and medium companies) while failing to be properly effective – as witnessed by the low level 0% of compliance by independent entrepreneurs and farmers. State Tax Services Social Fund Statistics Committee On that basis, reform of the system is clearly necessary. Individual entrepreneurs Small and medium companies Farmers 8.6. businesses with a small turnover bear Chart 8.9: a clear majority of small and medium a ComParatively heavier burden in terms oF companies submitted an average of 43 reports in 2008 tax aCCounting and mandatory rePorting In general, the greater the turnover of a business, the greater average number of reports submitted by SMEs (of those returning reports)* its tax accounting and reporting costs. However, tax account- * 2008 ing and reporting costs are strongly regressive, with the result 20 that these do not increase in proportion to company turnover 17 16 (Charts 8.10 and 8.11). 15 The labor cost of tax accounting for small and medium com- 11 10 10 10 panies with turnover below KGS1 million ($27,344) per year 7 equates to an additional tax burden of 12 percent on turn- over, whereas the equivalent cost for companies with annual 5 turnover in excess of KGS5 million ($136,724) amounts to an 2 2 1 additional tax of only 0.5 percent on turnover. This may be 0 due to the fact that companies with higher turnover realize State Tax Services Social Fund Statistics Committee some economies of scale in their tax accounting and book- Individual entrepreneurs Small and medium companies Farmers keeping – a company with a higher turnover is more likely to be able to maintain computerized accounting systems, for example. The mandatory reporting burden is also propor- The low level of compliance by individual entrepreneurs and tionately higher for smaller companies: small and medium farmers in the submission of reports is not correlated to low companies with turnover below KGS1 million incur costs in tax compliance: indeed, 99 percent of farmers stated that they the order of 10 percent of annual turnover, while for those had paid land tax liabilities in 2008, and 94 percent had paid small and medium companies with turnover in excess of due contributions to the Social Fund. Rather, it is due to (i) an KGS5 million the proportional cost is only 0.3 percent. ignorance of reporting requirements on the part of farmers and individual entrepreneurs; and (ii) the fact that these two The high relative cost of tax accounting and mandatory sectors are not treated as priory groups by the authorities to reporting for small and medium companies with turnover whom reports are due. The relevant authorities appear, rather, below KGS1 million per year suggests that, after deduction of to prioritize the submission of reports by small and medium tax liabilities and associated administration costs, only those companies, possibly because these businesses tend to (i) companies that generate a very high return on investment 8. taxatiOn 119 can survive. Those businesses that do not generate such high 8.7. insPeCtions are a heavy burden and rates of return either do not survive or else operate on an are not suFFiCiently risk-FoCused informal basis. Even those businesses that are able to gener- The proportion of SMEs subject to various types of tax inspec- ate a sufficiently high rate of return to be viable face strong tions in 2008 is very high: 66 percent of all individual entrepre- competition from imports and the products and services of neurs, 59 percent of all small and medium companies, and larger businesses for which the cost of tax accounting and 10 percent of all farmers completing the Survey were subject compliance is proportionately lower. to inspections during that year (Chart 8.12). Tax inspections include not only full tax audits, but also the verification of Chart 8.10: the labor costs of tax accounting are patents, cash registers, and permits. strongly regressive Relative labor costs of tax accounting (in proportion to Chart 8.12: tax inspections are a heavy burden on indi- turnover) for small and medium companies vidual entrepreneurs and small and medium companies 80000 14% Proportion of enterprises subject to tax inspections in 2008, 12.2% Average and average number of inspections per business 70000 73507 12% accounting 60000 cost per year 70% 66% 3.0 62103 10% (KGS) 60% 59% Proportion of 50000 Ratio: annual 2.5 8% enterprises subject 40000 accounting 50% to inspection 2.2 2.0 41493 6% cost/ turnover by the State Tax 40% 30000 Service in 2008 1.5 1.6 28038 4% 30% 1.4 20000 3.1% Average number 2.0% 1.0 2% 20% of tax inspections, 10000 0.5% 10% 2008 10% 0.5 0 0% Less than 1-2 2-5 More than 0% 0 1 million million million 5 million Individual Small and Farmers entrepreneurs medium companies Chart 8.11: the labor costs of tax reporting are also This percentage is even higher if the proportion of businesses strongly regressive inspected by the Social Fund (which checks similar informa- tion) is also taken into consideration: 72 percent of individual Relative labor costs of mandatory reporting (in proportion to entrepreneurs, 70 percent of small and medium companies turnover) for small and medium companies and 12 percent of farmers were inspected by either the State 50000 15% Average Tax Service or the Social Fund in 2008, whereas 37 percent 40000 accounting of individual entrepreneurs, 41 percent of small and medium cost per year 41667 10% (KGS) companies and four percent of farmers were inspected by 10% 30000 Ratio: annual both organizations. Inspections of the same businesses by accounting both the State Tax Service and the Social Fund would appear 25895 cost/ turnover 20000 to suggest a waste of resources on the part of both inspect- 20222 5% 19527 ing agencies and enterprises, since the same documents are 10000 1.4% checked in each case. 0.8% 0.3% 0 0% less than 1-2 2-5 more than The high incidence of tax inspections, and the fact that indi- 1 million million million 5 million vidual entrepreneurs are subject to more inspections than small and medium companies, would suggest that risk-man- agement principles are not, in general, used in the selection of businesses for inspection. Survey results indicate, rather, an excessive number of inspections regardless of the anticipated benefit in terms of additional tax revenues. In France, by com- parison, less than two percent of all businesses are inspected 120 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs by the tax authorities every year.111 In Germany, medium-sized businesses are inspected, on average, once every 11.1 years (Table 8.9). In South Africa, less than five percent of SMEs are subject to any kind of tax inspection or audit in any given year.112 table 8.9: tax audits in germany (2000) SIzE OF BuSInESS nuMBER OF REgIStEREd nuMBER OF tax audItS avERagE FREquEnCy OF BuSInESSES COnduCtEd audItS large 167,164 38,115 Every 4.3 years medium 755,061 67,457 Every 11.1 years small 1,169,364 119,111 risk-based selection of a small number of small and micro micro 4,394,539 businesses for audits Source: World Bank Group (2007) “Designing a Tax System for Micro and Small Businesses: Guide for Practitioners.” In addition, the high number of inspections in the Kyrgyz Re- The new Tax Code foresees the implementation of a risk- public increases contacts between taxpayers and tax officials based approach to the planning and conduct of tax inspec- and results in the soliciting and payment of unofficial fees and tions. The focus of such risk-based audits should be on those gifts. This, in turn, may have a negative impact on the volume taxpayers that are most likely to be non-compliant, and those of tax revenue collected. World Bank Business Environment most likely to generate the highest tax revenue in terms of and Enterprise Performance Survey (BEEPS) data indicate the each audit conducted. soliciting and payment of gifts and unofficial fees during tax inspections to be among the highest of all post-Soviet coun- Risk-based audits both improve the efficiency of tax adminis- tries (Chart 8.13). tration and decrease the burden on businesses. In particular, risk-based audits increase the tax yield per audit and decrease Chart 8.13: BEEPS data indicate the practice of informal the compliance burden borne by honest tax payers, since payments during tax inspections in the Kyrgyz Republic these are audited less frequently. to be among the highest of all post-Soviet countries In addition, pursuant to Presidential Decree No. 425 “On Mea- Percentage of firms indicating gifts/informal payments had been requested during a tax inspection sures to Ensure the Implementation of the Law of the Kyrgyz Republic on the Structure of the Government,”113 and pursuant to 40% 36% Government Resolution No. 735 “On the State Tax Service under 35% 32% the Government of the Kyrgyz Republic,”114 the State Tax Service 30% is now responsible for the administration and collection of 26% 26% 25% contributions to the Social Fund. Once this measure becomes effective it is expected to have a positive impact on the inci- 20% 18% dence of inspections to which businesses are subject, since 15% de facto inspections by the State Tax Service and the Social 10% Fund will be merged. It will also result in the more efficient use of the resources of these two organizations. 5% 1% 0% 0% Kyrgyz Tajikistan Azerbaijan Uzbekistan Ukraine Belarus Georgia Republic Source: EBRD-World Bank Business Environment and Enterprise Performance Survey data. 111 General Directorate for Taxes, France (2007) “Rapport Annuel de Performance”. 113 Presidential Decree No. 425 “On Measures to Ensure the Implementation of the Law Available at http://www2.impots.gouv.fr/documentation/rapports/activites/ of the Kyrgyz Republic on the Structure of the Government,” adopted October 26, dgi/2007/dgi_rapport_performance_2007.pdf and http://www.insee.fr/fr/ 2009. themes/tableau.asp?reg_id=0&id=219. 114 Government Resolution No. 735 “On State Tax Service under the Government of the 112 World Bank Group (2009) “Tax Compliance Cost Survey”. Kyrgyz Republic,” adopted December 4, 2009. 8. taxatiOn 121 The official number of tax audits performed by the State Tax by 40 percent between 2007 and 2008, while total tax yields Service in 2008 differs from the total number of tax inspec- increased by 14 percent. The criteria used by the State Tax tions indicated in Survey results. Survey results indicate that Service for the selection of businesses to be audited include (i) around 260,000 tax inspections were performed in 2008,115 discrepancies in the information submitted to various govern- whereas the State Tax Service reports that 10,157 audits were ment agencies; (ii) failure to justify inconsistencies in tax returns; conducted in that year.116 This discrepancy is due to the fact (iii) the regular declaration of losses by a business; and (iv) tax that (i) Survey results include all tax inspections, not tax audits liabilities lower than other businesses engaged in similar ac- alone – i.e., Survey results also include verification of patents, tivities. However, risk-related data on taxpayers are not available cash registers, etc.; and (ii) some audits may have been con- electronically, and data collected are currently held by various ducted “unofficially” and are thus not registered by the State agencies, with the result that the efficiency of the risk-based Tax Service. selection of taxpayers to be audited remains limited. The number of audits (as well as subsequent tax yields) re- As this report went to press (spring 2010), the IFC was engaged corded between 2005 and 2008 suggests that in 2008 the in assisting the State Tax Service in evaluating the challenges State Tax Service began to use risk-based criteria for the plan- associated with the implementation of the risk-based audit ning of audits and the selection of businesses for investiga- system in the Kyrgyz Republic consistent with international tion (Table 8.10). The number of audits conducted decreased best practice (Box 8.5). table 8.10: number of tax audits conducted in the Kyrgyz Republic 2005–2008 and subsequent tax yields yEaR 2005 2006 2007 2008 number of audits 15,598 15,898 16,791 10,157 tax yields (Kgs) 863,318,600 524,232,800 921,823,200 1,053,170,100 tax yield/audit (Kgs) 53,964 32,975 54,900 103,689 Note: Includes planned, unplanned, control and re-audits. Source: State Tax Service. box 8.5: inTernaTional besT pracTice – laTvia has successfully adopTed a risK-based approach To Tax conTrols The modernization of Latvia’s State Revenue Service tax control system was supported by international organizations such as the World Bank and the European Union. Prior to the introduction of risk criteria for the selection of taxpayers to be audited, regional offices of the State Revenue Service would select taxpayers to be audited autonomously, on the basis of subjective criteria. The number of tax audits was high, and the average tax yield of a single audit relatively low. A system for the risk-based selection of taxpayers to be audited was gradually established between 2001 and 2004. Prior to the “Eskort” system being put in place in 2004 (i.e., between 2001 and 2003), local offices of the State Revenue Service would conduct credibility checks of VAT returns manually, on the basis of defined risk criteria. For this purpose taxpayers were divided into various risk categories. The VAT returns of high-risk taxpayers were analyzed individually using certain risk criteria contained in a specific checklist, and “points” awarded. The total sum of points calculated after completion of the checklist allowed inspectors to define further actions to be taken against the taxpayer (e.g., a systematic check, VAT audit, deregistration of company from the VAT register, etc.). The manual credibility check of VAT returns was then replaced by a fully computerized system. During 2002 and 2003 the central administration of the State Revenue Service also helped regional offices to select high-risk taxpayers through a simple semi- computerized risk filtering approach. Tax inspectors were to divide all taxpayers into risk categories and focus on those taxpayers whose fiscal risk (compliance level) and fiscal importance (measured, for example, in terms of turnover) was the highest. 115 Estimate based on Survey results. 116 Including planned, unplanned, control and re-audits. 122 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Fiscal risk was measured using simple filtering techniques such as (i) the selection of those taxpayers submitting information that appeared to differ on customs and VAT returns; and (ii) the selection of those taxpayers recording a high VAT turnover but a small number of employees (indicating a potential risk that the company was using illegal labour), and so on. Since 2004 the State Revenue Service has used the “Eskort” risk analysis system in the planning of various tax control initiatives. “Eskort” is a fully computerized system that evaluates a taxpayer’s risk and helps identify those deemed to present the greatest potential risk. Three types of risk factors are used in identifying higher-risk tax payers. Each risk factor is allocated a risk score on the basis of the probability that such risk factor may involve non-compliance. Based on this, the “Eskort” system is able to identify those taxpayers that represent the greatest risk, and which should, therefore, be subject to investigation or control. Those taxpayers representing the greatest risk are those that demonstrate several risk factors. For example, a taxpayer that has declared losses for several years, and that has tax liabilities lower than those of similar taxpayers, or that demonstrates discrepancies between, for example, VAT and customs returns, clearly demonstrates a number of risk factors and is likely to appear at the top of any list of taxpayers to be investigated. As a result of the risk-based approach to tax controls implemented in Latvia since 2001, the number of tax audits undertaken has decreased rapidly, while the average tax yield of a single audit has increased significantly, from LVL15,903 in 2000 to LVL77,164 in 2005 (Table 8.11). table 8.11. number of audits and average tax yields prior to and after reform yEaR nuMBER OF audItS tax yIEld (lvl MIllIOn) avERagE tax yIEld PER SInglE audIt (lvl) 2000 4,144 65.9 15,903 2003 2,768 133.1 48,085 2004 1,887 98.3 52,093 2005 1,918 148 77,164 Source: IFC (2009) “Case Study on Tax Control Reform and Implementation of a Risk Analysis System in the State Revenue Service of Latvia”. 8.8. the tax system disCourages Survey results indicate that the majority of small and medium “graduation”117 From the Patent regime companies chose to operate under the general tax regime, to the simPliFied tax regime despite its generally complex and labor-intensive demands The Survey was conducted between April and August 2009, in terms of compliance. There appear to be four main reasons with the reference period for tax-related questions being for this: (i) the simplified tax regime was unattractive financial- January–December 2008. It does not, therefore, reflect the ly for most small and medium companies, (ii) over 40 percent impact of the new Tax Code, which came into effect on of those small and medium companies that were eligible to January 1, 2009. However, the Survey does highlight the key operate under the simplified tax regime were unaware of that challenges and problems experienced under the tax admin- regime; (iii) the general tax regime provides for the refund istration system, which can, accordingly, be examined in light of VAT; and (iv) operating under the general tax regime may of the changes introduced under the new Tax Code. boost sales by enlarging a company’s customer base. 117 Graduation is understood here to refer to a business switching from one tax regime to another, more complex one – for example, from the patent regime to the simplified tax regime, or from the simplified tax regime to the general tax regime. 8. taxatiOn 123 The majority of individual entrepreneurs (51 percent) operate under the patent regime. Apart from the fact that a great box 8.6: why would Tax regime graduaTion appeal To number of activities (124) can be conducted under the patent a business? regime, the turnover ceiling under the patent regime is quite high (at KGS4 million). Compliance with the regime and with Business graduation – from the patent regime to the simplified tax regime, and ultimately to the general tax regime – may support business tax audits conducted in accordance with it are simple, and tax growth for the following reasons. liabilities are known in advance – and, in most cases, are lower than they would be under other regimes, particularly for indi- vidual entrepreneurs at the upper end of the patent ceiling. Individual entrepreneurs are discouraged from joining the simplified tax regime by high tax payments, by the fact that the turnover ceiling is the same as under the patent regime, and by the complexity of compliance. As a result, entrepre- neurs at the upper end of the patent regime have a strong disincentive to graduate from this and thus keep their opera- tions artificially small in order to continue to benefit from it. The patent regime therefore encourages evasion and creates unfair competition. Chart 8.14: the simplified tax regime is rarely used use of various tax regimes by SMEs and individual entrepreneurs 100% 93% 92% 92% General taxation 80% regime Simplified taxation regime 60% 57% 55% 51% Patent 40% 36% 35% 36% 20% 13% 7% 8% 9% 7% 8% 0% Individual Small and medium Individual Small and medium Individual Small and medium entrepreneurs companies entrepreneurs companies entrepreneurs companies 2006 2007 2008 the attractiveness of the patent regime means it is used by almost half of all individual entrepreneurs The patent regime is very attractive but, as a result, is believed to discourage tax regime graduation, with negative consequenc- es for business growth and revenue collection (Box 8.6). Close to half of all individual entrepreneurs choose to operate under the patent regime (Charts 8.14 and 8.17). The proportion of individual entrepreneurs operating under the patent regime has, however, decreased from 57 percent to 51 percent between 2006 and 2008, while the proportion of individual entrepreneurs using the simplified tax regime has increased (Chart 8.14). 124 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs The proportion of individual entrepreneurs with annual turn- Chart 8.15: the proportion of individual entrepreneurs over below KGS4 million using the patent regime is greatest using the patent regime is greatest in the transport sector in the hospitality and catering and transport sectors, at 53 Proportion of individual entrepreneurs operating under the and 67 percent, respectively (Chart 8.15). The proportion of patent regime, by sector* individual entrepreneurs with annual turnover below KGS4 80% million operating under the patent regime is greatest in the 70% 67% rural districts of the country, with 97 percent of individual entrepreneurs in Batken and 93 percent in Naryn choosing to 60% 53% operate under this regime (Chart 8.16). 50% 47% 45% 45% 42% 40% The reason why the patent regime is used most extensively 30% by individual entrepreneurs is due to the fact that (i) it encom- 20% passes a significant number of activities (124, see Annex 8.1); 10% (ii) compliance is easy, requiring only minimal tax accounting 0% records to be maintained (including, for those businesses that Industry/ Wholesale Retail Hospitality Transport Services, production trade trade and catering except do not maintain cash registers, the use of specific ledgers for nancial services all cash receipts) and requiring only one annual report to be * Of those eligible to operate under the patent tax regime. submitted; (ii) tax inspections are easier since minimal ac- counting is subject to review by inspectors; (iii) the extent of tax liabilities under the patent regime is known in advance Chart 8.16: the patent regime is the preferred regime and is relatively proportional to turnover, particularly for among individual entrepreneurs, particularly in rural those individual entrepreneurs whose turnover is close to the areas of the country patent regime ceiling; and (iv) the turnover ceiling for patent Proportion of individual entrepreneurs operating under the users is quite high in comparison with other post-Soviet patent regime, by region* countries (at KGS4 million or $109,379) and is similar to that 97% 100% 93% applicable to an entrepreneur operating under the simplified tax regime.118 These reasons are valid under both the old and 80% 73% the new Tax Code. 69% 69% 60% Because the patent regime is very attractive, individual entre- 40% preneurs have no incentive to graduate from the patent to 28% 24% the simplified or the general tax regimes. As a result, some in- 21% 20% dividual entrepreneurs manage their operations in such a way as to remain under the patent regime. This is borne out by 0% research among focus groups, which indicates that some op- Batken Naryn Osh Osh Chui Bishkek Jalal- Issyk-Kul oblast oblast city oblast oblast city abat oblast portunities arise for tax minimization or evasion, for example oblast where (i) those individual entrepreneurs whose turnover is * Of those eligible to operate under the patent tax regime. close to the KGS4 million turnover threshold hide part of their turnover in order to remain under the patent regime; and (ii) the simplified tax regime lacks attractiveness some individual entrepreneurs divide their operations into and is therefore rarely used two and purchase a patent for each in order to remain under Survey results show that the simplified tax regime was rarely the patent regime. used in 2008 because (i) it is unattractive to enterprises; and (ii) many businesses are unaware of it. As a result, the sim- plified tax regime did not, under the old Tax Code, play its 118 In Tajikistan, the annual turnover ceiling for individual entrepreneurs operating intended role as an intermediary regime between the patent under the patent regime is TJS200,000 (approximately $63,000). Uzbekistan imposes no turnover ceiling for individual entrepreneurs paying the fixed tax. regime and the general tax regime, and one which would Rather, the ceiling is set according to the number of employees, and individual enable small businesses to gradually grow and formalize entrepreneurs paying the fixed tax cannot engage employees. In Ukraine, the ceiling for individual entrepreneurs operating under the patent regime is set their operations. Survey results indicate that only 10 percent on the basis of both the number of employees (a maximum of five) and annual of those small and medium companies eligible to operate turnover (a maximum of UAH119,000 (approximately $14,875). 8. taxatiOn 125 under the simplified tax regime (i.e., those with a turnover Chart 8.17: Most businesses that have a choice between below KGS4 million) chose to do so, while 90 percent of the simplified and the general tax regime choose the small and medium companies eligible to operate under the general tax regime simplified tax regime chose instead to operate under the use of different tax regimes among businesses with turnover general tax regime. Likewise, only 10 percent of those indi- below KgS4 million vidual entrepreneurs eligible to operate under the simplified 100% tax regime chose to do so, whereas 41 percent of the same 90% Individual group chose to operate under the general tax regime (Chart 80% entrepreneurs 8.17). These data indicate that the simplified tax regime, as at Small and medium 2008, was unattractive to these businesses. As a result, some 60% companies individual entrepreneurs structured their activities in a way 41% 49% 40% which would allow them to remain under the patent regime, with negative consequences for: 20% (i) the growth of these businesses – operating under the 10% 10% simplified or the general tax regime (a) improves access 0% General Simpli ed Patent to credit; and (b) helps businesses improve their ac- regime regime regime counting skills and capacities, which in turn supports the growth of their turnover and profit; (ii) employment, since business growth results in job creation; When questioned on the advantages and disadvantages (iii) the development of the private sector in the country; and of the simplified tax regime, 41 percent of those small and (iv) tax revenue collection, since the higher the turnover and medium companies and 53 percent of those individual en- profit of a business, the more tax revenue it generates. trepreneurs eligible to operate under this regime indicated that they were not aware of it (Chart 8.18). This low level of This situation has, to a certain extent, changed under the new awareness is, in part, due to the fact that most small and Tax Code as the reduction in the rate of the single tax on turn- medium companies operate under the general tax regime over has made the simplified tax regime more advantageous and most individual entrepreneurs operate under the patent for businesses – although it is, as yet, not clear whether this or general tax regimes – indicating, perhaps, a need for has resulted in any change in behavior. awareness campaigns on the eligibility criteria and benefits of the simplified tax regime. Research among focus groups would appear to suggest that businesses remain unaware of “ If I joined the simplified tax regime I would have to pay much more tax than under the patent regime. the improvements that have been made to the simplified tax regime under the new Tax Code – including, for example, the reduction in the rate of the single tax on turnover, reduced So, each time my turnover approaches the KGS4 frequency of reporting requirements, and so on. million threshold, I buy a patent under the name of one of my employees, and continue doing business Approximately 10 percent of individual entrepreneurs and under my employee’s name. It is possible to get by of small and medium companies with turnover below KGS4 with this practice with the State Tax Service.” million were operating under the simplified tax regime in 2008. Usage of the simplified tax regime was lowest in the An entrepreneur in the retail trade Naryn and Batken regions, as well as Osh city, and highest in Bishkek city, followed by Issyk-Kul, and Chui (Chart 8.19). This may be due to the fact that those enterprises based in Bishkek, Issyk-Kul, and Chui are more likely to be active in sectors that have a higher profit margin (e.g., financial services, consumer services, and so on), and are thus more likely to choose the simplified tax regime. For example, 93 percent of small and medium companies operating in the financial sector, and 89 percent of all small and medium companies active in the service sector (excluding financial services) were based in Bishkek. 126 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 8.18: Over half of those individual entrepreneurs and over 40 percent of small and medium companies eligible to operate under the simplified tax regime were unaware of it119 Simplified regime: main advantages and disadvantages 60% 53% 50% Individual 41% Entrepreneurs 40% 30% Small and medium companies 20% 16% 12% 11% 10% 7% 7% 9% 9% 8% 0% -10% -8% -9% -9% -13% -20% -16% -30% -40% -41% -50% -60% -53% -53% Acceptable Easy to Simplicity No Don't know Need to No High Don't know tax rates understand of advantages anything have an disadvan- tax rate anything about accounting about accountant tages this regime this regime advantages disadvantages Chart 8.19: the simplified tax regime is not utilized at all to be “no advantages” to operating under the general tax in more than half of the regions of the country regime, while 28 percent of respondents perceived the main advantage to be the opportunity for reimbursement of VAT. Proportion of individual entrepreneurs and small and medium Twenty six percent of respondents felt the main advantage to companies using the simplified regime* be the opportunity to buy from and sell to a large number of 40% 36% * Of those businesses eligible. companies, insofar as many suppliers and distributors prefer 35% to trade with VAT-registered companies in order to benefit 30% from the refund of VAT, and being VAT registered is believed 25% to enhance a company’s reputation. 20% 15% 14% Small and medium companies cited the main disadvantages 11% 11% 10% 8% of working under the general tax regime as the cost of labor- 5% 4% 3% 4% intensive accounting procedures (28 percent) and the complex- 0% 0% 0% 0% 0% 0% 0% ity of accounting and compliance (20 percent). Although the Bishkek Issyk-Kul Chui Osh Naryn Batken Osh greatest proportion (30 percent) of small and medium compa- city oblast oblast oblast oblast oblast city nies believe there to be “no advantages” to the general taxa- Individual entrepreneurs Small and medium companies tion regime, the vast majority (92 percent in 2008) nonetheless chose to operate under the general taxation regime between 2006 and 2008. This may be due to the fact that the general tax the general tax regime is chosen by the regime was, for many businesses, at least prior to the introduc- majority of small and medium companies even tion of the new Tax Code, more advantageous financially than though compliance is complex the simplified tax regime. This situation has changed to some All survey respondents were eligible to operate under the extent since the new Tax Code was adopted. For example, the general taxation regime, and all were asked to identify what percentage of small and medium companies operating under they perceived to be the main advantages and disadvantages the general taxation regime (98 percent) was particularly high in of it. Thirty two percent of all small and medium companies (the single largest group) indicated that they perceived there 119 Positive numbers indicate advantages and negative numbers disadvantages. 8. taxatiOn 127 the wholesale sector. In general, small and medium companies When asked what they perceived to be the main advantages active in sectors in which profit margins tend to be low and in and disadvantages of the general tax regime, 24 percent of which turnover is generally high (e.g., companies engaged in those individual entrepreneurs that demonstrated an aware- trading operations) prefer, as a rule, to operate under the general ness of the general tax regime indicated that they felt the tax regime, regardless of their size, since this regime operates on general tax regime to have no advantages, with 17 percent the basis of a tax on profit, whereas the simplified tax regime citing its only advantage as the opportunity to buy from operates on the basis of a tax on turnover. Because the general and sell to a wider range of companies (Chart 8.20). The tax regime was, in 2008, more advantageous financially, overall, proportion of individual entrepreneurs operating under the than the simplified tax regime, 74 percent of those small and general tax regime (36 percent) remained stable between medium companies operating under the general tax regime 2006 and 2008. Individual entrepreneurs may choose to join were found to have recorded annual turnover below KGS4 the general tax regime (i) in order to benefit from the advan- million – the threshold at which a business becomes eligible to tages of the general tax regime (specifically the opportunity operate under the simplified tax regime. Many of these small for the refund of input VAT); (ii) if the activity or activities in and medium companies, however, had no incentive to do so. which they are engaged cannot be conducted under the patent regime; or (iii) if their annual turnover exceeds KGS4 Small and medium companies’ awareness of the general tax million. The sector showing the greatest proportion of indi- regime was relatively high, with only 10 percent claiming no vidual entrepreneurs operating under the general tax regime knowledge of it – due to the fact that the majority operate is the service sector, at 49 percent, with the transport sector under this regime (90 percent in 2008), partly because they are the lowest, at 22 percent (Chart 8.21). Individual entrepre- ineligible for the patent tax regime. Individual entrepreneurs’ neurs operating in the transport sector rarely record annual awareness of the general tax regime is low, with 45 percent turnover in excess of KGS4 million (indeed, the turnover of of respondents in this category indicating that they had no individual entrepreneurs in this sector is lower than in any knowledge of it: this low awareness, however, is due to the other), and are thus likely to be eligible to operate under the fact that most individual entrepreneurs operate under the patent tax regime. patent tax regime. Chart 8.20: Close to one third of small and medium companies surveyed indicated that operating under the general tax regime has no advantages120 general regime: advantages and disadvantages 50% 45% 40% Individual Entrepreneurs 29% 30% 30% 26% 24% Small and medium 20% 17% companies 11% 11% 11% 10% 0% -10% -9% -12% -20% -15% -13% -23% -30% -29% -40% -50% -45% Better ability Possible No Don't know Don't know Cost of Complexity No to buy and/or VAT advantages anything anything accounting of disadvantages sell reimbursement about about accounting this regime this regime advantages disadvantages 120 Positive numbers indicate advantages and negative numbers disadvantages. 128 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Chart 8.21: the general tax regime is the system most widely used by small and medium companies across all sectors Proportion of entrepreneurs operating under the general tax regime, by sector 100% 98% 92% 90% 91% 90% 90% Individual entrepreneurs 80% Small and medium companies 60% 49% 44% 46% 40% 40% 33% 22% 20% 0% Hospitality Wholesale Transport Retail trade Services, except Industry/ Construction and Catering trade nancial services production Farmers have the least burdensome tax regime of all categories of smes The tax regime is considerably less onerous for farmers than for individual entrepreneurs and small and medium companies since farmers are exempt from profit tax and VAT and, from 2009, from the sales tax. The liabilities of the majority of farmers are limited to the land tax (paid by 99 percent) and contributions to the Social Fund (paid by 94 percent). Although farmers engaged in land culti- vation, harvesting, slaughtering, and the sale of meat products are eligible to operate under the patent tax regime (under both the old and the new Tax Code) none of the respondents to the Survey had chosen to do so. 8.9. reCommendations ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) ShORt-tERM RECOMMEndatIOnS although implemented with effect develop a guide or manual supplementary to the tax code better knowledge of their tax liabilities from January 1, 2009, awareness of the in order to increase taxpayers’ knowledge of their potential and compliance obligations will (i) various provisions of the new tax code liabilities and compliance obligations. Ensure the wide dis- reduce compliance costs for businesses; (including the filing of tax returns) is low semination of this information through the web site of the (ii) reduce opportunities for the unof- state tax service and other sources ficial payments; and (iii) increase tax revenue through the avoidance of error the costs involved in tax accounting the advantages of the simplified tax regime should be a better knowledge of the various and compliance are high. the simplified widely publicized, with detailed information allowing smEs tax regimes would enable taxpayers tax regime is rarely used, with the result to choose the regime most appropriate to their business to make an informed decision on the that few businesses benefit from its less (e.g., highlighting the benefits of the simplified tax regime regime most appropriate to their busi- onerous accounting requirements for businesses with higher profit margins etc.) nesses. businesses will be aware of the lower accounting and compliance costs incurred under the simplified tax regime the cost involved in tax compliance are the reduction in the number of applicable taxes, follow- compliance costs will be reduced in line significant ing the implementation of the new tax code, have already with a further reduction in the number resulted in a reduction in businesses’ compliance costs. of applicable taxes however, abolishing the sales tax (and raising the vat rate to compensate for this) would further reduce the compli- ance burden with no corresponding reduction in revenue, since both are imposed on the same tax base 8. taxatiOn 129 ISSuE RECOMMEndatIOnS antICIPatEd IMPaCt(S) the cost of complying with mandatory simplify reporting forms (such as the single tax on turnover simplifying reporting formats would reporting requirements (including the return); merge some reports (e.g., reports on social insur- reduce the administrative burden on preparation and submission of reports) ance payments and pit); eliminate some annexes to the both taxpayers and officials and would is high vat return; eliminate duplication of information arising encourage the avoidance of error from submissions to different agencies inspections represent a significant implement a risk-based approach to the selection of busi- Fewer inspections will reduce compli- burden on taxpayers, and are not suf- nesses for inspection, and in the planning and implementa- ance costs for businesses, will allow ficiently risk-based tion of inspections the better and more cost-effective targeting of the resources of the state tax service, and will result in the higher generation of net tax revenue the simplified tax regime is rarely used building on amendments introduced under the new tax businesses will have a stronger incentive code, introduce further reform to the simplified tax regime to graduate to the simplified tax regime, (e.g., simplifying the return for the single tax on turnover) to and tax revenue will increase make it more attractive in terms of its financial and admin- istrative burden MEdIuM-tERM RECOMMEndatIOnS the cost of complying with mandatory Encourage voluntary e-filing the time spent on report submission reporting requirements, including filing, will be cut, and interactions between is high tax officials and taxpayers reduced. Wider use of electronic systems will help to develop a comprehensive infor- mation database, which will ultimately allow the easier implementation of risk-based audits the voluntary patent regime is very Once the simplified tax regime has been further reformed, limiting the patent regime to the small- attractive and, as a result, does not reform the voluntary patent regime. a medium-term est businesses only, and encouraging encourage graduation to the simplified objective might be the introduction of a new upper limit larger businesses to graduate to the tax regime on turnover under the patent regime, with the result that simplified tax regime, will encourage this facility would be limited to the smallest businesses only. businesses to grow and tax revenues to such a ceiling should be significantly lower than the current increase ceiling for vat annex 8.1: eligible aCtivities under the voluntary tax Patent regime Bishkek city, Government House December 30th, 2008, Government Resolution No. 733 “On Approving Amount of Voluntary Patent Tax by Type of Entrepreneurial Activity,” nO. aCtIvIty/aCtIvItIES COSt FOR 30 dayS (KgS) 1. cultivation of land and harvesting 2,000 2. slaughtering 2,000 3. production of bread and bakery products 10,000 4. manufacturing of turning items 3,000 5. repair of television and radio electronic devices 4,000 6. general construction work121 5,000 7. Electric installation work 5,000 8. sanitary and technical work 6,000 9. carpentry work 2,500 121 Operating under the patent regime is possible only for businesses involved in minor construction work such as painting, plastering, etc. Businesses involved in the con- struction of a new building or buildings, or the capital repair of old buildings may not operate under the patent regime. 130 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs nO. aCtIvIty/aCtIvItIES COSt FOR 30 dayS (KgS) 10. maintenance and repair of vehicles a) maintenance of cars (per vehicle place) 3,000 b) car body shop services 10,000 c) repair of tires, wheels 3,000 d) repair of cars, including repair of doors, windows, locks, etc. 2,000 e) car washing services (per washing place) 4,000 11. trade in agricultural non-processed products, livestock, raw textiles and semi-finished goods 3,000 12. sale of garment, knitted goods, and footwear 2,000 13. sale of fur, leather, and fake leather 10,000 14. sale of cloth and fabric 2,000 15. sale of carpets 5,000 16. sale of detergents and cosmetics 2,000 17. sale of jewellery 2,000 18. sale of toys and souvenirs 2,000 19. sale of national artistic goods 1,500 20. sale of tin goods 3,000 21. sale of video, audio-cassettes and cds 2,000 22. sale of spare parts and equipment for cars 4,000 23. sale of radio and television devices, spare parts, and components 3,000 24. sale of stationery 3,000 25. sale of household goods and equipment 3,000 26. sale of flowers and floral compositions 2,000 27. sale of newspapers, books and magazines 500 28. sale of tobacco goods 2,000 29. sale of bread and bakery 1,000 30. sale of confectionery 1,500 31. sale of meat of livestock, poultry, and other animals, live, raw, or processed 1,800 32. sale of milk and dairy products 500 33. sale of vegetables, fruits, berries, natural or processed 1,300 34. sale of apiculture products 2,000 35. sale of soft and national drinks 2,000 36. sale of baking and dairy products 1,000 37. sale of food products in stationary outlets and in kiosks, pavilions, containers, trailers, 7,000 concessions, shop counters, stalls, yurts, manual movable carriages, tents, etc. 38. sale of non-foods items, except for pyrotechnical goods, in stationary outlets and in kiosks, pa- 15,000 vilions, containers, trailers, concessions, shop counters, stalls, yurts, manual movable carriages, tents, etc. 39. sale of construction materials (except for cement, roof slates) 10,000 40. sale of lubricating oil and coolant materials at private residences and at the road side 2,000 41. sale of electric appliances, tools, and devices 2,500 42. sale of fish (dried, salted, fresh, etc.) and fish products 2,000 43. sale of turning items 1,000 44. sale of spare parts for agricultural machinery 1,000 45. breeding and sale of goldfish and pet birds, and related foodstuffs and accessories 1,000 46. sale of goods and equipment for hunting, fishing, and sport 1,000 8. taxatiOn 131 nO. aCtIvIty/aCtIvItIES COSt FOR 30 dayS (KgS) 47. sale of paintings and portraits 2,000 48. sale of animal foodstuffs 1,000 49. sale of grains: wheat, barley, corn, etc. 1,500 50. shoe repair 1,000 51. Watch repair 1,000 52. repair of household goods and personal items 1,000 53. production and sale of hotdogs, cheeseburgers, and hamburgers 3,500 54. passenger and cargo carriage: а) transport of passengers in minivans of 12 seats 2,000 b) transport of passengers in a bus of 12–33 seats 3,000 c) transport of passengers in a bus of over 33 seats 4,000 d) transport of passengers in cars (taxi services) 1,000 e) transport of cargo by vehicles with a capacity of up to one ton 2,000 f) transport of cargo by vehicles with a capacity of one to eight tons 4,000 g) transport of cargo by vehicles with a capacity of over eight tons 6,000 55. storage room services 6,000 56. the rent of: a) own real estate as a hotel (per bed) 4,000 b) living space (per room) 1,500 c) non-residential premises (depending on area) 10,000 57. photographic activity 3,000 58. services on packaging of goods (cargo) 2,000 59. repair and restoration of furniture 3,000 60. design decoration services 15,000 61. cleaning of pits and removal of household waste 2,000 62. artistic activities 1,000 63. amusement ride (per ride): a) in bishkek city 5,000 b) in resort zones 50,000 c) in the rest of the country 4,000 64. renting of bikes, skis, parachutes, catamarans, horses (per piece) 25,000 65. hairdressers and manicure, up to three seats (per seat) 2,000 66. paid public toilets (per cubicle) 200 67. massage therapy 5,000 68. repair and sharpening of cutting instruments, glass cutting 2,000 69. transportation of cargo by handcarts 150 70. glass recycling 500 71. breeding and sale of dogs 500 72. stocking of skin and wool of livestock 5,000 73. herding services 1,500 74. cooking and sale of shish kebab of meat of livestock and poultry 1,500 75. services of private flour mills, oil and rice mills 2,500 132 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs nO. aCtIvIty/aCtIvItIES COSt FOR 30 dayS (KgS) 76. production of ready-made textile goods, including tailoring of jackets and floor covers for cars up to 10 units of equipment (sewing machines, knitting 77. manufacture of hosiery and knitted goods machines, etc.): 2000. For the 78. manufacture of leather and fur garments, as well as leather substitutes next 10 pieces of equipment, an additional 1000 79. manufacture of work garments 80. manufacture of clothes 81. manufacture of underwear 82. manufacture of hats and related garments 83. manufacture of fur 84. manufacture of saddle goods 1,000 85. timber sawing services 1,500 86. paper recycling 1,000 87. manufacture of ceramic and decorative products 1,500 88. Fabrication and repair of keys and locks 500 89. repair of agricultural machines 1,500 90. repair of special medical equipment 1,000 91. production of national musical instruments 1,000 92. repair and tuning of musical instruments 600 93. home production of natural and artistic goods 800 94. manufacture of artificial flowers and funeral wreaths 1,000 95. sale of gas tanks 1,500 96. sale of saddle goods 800 97. sale of national musical instruments 100 98. sale of artificial flowers and wreaths 800 99. sale of ceramic and decorative products 1,500 100. sale of gravestones, bases and supporting elements 200 101. purchase, repair, and sale of precious metals and stones in outlet of up to 10 square meters 2,000 102. repair of clothes, hats, furs, garments, knitted goods, accessories, etc. 1,500 103. public catering: a) in temporary facilities (pavilions, yurts, tents, etc.), per table with four seats 1,000 b) located in educational establishment buildings (depending on number of students) 4,000 c) in stationary facilities, located in resort zones and operating during the holiday season, per 2,000 table with four seats 104. advertising by radio in markets and other public places 1,000 105. Operation of: a) computer games centers (per computer) 500 b) game console centers (per console) 300 106. maintenance of computer hardware and software and copiers 2,000 107. training of dogs 500 108. translation and consulting services for international projects and programs 2,000 8. taxatiOn 133 nO. aCtIvIty/aCtIvItIES COSt FOR 30 dayS (KgS) 109. local staff of international projects and programs: a) managers and advisers 3,000 b) coordinators 2,000 c) specialists and experts 1,500 d) administrative and financial assistants 1,000 e) secretaries, drivers 700 f) support staff (security guards, doormen, cleaners, etc.) 500 110. services: a) processing of documents with computers and copying 1,000 b) typing 500 c) crediting of cell phones 500 111. services: a) teaching of foreign languages, computer use, accounting, driving, tailoring, sewing, knitting, 2,000 and other skills b) tutoring 600 112. audio and video shooting and recording, karaoke 1,500 113. musical arrangements during celebrations and ceremonies 2,500 114. Organization of: a) paid games (tennis, chess, etc.) 1,000 b) games “russian lotto” and bingo-lotto" 2,000 115. boat, motorboat, and yacht riding services 50,000 116. laundry services at home 500 117. make-up designer services 1,000 118. manufacture of gravestones, bases, and supporting elements 1,200 119. astrological forecasts 500 120. housekeeping and baby sitting 500 121. installation of television antennae 800 122. carpentry services 900 123. Welding services 1,000 134 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 8.2: taxes and rates aPPliCable under eaCh oF the Four tax regimes gEnERal tax REgIME SIMPlIFIEd tax REgIME tax PatEnt tax COntRaCt REgIME REgIME required to submit yes yes no yes tax reports to state tax service? documents to be accounting records accounting records patent and patent no requirement to keep retained receipt tax accounting records for the taxes covered by the tax contract (profit tax, vat, and the sales tax) personal income tax122 10% 10% 10% 10% profit tax123 10% n/a n/a included in the amount of the contract sales tax Sale of products, works and n/a n/a included in the amount of services bearing or exempt contract from vat: trading activity: 1.5% Other activities: 2.5% In other cases not provided for under the above: trading activity 2.5% Other activities: 3.5% vat 12% n/a n/a included in the amount of the contract land taxes (on varies according to the type of varies according to the type of land varies according varies according to the agricultural and non- land and/or business, and its and/or business, and its regional to the type of land type of land and/or agricultural land) regional location location and/or business, business, and its regional and its regional location location Excise tax varies depending on the goods n/a n/a n/a in question property tax varies according to the size of varies according to the size of the varies according varies according to the size the property property to the size of the of the property property tax on the use of bonus levels determined by bonus levels determined by the n/a bonus levels determined by mineral resources the government according government according to a specific the government according to a specific classification classification table (based on the to a specific classification table (based on the type of type of mineral resource and extent table (based on the type of mineral resource and extent of of extraction activities) mineral resource and extent extraction activities) royalty amount based on the type of extraction activities) royalty amount based on the of mineral resource and volume royalty amount based type of mineral resource and sold on the type of mineral volume sold resource and volume sold single tax on turnover n/a manufacturing, trade, agricultural n/a n/a processing: 4% Other activities: 6% social Fund 17.25% of salary 17.25% of salary for small and 25% of tax 17.25% of salary for small contributions medium companies patent cost and medium companies individual entrepreneurs : 9.25% of individual entrepreneurs: own salary 9.25% of own salary 122 Under the simplified tax and the patent tax regimes, the tax base is not the wage but the minimal income defined annually by the tax authorities. 123 Individual entrepreneurs operating under the general tax regime pay the profit tax in respect of their own income, and the personal income tax in respect of their employees. 8. taxatiOn 135 annex 8.3: number oF rePorts to be submitted to state tax serviCe annually by small and medium ComPanies under the old and the new tax Code Old tax COdE nEW tax COdE gEnERal SIMPlIFIEd tax REgIME gEnERal SIMPlIFIEd tax REgIME tax REgIME tax lEgal EntItIES IndIvIdualS REgIME lEgal EntItIES IndIvIdualS income tax 12 12 imputed 12 12 imputed corporate 1 imputed n/a 1 imputed n/a profit tax vat 12 n/a n/a 12 n/a n/a Excise tax 12 n/a n/a 12 n/a n/a land tax 1 1 1 1 1 1 property tax n/a n/a n/a 1 1 1 mineral re- 12 12 n/a 12 12 12 sources use tax sales tax n/a n/a n/a 12 imputed imputed single tax on n/a 12 12 n/a 4 4 turnover social Fund 12 12 12 12 12 12 Emergency 12 n/a n/a abolished abolished abolished Fund hotel tax 12 12 12 abolished abolished abolished resort tax 12 12 12 abolished abolished abolished advert tax 12 12 12 abolished abolished abolished retail sales tax 12 imputed imputed abolished abolished abolished real property n/a n/a n/a abolished abolished abolished tax vehicle owners’ 1 1 1 abolished abolished abolished tax road use tax 1 imputed n/a abolished abolished abolished 136 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annex 8.4: annual labor Cost oF tax ComPlianCe For smes annual labor costs of accountancy and tax filings for individual entrepreneurs aCCOuntant, aCCOuntant, aCCOuntant aCCOuntIng tOtal (KgS) COMMEntS nOn-StaFF ManagER PaRt tIME Full tIME OWnER/ SOuRCE OthER StaFF StaFF FIRM a proportion 88% 7% 3% 5% 2% 1% survey total higher of individual results than 100 entrepreneurs because using the fol- respondents lowing human were allowed resources for to give mul- their accounting tiple answers b proportion of 77% 68% 68% 63% 32% 0% survey this time spent results on accounting c proportion of 23% 32% 32% 37% 68% 100% survey this time spent results on preparation and submission of reports d total monthly 635 3 789 2 974 1 806 500 0 survey expenses in results 2008 (Kgs) and state statistics commit- tee (for owners) E number of 1 survey employees results F number of 2,5 survey working days results g number of 145,663 state active individual statistics entrepreneurs commit- except agricul- tee tural sector h total number 128,475 9,704 4,703 7,722 2,768 728 g*a of individual entrepreneurs using the fol- lowing human resources for their accounting i total yearly cost 978,795,065 441,208,041 167,833,229 167,334,213 16,605,582 0 1,771,776,130 h*d*12 (Kgs) J total yearly cost 750,735,815 301,345,092 114,407,360 104,979,769 5,349,112 0 1,276,817,148 i*b tax accounting (Kgs) K total yearly cost, 228,059,250 139,862,949 53,425,869 62,354,445 11,256,470 0 494,958,982 i*c preparation and submission of reports (Kgs) 8. taxatiOn 137 annual labor costs of accountancy and tax filings for small and medium companies aCCOuntant, aCCOuntant, aCCOuntant aCCOuntIng tOtal (KgS) COMMEntS nOn-StaFF ManagER PaRt tIME Full tIME OWnER/ SOuRCE OthER StaFF StaFF FIRM a proportion 46% 57% 19% 12% 2% 0% survey total higher of small and results than 100 medium com- because panies using the respon- following human dents were resources for allowed their accounting to give multiple answers b proportion of 31% 66% 58% 50% 62% 45% survey this time spent results on accounting c proportion of 69% 34% 42% 50% 38% 55% survey this time spent results on preparation and submission of reports d total monthly 663 7,497 4,349 3,008 6,497 8,834 survey expenses in results 2008 (Kgs) and state statistics commit- tee (for owners) E number of 1 survey employees results F number of 2,6 survey working days results g number of 10 982 state active small and statistics medium com- commit- panies except tee agricultural sector h total number 5,014 6,242 2,073 1,346 186 46 (g*a) of small and medium com- panies using the following human resources for their accounting i total yearly cost 39,874,453 561,581,994 108,198,429 48,586,821 14,529,702 4,869,990 777,641,390 (d*h*12) (Kgs) J total yearly cost 12,231,498 368,128,045 63,163,068 24,507,017 8,957,365 2,173,340 479,160,332 (i*b) tax accounting (Kgs) K total yearly cost, 27,642,955 193,453,949 45,035,362 24,079,805 5,572,337 2,696,650 298,481,057 (i*c) preparation and submission of reports (Kgs) 138 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs annual labor costs of accountancy and tax filings for farmers aCCOuntant, aCCOuntant, aCCOuntant aCCOuntIng tOtal (KgS) nOn-StaFF ManagER PaRt tIME Full tIME OWnER/ SOuRCE OthER StaFF StaFF FIRM a proportion of farmers using 98% 1% 0,5% 0,1% 0% 0% survey the following human re- results sources for their accounting b proportion of this time spent 90% 69% 62% 60% 62% 45% survey on accounting results c proportion of this time spent 10% 31% 38% 40% 38% 55% survey on preparation and submis- results sion of reports d total monthly expenses in 486 2 335 3 169 3 150 6 497 8 834 survey 2008 (Kgs) results and state statistics committee (for owners) E number of employees 1 survey results F number of working days 1,9 survey results g number of active farmers 280,408 state statistics committee h total number of farmers 274,800 2,804 1,402 280 0 0 g*a using the following human resources for their accounting i total yearly cost (Kgs) 1,601,543,853 78,563,463 53,309,085 10,599,422 0 0 1,744,015,824 h*d*12 J total yearly cost tax account- 1,433,440,693 54,005,360 32,908,590 6,343,042 0 0 1,526,697,684 i*b ing (Kgs) K total yearly cost, preparation 168,103,160 24,558,104 20,400,496 4,256,381 0 0 217,318,140 i*c and submission of reports (Kgs) annual labor costs of accountancy and tax filings for SMEs IndIvIdual SMall and MEdIuM FaRMERS tOtal (KgS) EntREPREnEuRS COMPanIES KgS $ KgS $ KgS $ labor cost on tax 1,276,817,148 34,914,333 479,160,332 13,102,552 1,526,697,684 41,747,271 3,282,675,164 accounting labor cost on reporting 494,958,982 13,534,563 298,481,057 8,161,910 217,318,140 5,942,525 1,010,758,179 total 1,771,776,130 48,448,896 777,641,390 21,264,462 1,744,015,824 47,689,796 grand total (KgS) 4,293,433,344 grand total ($) 117,403,154 8. taxatiOn 139 annex 8.5: annual labor Costs oF tax audits EntREPREnEuRS COMPanIES SMall and IndIvIdual FaRMERS MEdIuM SOuRCE a total number of enterprises 145,663 10,982 280,408 state statistics committee b proportion of smEs subject to tax inspections in 2008 66% 59% 10% survey results c no. of enterprises inspected by state tax service 96,720 6,446 27,200 a * b d proportion of smEs having staff accountant 7% 57% 1% survey results E proportion of smEs where the owner/manager was in charge of tax 93% 43% 99% survey results accounting F no. of smEs having staff accountant 6,443 3,664 217 c * d g no. of smEs where the owner/manager was in charge of tax accounting 90,277 2,782 26,983 c * E h total monthly expenses on staff accountants in 2008 in Kgs 3,789 7,497 2,335 survey results i average no. of accountants 1,06 1,34 1,04 survey results J avarage salary of one accountant 3,585 5,596 2,245 survey results K avarage salary of owner/manager 5,378 5,378 5,378 state statistics committee l duration of all tax inspections in 2008, working days 2,98 4,68 2,25 survey results m time spent by smEs on inspections 1,49 2,34 1,12 assumption: staff spend half of the duration of the inspection working with inspectors n labor costs of accountants working on tax inspections (Kgs) 1,640,640 2,284,187 26,001 (J*m/21)*F O labor costs of owner/manager working on tax inspections (Kgs) 34,480,751 1,667,034 7,761,541 (K*m/21)* g P total labor cost of tax inspections for each category (KgS) 36,121,391 3,951,221 7,787,542 q total labor costs of tax inspections for SMEs (KgS) 47,860,154 R total labor costs of tax inspectons for SMEs ($) 1,308,727 9. Survey Methodology Objective: The main objective of the SME survey was to account for approximately 17.8% of the nation’s GDP. The measure regulatory and administrative barriers adversely af- survey makes no distinction between individual entre- fecting the activities, growth and development of small and preneurs with and without labor force. In practice there medium enterprises in the Kyrgyz Republic. The empirical is no difference between the two types of individual survey data and subsequent recommendations to Kyrgyz state entrepreneurs both can hire workers or not. Moreover, authorities are expected to stimulate the debate for reform of there is a very common practice, when individual entre- the regulatory and administrative environment facing small preneurs hire other workers, but workers pay taxes for and medium enterprises. This national level survey is the first themselves by purchasing patents from the tax authori- of its kind to be implemented in the Kyrgyz Republic. ties. As a result, reporting or tax burden for individual en- trepreneurs who hire a worker (with a patent) is the same Reference period: The reference period of the survey is as for individual entrepreneurs who do not hire any labor. 2008, except for the inspections procedure. For the inspec- For purposes of monitoring employment level, the Gov- tions procedure, the first quarter of 2009 was also included ernment in statistical reporting distinguishes individual in the reference period of the survey in order to allow assess- entrepreneurs with hired workers and individual entre- ment of inspections after the Moratorium. (The Moratorium preneurs without workers. Since there is no difference in on Inspections was effective from April, 25 2008 until Decem- practice between the two sub-populations of individual ber, 31 2008). entrepreneurs the survey makes no distinction between the two sub-populations of individual entrepreneurs Coverage of the Survey and definitions 3. Farmers: This was an important sub-population and sector Three categories of populations were covered in the nation- of economy to be surveyed as farmers’ account for approx. wide survey: 17.6% of the nation’s GDP. Legal entities and individual entre- 1. Small and medium companies (SMCs). This was an preneurs involved in agricultural activities will be categorized important sub-population to be surveyed as small and in the agricultural/farmers population. Traditionally, legal medium companies account for approximately 10% of enterprises and individual entrepreneurs involved in agricul- the nation’s GDP. Large companies were excluded from tural activities appear as a sub-sector in SME surveys, but in the survey both because the focus of the Project is on the Kyrgyz survey they will be classified as farmers. The ratio- SMCs, and because large companies often have separate nale for this is that, although the Kyrgyz legislation does not practices when complying with regulatory and admin- provide for separate registration for farmers, farming activities istrative procedures. For the same reasons only privately are regulated differently from other types of production owned companies were covered. or service, so for the purpose of the survey they are distin- 2. Individual entrepreneurs (IEs). This was an important sub- guished from small and medium companies and individual population to be surveyed as individual entrepreneurs entrepreneurs NOT engaged in agricultural production. 9. survEy mEthOdOlOgy 141 Sampling methodology (b) Small and medium companies by turnover The sampling was stratified by region, firm size/type and Size of enterprise threshold and interval of total sector of the economy thus ensuring a nationally representa- by total turnover turnover (production, work and (production, work services), thousand Soms tive sample. Data from the Kyrgyz National Statistics Com- and services) mittee showing registered small and medium companies, group I group II individual entrepreneurs, and farmers and their location and small companies, up to 500 up to 500 principle business activity was used as a basis for populating including very small up to 150 up to 230 the samples. The sample structure was shifted to secure suffi- (micro) cient representation of small strata’s to enable disaggregated medium From 500 to From 500 to 2,000 comparison. Within each stratification cell, probability-based companies 2,000 sampling methodology was used, where the businesses for interview were selected according to a known non-zero probability equal for every respondents. The major advan- For the purpose of the BEE/IC Survey, Kyrgyz classification of tage of this method was that it allowed statistical inferences firms by headcount criteria was followed: in the production to be made about a larger population (at national, regional sphere, firms with head count less than 50 are considered to levels), which in turn can be used to evaluate the impact of be small enterprises whereas firms with headcount between regulatory reforms. It is expected that the estimates from 51-200 are classified as medium enterprises. In the non-produc- the survey will provide benchmarks against which change tion sphere: firms with head count less than 15 are considered can be measured. To this end, the survey data is expected to to be small enterprises; firms with headcount between 16-50 facilitate: (a) Monitoring & Evaluation exercises during and at are classified as medium enterprises. the end of the project cycle and (b) economic impact assess- ment, including ex-post assessment of legislation passed. Sectors of economic activity For the purpose of this survey, the sample was stratified by Classification of firm type and sector of economic sectors of economic activities. Sectors of the economy are activity defined on the basis of the national system of economic According to the Kyrgyz legislation, classification of firm type/ sectors classification which is different from internationally size is based on headcount or turnover and it is further refined recognized classifications. by activities in the production and non-production sphere. For small and medium companies sectors are: manufactur- The definition of establishment size was adopted by Decree ing industry, construction, trade and repair, transport and of the Government of the Kyrgyz Republic #78 of February 17, communications, real estate and other services, and other. 1998 and Decree of the Government of the Kyrgyz Republic The criterion for selection of these 5 sectors was as follows: #500 of August 29, 2002. According to its definition, establish- total number of enterprises in each of these sectors more ments are classified as follows: than 5% of the total number of enterprises in the country All remaining industries were included in “Other” sector to allow (a) Small and medium companies by number of employees for statistically valid analysis: mining, electricity, gas and water Size of threshold and interval of average number supply, hotels and restaurants, finance, education, health enterprise of paid employees service, Housing and communal services. by average number of paid group I (In the pro- group II (In the non- employees duction sphere) production sphere) For individual entrepreneurs sectors are: manufacturing in- small companies, up to 50 inclusively up to 15 inclusively dustry, trade and repair, hotels and restaurants, transport and including very up to 15 inclusively up to 7 inclusively communications and other. The criteria for sectors selection small (micro) was the same as for small and medium companies. The fol- medium From 51 to 200 From 16 to 50 lowing industries were included in “other” sector to allow for companies inclusively inclusively statistically valid analysis: mining, electricity, gas and water supply, construction, real estate and other services, finance, education, health service, housing and communal services. Regions of the Kyrgyz Republic The regional breakdown of the Kyrgyz Republic is: Issyk-kul oblast, Jalalabat oblast, Naryn oblast, Batken oblast, Osh 142 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs oblast, Talas oblast, Chui oblast, Bishkek city and Osh city. For table 9.1. Sample size of small and medium companies by region the purpose of the survey, sampling was done on the basis of the regional breakdown of the number of enterprises. The ra- without non- response rate total number Sample size Sample size tionale for this grouping was to have more detailed reflection of SMCs, n with non- response of the businesses’ distribution in the sample. rate, n (20%) Determination of sample size issyk-kul oblast 331 34 43 Since we have no data of previous surveys, it’s difficult to cal- culate sample size for means. To determine minimum sample Jalalabat oblast 415 45 58 size for each sub-population we use estimates of population naryn oblast 217 22 27 proportion with levels of precision at a minimum 4% preci- batken oblast 138 15 17 sion for 95% confidence intervals124: Osh oblast 361 38 48 talas oblast 119 13 16 chui oblast 1,056 111 137 bishkek city 7,666 211 263 Osh city 679 80 102 where: n-final sample size, N = population size, P = popula- total 10,982 569 711 tion proportion, Q = 1-P, k = desired level of precision, z1-α/2 is the value of the normal standard coordinate for a desire level of confidence, 1- α. As can be seen from the table, the state distribution of small and medium companies is uneven and largely skewed towards Non-response rate Bishkek city. In order to mitigate this and allow for statistically In order to derive the final sample size for each population, it valid analysis across regions, the sample size for Bishkek city was is necessary to take into account the possible non-response reduced by half and the sample sizes for other regions were rate based on experience of previous surveys. Since there is proportionately increased. For data analysis initial shape of distri- no precedent in the Kyrgyz Republic to estimate the possible bution will be restored by weight coefficients. The sample was non-response rate for farmers, individual entrepreneurs and further stratified by size of firms based on national incidence of small and medium companies, the non-response rate was small and medium enterprises for 2008 provided by the National estimated to be of respectively 5%, 10% and 20%. To calculate Statistics Committee of the Kyrgyz Republic. final sample size it is necessary to use following formula: table 9.2. Sample size by region and size of firms number of medium medium companies where: nf = final sample size, n=sample size without non- total sample size number of small small companies response rate, Rn = non-response rate. Sample size n, Sample size n, companies companies Sampling distribution for small and medium companies In order to establish the sampling universe for small and medium companies, the incidence and regional distribution as of 01.01.2009 of existing small and medium companies issyk-kul oblast 277 54 39 4 43 were obtained from the Kyrgyz National Statistical Commit- Jalalabat oblast 350 65 52 6 58 tee. Legal entities involved in agriculture, hunting and fishery naryn oblast 193 24 26 1 27 were categorized into the farmer’s sub-population and is not batken oblast 120 18 17 0 17 reflected here. Based on the above formula and taking into Osh oblast 323 38 46 2 48 account the non-response rate, the national incidence of talas oblast 104 15 16 0 16 10,982 small and medium companies therefore, was region- chui oblast 943 113 130 7 137 ally distributed as follows: bishkek city 7,189 477 233 30 263 Osh city 635 44 98 4 102 124 A 4% precision of an estimate in a 95% confidence interval means that we can guarantee that the population parameter is within the 4% range of the ob- total 10,134 848 657 54 711 served sample parameter, except in 5% of the cases. 9. survEy mEthOdOlOgy 143 The table below shows the sample distribution of the small and The corresponding sample size was calculated. As can be medium company population by sector of economic activity. seen from the table, the national distribution of individual entrepreneurs is larger in the trade and repair sector. In order table 9.3. Sample size by sector and size of firms to mitigate this and allow for statistically valid analysis across SIzE OF FIRMS tOtal SMall MEdIuM sectors, the sample size for the trade and repair sector was reduced by half and the sample sizes for other sectors were manufacturing 113 103 10 proportionately increased. For data analysis initial shape of industry distribution will be restored by weight coefficients. construction 79 74 5 trade and repair 216 205 11 table 9.5. Sample size of individual entrepreneurs by region with non-response rate (10%) transport and 61 54 7 communica- tOtal nuMBER SaMPlE SIzE, n tions OF IEs, n real estate and 152 138 14 batken oblast 8,264 35 other services Jalalabat oblast 10,636 43 Other 90 83 7 issyk-kul oblast 17,178 81 total 711 657 54 naryn oblast 6,346 27 Osh oblast 20,375 94 The final sample size of 711 small and medium companies is representative of the national population such that statisti- talas oblast 3,070 14 cally valid inferences at 4% significance level for this sub-pop- chui oblast 29,444 141 ulation within 95% confidence interval are possible for small bishkek city 35,298 161 and medium companies in each region and sector of activity. Osh city 15,052 71 Sample distribution for individual entrepreneurs total 145,663 667 The data on national incidence and distribution of individual entrepreneurs as of 01.01.2009 was obtained from the Kyrgyz State Statistics Committee. The national incidence of 145,663 individual entrepreneurs in all sectors with the exception of the agricultural sector was distributed by regions and sectors as follows: table 9.4. national incidence of individual entrepreneurs as of 01.01.2009 by region and sector tOtal ManuFaCtuRIng tRadE and hOtElS and tRanSPORt and OthER InduStRy REPaIR REStauRantS COMMunICatIOnS batken oblast 8,264 749 5,292 431 1,179 613 Jalalabat oblast 10,636 1,126 7,265 535 1,060 650 issyk-kul oblast 17,178 822 9,796 601 4,551 1,408 naryn oblast 6,346 876 4,265 207 566 432 Osh oblast 20,375 2,809 11,904 797 3,863 1,002 talas oblast 3,070 342 2,002 105 345 276 chui oblast 29,444 2,671 16,393 1,172 6,283 2,925 bishkek city 35,298 3,594 21,181 2,530 2,834 5,159 Osh city 15,052 834 8,713 789 3,246 1,470 total 145,663 13,823 86,811 7,167 23,927 13,935 144 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs table 9.6. Sample size of individual entrepreneurs by The national incidence of both agricultural sub-populations sector with non-response rate (10%) was regionally distributed as follows: tOtal nuMBER SaMPlE table 9.7. national incidence of agricultural enterprises OF IES, n SIzE, n tOtal lEgal IndIvIdual manufacturing industry 13,823 111 EntItIES EntERPREnEuRS trade and repair 86,811 199 batken oblast 14,244 244 14,000 hotels and restaurants 7,167 56 Jalalabat oblast 80,327 1,593 78,734 transport and 23,927 191 issyk-kul oblast 16,403 510 15,893 communications naryn oblast 34,518 470 34,048 Other 13,935 110 Osh oblast 66,907 641 66,266 total 145,663 667 talas oblast 18,110 334 17,776 The final sample size of 667 individual entrepreneurs is rep- chui oblast 46,418 668 45,750 resentative of the national population such that statistically bishkek city 737 66 671 valid inferences at 4% precision level for this sub-population Osh city 2,618 22 2,596 within 95% confidence interval are possible for individual en- trepreneurs in every region. total 280,282 4,548 275,734 Sample distribution for Agricultural enterprises/ At the third stage the corresponding sample size was calculated: farmers In the first stage of sampling of the population of agricultural table 9.8. Sample size of agricultural enterprises by region enterprises, the regional distribution from official sources was with non-response rate (5%) obtained. The information was provided by the Kyrgyz Na- tOtal lEgal IndIvIdual tional Statistics Committee as of 01.01.2009. At the second EntItIES EntERPREnEuRS stage of sampling different types of agricultural enterprises batken oblast 33 6 27 were aggregated into two sub-populations: 1. Agricultural legal entities included: Jalalabat oblast 187 36 151 a. Farmer cooperatives issyk-kul oblast 42 11 31 b. Peasant farms registered as legal entities naryn oblast 76 11 65 c. Small and medium companies in the Agriculture and Osh oblast 142 15 127 Fishery sectors talas oblast 42 8 34 2. Agricultural Individual enterprises included: chui oblast 103 15 88 a. Peasant farms registered as Individual enterprises b. Individual entrepreneurs in the Agriculture and fishery bishkek city 2 1 1 sectors. Osh city 5 0 5 total 632 102 529 9. survEy mEthOdOlOgy 145 The final sample size of 632 agricultural enterprises was rep- The survey use method of face-to-face interviewing of the resentative of the national population such that statistically most knowledgeable person in the businesses (owner or valid inferences at 4% precision level within 95% confidence manager). Face-to-face interviews allow for longer interviews interval. and usually have a higher response rate. Respondents also feel more comfortable providing sensitive information during The aggregate sample size for all 3 populations face-to-face interviews than over the phone. The average du- amounted to 2010 i.e. small and medium companies ration of interviews was 45-50 minutes. = 711, individual entrepreneurs = 667 and farmers = 632, which matched the initial plans. Qualitative Methods of Data Collection Key informant interviews and focus groups were organized Fieldwork at the beginning and at the end of the survey process to For the purposes of the survey, questionnaires for each target interpret and complement quantitative survey data. During population were developed. Given the emphasis on the the conceptualization of the survey process, focus groups quantitative survey, the questionnaires were pre-coded and and key informant interviews with industry practitioners and closed-ended. The selected Survey Company (SIAR) was re- experts were also organized to identify problems and proce- sponsible for translation of survey instruments into Kyrgyz. dures for the survey. For the purpose of respondents recruitment, a call-center was Quality control organized by the survey company. Such approach allowed Survey control was performed both by the research company providing fieldwork in the needed timeframe and reach rel- and by IFC at all stages of the survey. The control of the evant respondents for interviewing. screening and field work processes was conducted through weekly submission of progress reports to IFC. The quality IFC survey specialists conducted comprehensive operational control of the enumerators’ work was performed by IFC trainings to enumerators and supervisors prior to starting the through random attendance of the interviews in the field. survey field work. Enumerators and their supervisors were Prior to start of the data entry, IFC conducted a visual review trained on data collection procedures, rapport building and of 20% of randomly selected questionnaires of each inter- on their responsibility in collecting reliable information from viewer to check for quality of completion. In addition, statisti- respondents. Supervisors were also trained on were trained cal methods to check the consistency, accuracy and quality on the utilization of random sampling. In addition, a data col- of work of each interviewer were used. Logical control of all lection manual was developed for enumerators and supervi- questionnaires was performed at the stage of data entry. The sors. In the manual, definitions and concepts of various terms research company used special programs to perform logical used in the questionnaire were provided to all enumerators control of the data. The double-entry approach was applied and supervisors. to ensure quality of the data entry. Before the main fieldwork, piloting of all questionnaires was carried out on a sample size of 70 followed by minor modifi- cations to the survey tool and final approval of the full survey. IFC survey specialists participated in the pilot interviews to ensure the interviewers understood the terminology and interviewing methodology. 146 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Annex 1. Respondents need for external financing in 2008 Percentage of 100% Access to Finance respondents 80% 51% 60% 61% 60% Did not need 40% external financing 49% Needed 20% 40% 39% external financing 0% IEs SMCs Farmers Respondents need for external financing (by region) Percentage of respondents Farmers SMCs IEs 120% 100% 100% 92% 81% 80% 74% 68% 66% 60% 59% 58% 60% 56% 49% 51% 48% 43% 41% 40% 36% 36% 29% 29% 26% 22% 20% 18% 18% 13% 11% 13% 6% 0% Osh city Chui oblast Talas oblast Osh oblast Batken oblast Naryn oblast Jalalabat oblast Issyk-kul oblast Bishkek city Respondents need for external financing (by sector) Percentage of respondents SMCs IEs 60% 58% 53% 41% 50% 48% 51% 42% 40% 40% 32% 30% 28% 25% 21% 20% 10% 0% 0% 0% 0% Other Hotel and Real estate Transportation Trade and Construction Production/ restaurant and Communication auto repair Manufactory annEx 1. accEss tO FinancE 147 Respondents who needed external financing and Respondents who needed external financing and applied for a loan (by financial institutions) applied for a loan Percentage of 140% Percentage of 100% respondents respondents 120% 80% 36% 52% 52% 100% 67% 60% 80% 45% 60% 40% 40% 13% Farmers 48% 48% 11% 20% SMCs 20% 44% Applied 33% 8% 24% 5% IEs Did not applied 9% 0% 0% Bank Mikrocredit Credit IEs SMCs Farmers organizations Union Respondents who needed external financing and applied for a loan (by sector) Percentage of respondents 50% 46% SMCs IEs 40% 30% 28% 21% 21% 20% 13% 10% 11% 11% 11% 10% 10% 7% 4% 1% 1% 2% 1% 1% 0% 0% 0% 0% Other Communication Financial Cafe, Construction Services, Transport Production/ Wholesale Retail trade services restaurants, hotels, except Manufactory trade public catering nancial services Respondents stated the main three reasons for not applying for a loan Percentage of respondents 100% Farmers SMCs IEs 86% 83% 82% 80% 64% 60% 53% 50% 43% 40% 27% 25% 20% 17% 12%13% 11% 7% 7% 9% 1% 6% 3% 5% 5% 6% 3% 1% 2% 2% 0% 0% 0% 0% 0% Other Conversion Long Restricted Unavailability Need to Dishonesty High High I do not know dif culties procedure of opportunity of long make of bank collateral interest such on current registration to receive term credits non-of cial workers requirements rates crediting transactions of collateral credits in cash payments tool 148 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Respondents received loans (by purposes) Percentage of respondents 1.0% 0.9% IEs 0.8% 0.8% SMCs Farmers 0.6% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0% For purchase For replenishment For nancing of Other/number of xed assets/ of the working capital/ trade activity/number of applications number of applications number of applications of applications Respondents who applied and received loans Respondents who borrowed money unofficially at interest for their enterprises’ activity in 2008 Percentage of 100% Percentage of 100% respondents 12% respondents 23% 19% 80% 80% 60% 60% 80% 85% 90% 88% 77% 81% 40% 40% 20% Did not 20% Did not received borrowed 20% Received Borrowed 10% 15% 0% 0% IEs SMCs Farmers IEs SMCs Farmers unofficial loans’ description 700000 10 617402 Average 9 600000 9 monthly 8 interest rate 500000 7 Average 6 Kg Soms 400000 6 amount in Rates 5 KGS 5 300000 4 200000 3 2 100000 1 39326 33662 0 0 IEs SMCs Farmers annEx 1. accEss tO FinancE 149 Respondents invested in enterprise assists Percentage of respondents 50% Farmers SMCs IEs 40% 39.3% 38.2% 30.8% 30% 23.6% 20% 15.7% 15.4% 15.6% 14.4% 12.5% 11.2% 9.5% 10% 7.5% 8.4% 5.6% 3.1% 3% 2.6% 1.6% 0% Purchase of vechicle Constructions Premises overhaul Equipment overhaul Purchase of equipments Premises maintenance Respondents estimated the access to finance Percentage of respondents Very dif cult 27.1% 22.7% 28.6% Rather dif cult 55.5% 49.3% 62.4% Rather simple 15.1% 24.3% 7.1% Very simple 2.3% 3.7% 1.9% 0% 20% 40% 60% 80% 100% IEs SMCs Farmers note: some tables in annex 1 do not contain information on farmers because the response rate was insignificant (less than 15) 150 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs Annex 2. Share of businesses dealing with export/import in 2008 Percentage of 30% Foreign Trade respondents 26% 25% 20% 15% 10% 6% 6% Export 5% Import 0% 0% SMCs IEs Share of SMCs dealing with export/import (by region) Percentage of respondents Export Import 35% 33% 30% 25% 20% 17% 15% 11% 11% 11% 11% 11% 10% 6% 6% 5% 5% 5% 5% 5% 4% 1% 0% 0% 0% 0% Bishkek city Issyk-kul oblast Jalalabat oblast Naryn oblast Batken oblast Osh oblast Talas oblast Chui oblast Osh city Share of IEs dealing with import (by region) Percentage of respondents 14% 13% 12% 11.1% 10.7% 10% 8% 7.2% 6% 4.8% 4% 2% 2.2% 2% 0.7% 0% 0% Bishkek city Issyk-kul oblast Jalalabat oblast Naryn oblast Batken oblast Osh oblast Talas oblast Chui oblast Osh city annEx 2. FOrEign tradE 151 Market distribution of exported goods the main type of product imported by SMCs in 2008, in % by SMCs 40% Percentage of respondents 36% 35% 60% 30% 52% 50% 25% 46% 40% 20% 19% 18% 15% 13% 30% 11% 10% 20% 5% 3% 10% 0% 2% Consumer Non consumer Equipment/ Production- Services Other 0% products, products technical related goods Internal Direct Re-export do not including equipment market export clothing or textiles average total volume of exported/imported products average number of export/import transactions in 2008, KgS 8000000 9 8 Export Import Export 8 7000000 7 252 054 Import 7 6000000 6 6 5000000 KgS 5 4000000 4 3 516 494 3000000 3 3 960 573 2000000 2 1000000 1 0 0 0 SMCs IEs SMCs IEs Share of companies requested to provide a certificate of average time spent for procedures related to compliance for export/import registration of OnE export/import transaction in 2008, in working days (man-days) Percentage of respondents 70% 66% 7 Export Import 6 6 Export Import 60% 6 54% 50% 50% 5 40% 4 3 30% 3 20% 2 10% 1 0% 0 0% 0 SMCs IEs SMCs IEs 152 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs SMCs spent more time for import procedures Share of companies experienced informal methods of export/import procedures 8 7 Percentage of 70% respondents 60% 59% 6 5 5 50% 49% 4 39% 40% 3 Maximum period of 3 30% custom clearing of goods 2 Average time spent for 3 20% procedures of custom 1 2 clearing of goods SMCs 10% 0 IEs SMCs IEs 0% 0% Export Import SMCs identified main challenges of export/import procedures Percentage of respondents Export Import 60% 50% 49% 42% 40% 34% 33% 30% 27% 23% 20% 18% 13% 14% 10% 0% 0% 0% 0% 0% 0% Dif culty to prove Custom High custom Big number of Corruption and Frequent change There were not the cost of transaction clearance duties documents necessary bureaucracy in of rules dif culties (by contract) for export operations custom bodies SMCs exporting/importing countries Percentage of respondents Exported Imported 40% 36% 35% 32% 30% 25% 22% 20% 18% 17% 15% 15% 10% 9% 8% 8% 7% 5% 5% 4% 3% 3% 3% 3% 2% 1% 1% 1% 0% Russia China Turkey Iran EU countries Turkmenistan Tajikistan Kazakhstan UAE Other annEx 2. FOrEign tradE 153 IEs importing countries Percentage of respondents 40% 36% 35% 30% 25% 20% 20% 16% 15% 10% 5% 5% 5% 5% 5% 4% 3% 2% 0% 0% Russia China Turkey Iran EU countries Turkmenistan Tajikistan Kazakhstan UAE Ukraine USA Respondents estimated export procedures Respondents estimated import procedures More than 50 percent businesses state that passing almost every second businesses said that passing import export procedures as rather simple procedures was rather simple percentage of respondents percentage of respondents IEs 51% 35% 15% IEs 50% 39% 12% SMCs 2% 52% 45% 2% SMCs 6% 52% 37% 5% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Very simple Rather simple Rather Very Very simple Rather simple Rather Very difficulties difficulties difficulties difficulties note: tables in annex 2 do not contain information on farmers because the response rate was insignificant (less than 15). tables on iEs in annex 2 do not contain information on export because the response rate was insignificant (less than 15), except the table “level of difficulties” 154 invEstmEnt climatE in thE Kyrgyz rEpublic as sEEn by small and mEdium EntErprisEs IFC Investment Climate Advisory Services Project 4th floor, 6 Ryskulov Street Bishkek, Kyrgyz Republic 720001 Tel.: +996 312 626162 www.ifc.org/beekg 2010