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B U S I N E S S E N V I R O N M E N T I N U Z B E K I S T A N A S S E E N B Y S M A L L A N D M E D I U M E N T E R P R I S E S

T a s h k e n t 2 0 0 4

Glossary ...........................................................................................................................2

Preface ..............................................................................................................................3

Executive Summary ..................................................................................................5

Survey: Key Facts ................................................................................................... 15

SME Sector at a Glance ................................................................................... 19

SME Business Environment ............................................................................... 25

Registration ................................................................................................................. 37

Permits .......................................................................................................................... 43

Taxation ........................................................................................................................ 51

Inspections ................................................................................................................... 61

SMEs and Financial Institutions ....................................................................... 71

Foreign Trade Operations ................................................................................ 85

Standardization and Certification ................................................................105

Licensing ......................................................................................................................109

Personnel Training and Information Technology ..............................113

Annexes ......................................................................................................................117

Survey results based on 2003

TABLE OF CONTENTS

Ä Å Ë Î Â À ß Ñ Ð Å Ä À Â Ó Ç Á Å Ê È Ñ Ò À Í Å 2 0 0 3Ä Å Ë Î Â À ß Ñ Ð Å Ä À Â Ó Ç Á Å Ê È Ñ Ò À Í Å 2 0 0 3

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GLOSSARY

ADPF - Association of Dekhan and Private Farms

CCPE - Chamber of Commodity Producers and Entrepreneurs

CM - Cabinet of Ministers

CSREO - Consolidated State Register of Enterprises and Organizations

CTI - Chamber of Trade and Industry

ICC - Inspections Coordination Council

IFC - International Finance Corporation

IRB - Inspections Registration Book

LLC - Limited Liability Company

MF [MinFin] - Ministry of Finance

MH [Minzdrav] - Ministry of Health

MJ [MinIUust] - Ministry of Justice

RU - Republic of Uzbekistan

SA - State Association

SACC [Gosarkhitektstroi] - State Architecture and Construction Committee

SCB - Services Certification Body

SCC - State Customs Committee

SEPC [Goskomprirody] - State Environmental Protection Committee

SES - Sanitary-Epidemiological Service

SJSC - State Joint Stock Company

SMB - Small and Medium Businesses

SME - Small and Medium Enterprises

SMECC - Small and Medium Enterprise Coordination Council

SSC [Goskomstat] - State Statistics Committee

STC - State Tax Committee

STI - State Tax Inspectorate

TN FEA - Trade Nomenclature for Foreign Economic Activities

TSDPC - Tashkent Shipping Documents Processing Center (under “Uzbekistan Temir Iulari”)

UFEOEIS - Unified Foreign Economic Operations Electronic Information System

Uzstandart - Uzbek Agency for Standardization, Certification and Metrology

VAT - Value Added Tax

WCO - World Customs Organization

WTO - World Trade Organization

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Ï Ð Î Â Å Ð Ê ÈP R E F A C E

This is the third annual survey the International Finance Corporation (IFC) has conducted of Uzbekistan’s small and medium enterprise (SME) sector. It was conducted pursuant to the recommendations of the SME Coordination Council with financial support from the State Secretariat for Economic Affairs of Switzerland (seco).

This survey report provides an opportunity to track, from the entrepreneur’s point of view, the dynamics of the reforms taking place in Uzbekistan’s private sector. It does not provide a comprehensive overview of all the problems Uzbekistan’s small and medium businesses face, nor does it represent the views and opinions of IFC or seco. Rather, it is a factual reflection of the views of Uzbekistan’s entrepreneurs themselves.

The size of the 2003 survey sample is larger than that of the preceeding survey, and included 2500 micro-firms and small and medium enterprises, which were selected in proportion to the number of SMEs operating in each economic sector and in each region of Uzbekistan. Survey participants answered 197 questions on all aspects of their operations. The quantitative and qualitative features in the survey sample and the survey methodology are designed to make it possible to collect data comparable to the data IFC collected in the Uzbekistan surveys it conducted in 2002 and 2003 to provide a way to track the reforms occurring in Uzbekistan’s business environment.

In preparing this report, representatives of ministries and departments (Ministry of Finance, Agency for Foreign Economic Relations, State Tax Committee, State Customs Committee), commercial banks, the Chamber of Commodity Producers and Entrepreneurs, as well as Uzbek SMEs took part in focus groups and round tables which discussed a number of topics. Out of these discussions came an assessment of the survey’s results and main findings. This report serves the additional purpose of making recommendations to the Government for removing barriers to business development that came to light in the course of conducting the survey.

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B U S I N E S S E N V I R O N M E N T I N U Z B E K I S T A N 2 0 0 3

This survey is a snapshot of the business environment as of February 2004 when the survey was conducted. After the fieldwork was completed, a number of laws and regulations were changed. While many of these changes have been noted in this document, this survey is not comprehensive on these changes. Tracking the impact of these changes on Uzbekistan’s business environment will have to wait for future IFC surveys.

The IFC SME survey Project expresses its gratitude to the Small and Medium Enterprise Coordination Council, the Inspections Coordination Council, the Ministry of Justice, the Agency for Foreign Economic Relations, the State Statistics Committee, the State Customs Committee, the State Tax Committee, the State Committee for State Property Management and Support of Enterprise, the Department of Foreign Economic Relations and Foreign Investments of the Cabinet of Ministers of the Republic of Uzbekistan, the Department for Support and Protection of Small and Medium Enterprises of the Ministry of Justice, the Chamber of Commodity Producers and Entrepreneurs, the Association of Dekhan and Private Farmers, as well as to our colleagues with the USAID Project for the Development of Trade and Investments, the World Bank Country Mission in Uzbekistan, the IFC Southern Europe and Central Asia Department, and the IFC Private Enterprise Partnership.

This report is published in English and Russian. Additional copies of the report are available in printed and electronic format at the following addresses:

International Finance CorporationWorld Bank Country Mission in Uzbekistan

107 B Amir Temur St.International Business Center, 14th FloorTashkent, Republic of Uzbekistan, 700084

International Finance CorporationPrivate Enterprise Partnership

2121 Pennsylvania Avenue, NWWashington, DC 20433USA

Òål: +(998 71) 138 59 28 / 138 59 50 Tel: +(1 202) 458 09 17Fax: +(998 71) 138 59 27 Fax: +(1 202) 974 43 12

www.ifc.org/centralasia www.ifc.org/pep

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Ï Ð Î Â Å Ð Ê È

The changes now taking place in Uzbekistan’s economy are reflected in the pace of development of the country’s small business sector. The sector responds with extraordinary sensitivity to all of the positive and negative developments in the business environment. The views of small and medium businesses concerning numerous aspects of their operations, as well as their assessment of the country’s business environment, are therefore useful and important indicators - both for the government of Uzbekistan as well as for the international community – of the development of the country’s private sector.

This third annual SME Survey provides an opportunity to monitor the progress of private sector reforms through the eyes of Uzbekistan’s entrepreneurs.

In 2003, the Government took a number of decisions aimed at lowering barriers to enterprise:

the ‘cash plan’ was legally abolished;

a number of restrictions on the payments settlement system for import operations were lifted;

entrepreneurs were given the opportunity to obtain certain types of permits through a “one window” registration system;

currency account convertibility was introduced;

oversight functions of state agencies were curtailed within the framework of incipient administrative reforms;

the Law “On Private Enterprise” (protecting private enterprise owners from double taxation) was adopted.

E X E C U T I V E S U M M A R Y

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In the course of the survey, entrepreneurs noted that alongside the positive changes taking place in the business environment, serious barriers hindering the development of small and private business continue to exist in Uzbekistan, and that many of these barriers become more acute with each passing year. The most troubling trend revealed by the survey is the share of entrepreneurs investing in their business has been dropping that steadily over the course of past three years (from 53% to 19% of those surveyed).

Why do fewer and fewer of Uzbekistan’s entrepreneurs invest in the development of their own businesses? What steps need to be taken to stem this trend?

As the chart below indicates, entrepreneurs are of the opinion that despite improvements in Uzbekistan’s business environment, many processes that exert a fundamental influence on the business climate remain problematic.

This report presents the views of entrepreneurs on the day-to-day regulatory environment in which they work and make decisions. The conclusions presented are accompanied by a number of recommendations as to further steps the Government of Uzbekistan can take to resolve what, in the view of private business, are acute problems.

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The main conclusions and recommendations regarding the five key processes impacting business development are set forth below.

TAXATION

The instability of tax legislation and the non-transparent method of calculating and paying taxes continue to create major difficulties for entrepreneurs.

SMEs continue to view taxation as the most problematic of all the processes they deal with in the course of their operations.

Over half of the respondents switched to the simplified taxation system after its adoption. The tax burden under the simplified system is lower than that under the general system: on average 17.6% and 19.7%, respectively.

Tax legislation was unstable in 2003: over 40 normative acts were adopted introducing over 90 changes in tax legislation. This was a major problem for 57% of respondents.

The existing tax system forces entrepreneurs “to go into the shadows”. One-third of the respondents who believe that SMEs conceal part of their business turnover indicated that over 20% of profits are hidden from taxation.

RECOMMENDATIONS:

1. Promote sharing of responsibility between SMEs and tax authorities by conducting roundtables and seminars, distributing information about taxes collected and how taxes are spent.

2. Guarantee entrepreneurs protection against adverse changes in the tax regime during the period they are launching their businesses (specifically, amend article 16 of the Law “On Guarantees of Freedom of Entrepreneurial Activities” to provide a precise definition of the criteria for linking changes in the tax system and tax rates to indexation).

3. Permit changes in the tax system to come into force only at the beginning of the tax year while maintaining a mandatory time limit (at least 3 months) between their adoption and their entry into force.

4. Allow borrowers to deduct interest paid on loans (regardless of time allotted for repayment) and accelerated depreciation from their gross income when calculating their taxes.

SMES AND FINANCIAL INSTITUTIONS

Entrepreneurs view banks as controlling organizations rather than as effective financial intermediaries.

It was more difficult than ever in 2003 for entrepreneurs to withdraw cash from their accounts. Lack of access to cash is most acute for enterprises in the real sector of the economy.

The share of respondents reporting that banks disclose information on their business transactions to third parties more than doubled in 2003.

SME demand for bank loans remained steady (29% of respondents applied for bank loans in 2003, 25% did in 2002). Access to sources of preferential financing is still limited.

The practice of making unofficial payments to bank employees continues. According to respondents, the average unofficial payment amounted to 8% of the loan granted.

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RECOMMENDATIONS:

1. Liberalize the Central Bank’s regulation of the money supply and abolish the practice of the “hidden cash plan”.

2. Abolish legal provisions that impose monitoring functions inappropriate to financial institutions on commercial banks.

3. Adopt a mechanism guaranteeing enterprises protection against negative changes in tax and customs regimes while they are implementing investment projects.

4. Enhance the legislative basis for the development of micro-finance organizations so as to provide: a definition of the concept of micro-financing to include additional financial services (e.g., micro-leasing); provide the opportunity to create commercial micro-finance institutions which have the right to use borrowed resources; create a specialized tax regime for micro-finance organizations.

5. Prepare and distribute to SMEs materials describing existing financial instruments and rules for handling account transactions. Such materials must describe in understandable language how to work with banks, the rights and obligations of banks, and should include filled out sample forms and applications.

6. Have banks revise their employee compensation system with stress on upgrading client services.

INSPECTIONS

Controlling agencies have now begun to carry out selective inspections of firms, rather than all-inclusive inspections as in the past. However, selection criteria are not transparent.

In 2003 the average number of inspections per SME dropped significantly to 1.9 (down from 4.2 in 2002 and 6.2 in 2001) while the “time tax” dropped on average to 4.4 working days (down from 8.5 days in 2002 and 13.5 days in 2001).

The procedures and principles for selection of enterprises for inspections as well as inspection regulations and parameters still lack transparency, as noted by both entrepreneurs and representatives of a number of controlling agencies.

The share of entrepreneurs with an adequate grasp of legislation governing inspections rose significantly in 2003, but that share is still not high enough.

Inspections Registration Books, more widely disseminated in 2003, were in the possession of 88% of those surveyed.

Controlling agencies are vested with excessive powers which deprive or severely limit the rights of entrepreneurs to carry out normal business activities.

Small enterprises spend a significant amount of time submitting reports and statements to government agencies and to banks performing controlling functions. Micro-firms and small enterprises paying taxes under the simplified system must submit up to 174 documents a year.

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RECOMMENDATIONS:

1. Adopt criteria for selecting small businesses for inspection based on estimates of the level of risk their business activities pose to public safety and health.

2. Develop and adopt model regulations for the work of controlling agencies, clearly stipulating the rights and obligations of both inspectors who conduct inspections as well as those of firms being inspected. The rules and regulations must contain the authorization to perform inspection activities and must contain unified regulatory procedures.

3. For inspections not pertaining to financial operations (for example those carried out by the fire and sanitary services), develop and adopt checklists of questions for regulatory bodies to when conducting site-checks. Checklists are an effective tool for clearly marking the jurisdiction of inspectors during site-checks at enterprises.

4. Implement programs to increase the legal awareness of entrepreneurs for the purpose of forging partnership relations between regulatory bodies and enterprises (conduct joint roundtable discussions and seminars, make information about inspection selection and procedures accessible).

5. Explore the possibility of transferring to the court system powers now exercised by controlling agencies to impose sanctions, as a result of an inspection, that can profoundly impact an enterprise’s operations (for example, suspension or cessation of an enterprise’s operations, cancellation of a license, removal of goods from circulation, impounding the use of a bank account, imposition of severe fines, etc.)

6. Reduce the number of reports required of SMEs by various state bodies as well as eliminate reports not mandated by legislation.

REGISTRATION

The modified “one window” registration system, which now includes the issuance of certain kinds of permits, is on the whole proving to be effective.

The new registration system introduced on October 1, 2003 is proving to be effective:

- the time the registration process takes has been reduced, on average, to 16 working days;

- the share of respondents having to resort to unofficial payments during the registration process has gone down to 8 %.

At the same time, length of registration time varies widely from region to region, which may be an indication that there are problems with adopting the new system on the regional level.

Some entrepreneurs are forced to themselves conclude a number of procedures that, by law, should be performed by registering bodies.

RECOMMENDATIONS:

1. Implement registration and permit issuance procedures at the regional level in a clear-cut fashion.

2. Adopt in stages a SME registration system based on the “application principle.”

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PERMITS

The Government is taking measures to streamline procedures for obtaining permits and has already included the issuance of certain permits in a streamlined “one window” enterprise registration system.

In 2003, each enterprise completing registration had to obtain, on its own, an average of 3 permits before launching operations. Enterprises in business over a year had to obtain on average one additional permit each.

About one-third of respondents continue to describe the process of obtaining permits as quite complex and problematic.

The existing legal basis governing the issuance of permits consists of numerous disparate interagency administrative rulings and regulations, most of which have not been scrutinized, as required, by legal experts.

SMEs do not have the open access they need to the entire legal basis governing procedures for obtaining permits.

The large number of documents required, long waits to obtain permits, and red tape continue to be the main problems entrepreneurs encounter in the process of obtaining permits and approvals.

The share of respondents having to make unofficial payments when obtaining permits and approvals has risen: in 2002 the share was 17%, in 2003 it was 25%.

RECOMMENDATIONS:

1. Systematize the existing legislative base governing the issuance of permits and approvals, including providing precise definitions of terms and concepts, and systematize all existing permits and approvals into one single list.

2. Facilitate free access to information on registration and on obtaining permits, and promote transparency of procedures (for example, prepare a standard kit of documents).

3. Expand the list of types of permits issued under the “one window” system.

4. Gradually phase-in a method of issuing particular permits and approvals on the basis of the “application” principle, in cases where requirements for obtaining a permit are sufficiently simple and the share of enterprises requiring the permit is sufficiently large.

5. Conduct an analysis, for purposes of further reducing the number of permits, of the advisability of retaining or not retaining various permits and approvals.

6. Develop, for inclusion in appropriate normative acts, precise regulations for issuing permits and approvals, which: indicate time limits for document review, specify the individual officials responsible for issuing concrete permits and approvals in each appropriate agency or department, and provide exhaustive lists of documents to be submitted as well as an exhaustive list of valid reasons for denial of a permit application.

FOREIGN TRADE OPERATIONS

Small and medium enterprise participation in foreign economic operations remains negligible.

Of SMEs surveyed in 2003, 1% and 3% engaged in export and import operations, respectively (in 2002 those indicators were 3% and 6%, respectively).

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One-third of entrepreneurs don’t engage in export-import operations because of the difficulty of export-import procedures, which are a major disincentive to engage in those activities.

Alongside positive changes in legislation, there are restrictions and added requirements negatively impacting the growth of the number of SMEs engaging in imports, namely:

- special requirements for entrepreneurs involved in wholesale trade (e.g., amount of charter capital, mandatory warehouse facilities);

- mandatory certification, introduced at the end of 2002, of a whole series of imported consumer goods.

The Government took a series of steps in 2003 to liberalize foreign economic activities, but as the steps are ambiguous they do not always achieve their intended goals.

In the opinion of 71% of importers surveyed, the fact that the customs value of goods is vaguely defined in current legislation has a negative impact on foreign trade operations.

Three-fifths of exporters and importers surveyed reported that the unofficial payments they are forced to resort to during foreign trade transactions constitute a major problem for their business.

RECOMMENDATIONS:

1. Simplify export-import procedures for private business:

further liberalize settlement of accounts during foreign trade transactions;

eliminate the practice of non-legislated demands made by various state agencies when registering foreign trade contracts, gradually changing the role of such agencies from regulation to monitoring.

2. Distribute materials to SMEs explaining procedures for registering export-import operations in detail, including samples of completed forms and applications.

3. Exempt, in stages, trading intermediaries from the mandatory sale of 50% of hard currency receipts obtained from exports, redirecting those resources to the promotion of export of products made in Uzbekistan.

4. Move forward with Uzbekistan’s integration into international (including WTO) and regional economic, trade, and customs unions to create an open market economy.

5. Incorporate a precise definition of the concept “technology equipment” into legislation.

6. Exempt technology equipment imported into Uzbekistan (regardless of purpose it is imported for) from VAT and customs duties.

7. Eliminate the practice of granting personal privileges to a limited number of enterprises.

By working together to solve the problems discussed above, the government of Uzbekistan, international financial institutions, donors, and entrepreneurs will assist in strengthening Uzbekistan’s private sector and the foundations of Uzbekistan’s economic system.

In conclusion, it should also be noted that one of the most encouraging findings to come out of this survey is that two-thirds of entrepreneurs believe that Uzbekistan’s business environment will improve in the near term.

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Results anticipated from some recommendations made in this report can be obtained in a relatively short period of time – a year or less. Thus, such recommendations can be viewed as aimed at achieving near-term results in improving Uzbekistan’s business environment. The table below lists a total of 15 such recommendations:

PERMITS AND APPROVALS

Define terms and concepts in legislation precisely.

Continue to reduce the number of permits and approvals and systematize them into a single list.

Expand the list of types of permits issued under the “one window” system.

INSPECTIONS Develop and adopt checklists for inspections.

Develop and adopt model regulations for the work of controlling agencies.

Explore the possibility of transferring, to the courts, powers wielded by controlling agencies to impose particularly harsh sanctions as a result of inspections.

Reduce the number of mandatory reports required of SMEs.

FOREIGN TRADE OPERATIONS

Abolish unwarranted requirements on the part of state agencies in the registration process.

Legally define the concept of “technology equipment”.

Exempt technologicy equipment imported into Uzbekistan, regardless of the purpose for which it is imported, from VAT and customs duties.

Take further steps to liberalize settlement of accounts during foreign trade transaction.

Eliminate the practice of granting personal privileges to particular enterprises.

FINANCING Guarantee protection against adverse changes in the tax and customs regimes during implementation of investment projects.

LICENSING Unify licensing requirements in one single normative act.

CERTIFICATION Abolish the requirement that an enterprise continuously pay state certifying agencies a share of its proceeds through use of a compliancy mark.

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The International Finance Corporation (IFC) compiles a report based on the annual survey it

conducts of the small and medium business environment in Uzbekistan. The purpose of the report

is to highlight the main administrative and regulatory barriers SMEs encounter in doing business.

The survey’s results, based on data obtained from SME representatives, reflect entrepreneurs’

opinions about their work environment and mirror the various factors hindering their development.

This is the third such survey (the first and second reported the results of the 2001 and 2002 IFC

surveys, respectively) and thus can serve as an effective tool for monitoring reforms undertaken

by the Government of the Republic of Uzbekistan.

Ï Ð Î Â Å Ð Ê ÈS U R V E Y : K E Y F A C T S

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SCOPE 2500 micro-firms, small and medium enterprises in all 12 regions of Uzbekistan, the Republic of Karakalpakstan and the city of Tashkent were surveyed.

TIMING Survey field work done in January-February 2004.

METHOD Structured personal interviews consisting of 197 questions covered the following topics: general enterprise information, information technology, human resources, training, business registration, permits and licenses, certification, standardization, export-import operations, inspections, taxation, relations with financial institutions, and relations with government authorities.

SAMPLE1 The sample was constructed proportionally to the number of active micro-firms and SMEs, by economic sector and by region (viloyat), according to official data of the State Statistics Committee of the Republic of Uzbekistan as of January 1, 2004.

Respondents were classified, in accordance with legislation of the Republic of Uzbekistan in effect through December 31, 2003, by size in terms of number of employees and by sphere of activity.2 The definitions of SMEs are given in Annex 2.

According to the legislation of Uzbekistan, dekhan farms and private farms meeting the requisite criteria for number of employees fit the definition of a SME. The number of such farms surveyed was weighted in proportion to the number of such farms in the overall number of SMEs. Insofar as the normative-legal basis governing certain aspects of registration, taxation, land use and granting loans is not the same for dekhan and private farms as it is for non-agricultural SMEs, explanations of such differences are given in the body of the report, where needed.

A profile of the respondents surveyed is given below.

TABLE 3.1. RESPONDENTS, BY REGION TABLE 3.2. RESPONDENTS, BY CATEGORY OF ENTERPRISE / FIRM

% %

Republic of Karakalpakstan 5% Micro-firms 86%

Andijan 9% Small enterprises 11%

Bukhara 8% Medium enterprises 3%

Djizzak 7% TOTAL 100%

Kashkadarya 13%

Navoi 5%

Namangan 6%

Samarkand 9%

Surkhandarya 5%

Syrdarya 4%

Tashkent region 7%

Fergana 8%

Khorezm 6%

Tashkent city 8%

TOTAL 100%

1 More detailed information on the sample is presented in Annex 1 to this report.2 (i) Law 69-II of the Republic of Uzbekistan “On Guarantees of Freedom of Entrepreneurial Activities” dated May 25, 2000.

(ii) Law 604-I of the Republic of Uzbekistan “On Dekhan Farms” dated April 30, 1998.

(iii) Law 602-I of the Republic of Uzbekistan “On Private Farms” (revised) dated April 30, 1998.

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It should be noted that with each passing year respondents are more open in their answers to survey questions. Even though respondents were guaranteed confidentiality, it is the opinion of on-site interviewers that slightly over 12% of respondents were not fully open when answering some of the sensitive questions in the survey (as compared with 16% and 12% in the 2001 and 2002 surveys, respectively).

In addition, the basic premise of the survey is that it polls only enterprises that are in operation. Entrepreneurs who failed to complete registration or licensing procedures, or, for example, who went out of business, were unable to avail themselves of the opportunity to express their views on existing problems in the business environment.

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Ï Ð Î Â Å Ð Ê ÈS M E S E C T O R A T A G L A N C E

Main Findings

The Role of SMEs in Uzbekistan’s Economy

Growth of Business Turnover of SMEs

Profitability of SMEs

MAIN FINDINGS

SMEs continue to grow in importance in Uzbekistan’s economy: official data indicate they number nearly 230,000; they account for 36% of GDP; their share of employment has climbed to 57%.

This year, as was the case last year as well, most SMEs reported an increase in their business volume. However, in half the cases the increase did not keep up with inflation.

The greatest gains in 2003 in terms of rate of growth of business volume and profitability were for the most part in the agricultural sector.

The larger an enterprise is, the harder it is for it to develop: medium enterprises reported the least profitability and business volume growth compared with micro-firms and small enterprises.

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The Role of SMEs in Uzbekistan’s Economy

Increasing their share of gross domestic product each year and providing employment for over half the labor force, small and medium businesses are playing a greater role in a sector that produces a significant portion of the goods and services needed for Uzbekistan’s economy.

With each passing year, the number of small and medium businesses in operation increases. That number reached nearly 230,000 in 2003.

According to official data, SMEs’ share of Uzbekistan’s GDP reached 36%.

SME share of production in most of Uzbekistan’s basic economic sectors continued to grow in 2003.

TABLE 4.1. SME SHARE OF VOLUME OF GOODS (SERVICES) PRODUCED, BY BASIC ECONOMIC SECTOR IN UZBEKISTAN, 2001-2003 (EXCLUSIVE OF INDIVIDUAL ENTREPRENEURS).

2001 2002 2003

Industry 14.5% 14.1% 15.9%

Agriculture 74.5% 76.4% 81.0%

Construction 36.8% 41.3% 40.8%

Trade 46.1% 43.8% 44.8%

Paid services 40.5% 41.3% 44.9%

Cargo traffic 32.9% 38.7% 45.9%

Passenger traffic 49.7% 54.9% 63.6%

Source: State Statistics Committee of the Republic of Uzbekistan. Basic Small / Medium Business and Private Enterprise Development Indicators.

The change in the number of workers employed in small and medium enterprises paralleled the growth in the volume of goods SMEs produced, reaching 57% in 2003.

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For years the experience of developed and rapidly developing countries has borne out the socio-economic importance of small and medium enterprise. These countries have been developing long-term policies for achieving strategic socio-economic societal development and have been making decisions in line with those policies so as to involve the broadest and most pro-active elements of the SME sector in those efforts. In this connection, a state undertakes a number of legal, administrative, and other measures stimulating overall support for and growth of SMEs in ways that promote the interests of society. A variety of measures, mechanisms, and tools are used to do so.

BOX 4.1. BASIC SME DEVELOPMENT INDICATORS AND SYSTEMS FOR SUPPORTING SME DEVELOPMENT IN DEVELOPED COUNTRIES1

Despite the great amount of material available about various forms of and mechanisms for supporting SMEs, it is exceedingly important to highlight the experience of the G 7 in using state funds and resources to support SMEs. The SME sector is precisely the sector that to a significant degree provides steady and dynamic socio-economic development in many countries facing growing competition in world markets. Data for India are also cited to show the results of the efforts of a state that has made a breakthrough to become one of the world’s leading countries in terms of a number of indicators. In this connection, SMEs are among those taking the lead in adopting modern technology and solving socio-economic problems.

CountryIndicator

USA Canada Japan Germany France Italy Great Britain

India

SME share of country’s GDP, %

52 43 51.6 57 49.8 55 52 6.9

SME share of total employment, %

50.1 47 69.5 69.3 56.6 71 55.5 4.5

SME share of number of enterprises

97.6 99,8 99.2 99.3 97.6 99.2 99.1 97.6

Volume of annual financial support of SMEs (in billions of USD):

For infrastructure support 0.8 0.45 1.64 1.8 1.5 5.05 1.37 0.35

Loans 21.6 22.8 39.9+2 480* 61.9 9.2 15.2 6.3 unavailable

Guarantees 1.67 3.36 4.7 unavailable 6.3 0.53

Government contracts and subcontracting

Nationwide contract procurement system in operation

SME services infrastructure:

Credit-financial services Extensive nationwide network of banks, funds, investment and insurance companies in operation

SME development centers 1 100521

313 374 600 1 200 450 487

Information centers 1 100 13 33 34 50 45 47

Business incubators and technoparks

330 186 11 182 216 26 471 96

Exports promotion centers 20 15 network network 26 123 60 network

Social centers 118 41 186 90 41 unavailable 98 unavailable

Social support Lobbying for SME interests by various social, entrepreneurial and professional associations at all levels of legislative and executive branches of government

1 Source: Conference materials for the Fifth All-Russia Conference of Representatives of Small Enterprises, March 2004.

* Private loans

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The experience of these countries shows that development of SMEs is possible only if the state has the political will to create the necessary social, economic, legal, political, and other conditions. These conditions are not possible without the creation of a specialized, integrated support infrastructure at the Republican and regional levels and without the development of small enterprise through the allocation of sufficient financial, administrative, and other resources.

Data taken from IFC’s 2003 survey on SME Development in Uzbekistan follow.

Growth of Business Turnover of SMEs

Survey respondents were asked to indicate the size of their enterprise’s yearly business turnover and their after-tax profitability level. The data reveal that on average the growth of actual yearly business turnover (in nominal monetary terms) of SMEs in 2003 was 15% (in 2002 it was 12%). This indicator varied significantly by size of enterprise surveyed (see Chart 4.4) and by region. Meanwhile, the range in variation by region decreased in 2003 (between 9% and 19%) compared with 2002 (between 8% and 21%).

These variations are a reflection of how the sectors in which surveyed enterprises operated differ structurally in terms of size and geographical location. For example, in the city of Tashkent the share of enterprises in the trade, public catering, and services (the latter had the lowest rate of business growth) sectors was greater than in other regions of the country.

The results of the survey bear out the fact that entrepreneurs are by and large optimistic about the possibilities for business growth of their enterprises: in 2003 79% of respondents experienced growth in annual business, while 87% anticipate such growth in 2004.

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Nevertheless, one must consider that respondents in all likelihood had in mind nominal sales growth, but for purposes of analysis a correction must be made for inflation. According to International Monetary Fund figures,2 the rate of inflation in 2003 was in the neighborhood of 8%.

If a correction is made for inflation, the share of SMEs achieving real turnover growth in 2003 was 53%.

Profitability of SMEs

Enterprise profitability indicators exhibit a trend analogous to that for annual turnover growth. Survey results showed that the average after-tax profitability level reported in 2003 matched the projected level (for 2002 it was 12%, falling short of projected profitability). This has given entrepreneurs confidence and they are anticipating that the after-tax level of profitability in 2004 on average will exceed that of 2003.

However, as analysis showed, total growth of profitability was at bottom due to those SMEs working in agriculture whose indicators significantly exceed results achieved in other sectors. Data are presented below showing projected and actual levels of enterprise profitability for each sector.

2 Source: Middle East and Central Asia Regional Economic Outlook, International Monetary Fund, (September 2004).

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In analyzing the data obtained, one can see that enterprises working in trade, construction, and public catering did not achieve anticipated levels of profitability in 2003 but plan to achieve anticipated levels of profitability in 2004.

An analysis of economic decisions made in 2003 in agricultural enterprise development policy can help explain why the business outlook of farmers is more positive than that of others. A series of Decrees3 of the President of the Republic of Uzbekistan were aimed at restructuring unprofitable, low profit, unpromising shirkats4 so as to make them completely separate from private farms and at the same time take private farms off the shirkat books. Streamlining property relations, which are an important element in the development of market economies also contributed to private farmers’ optimistic outlook: parcels of farmland are now available to farmers on a competitive basis for long-term (up to 50 years) rental use with right of inheritance for the duration of rental. There is, therefore, every reason to believe that structural reform and reform of ownership of land – a farmer’s chief capital resource – are an effective tool for building hopes in this sector. The 2004 survey will tell whether private farmers’ expectations are justified or not, that is, whether these decisions will be successful or not.

In comparing the level of reported profitability and rates of business volume growth by size of enterprise, an obvious pattern emerges: the larger an enterprise is, the harder it is for it to develop.

One of the factors making smaller sized enterprises more profitable is the simpler tax system discussed in the Taxation chapter later in this report. This may in part be related to, as focus group participants commented, the fact that it’s easier for smaller sized enterprises to conceal part of their income from taxation (for details see the Taxation chapter). Subsequent chapters provide a close look at the problems SMEs encountered in doing business in Uzbekistan.

3 Decree UP-3226 of the President of the Republic of Uzbekistan “On Major Ways to Lend Impetus to Agricultural Reforms” dated March 24, 2003; Decree UP-3342 of the President of the Republic of Uzbekistan “On Ideas for the Development of Farming, 2004-2006” dated October 27, 2003.

4 A shirkat (agricultural cooperative) is an independent entrepreneurial entity which has the rights of a legal entity, is based on shareholder principles, and is largely a family (collective) run voluntary association of citizens for the production of agricultural goods (Article 1 of Law 600-1 of the Republic of Uzbekistan “On the Agricultural Cooperative (Shirkat)” dated April 30, 1998.

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Ï Ð Î Â Å Ð Ê ÈS M E B U S I N E S S E N V I R O N M E N T

MAIN FINDINGS

Entrepreneurs lowered their assessment of the performance of central government authorities in 2003. Entrepreneurs are concerned that their opinions are not taken into consideration when decisions are made that directly influence their businesses.

Over 40 Decrees and Resolutions of the Cabinet of Ministers directly impacting SME operations were adopted in 2003.

Awareness of SMEs of the existence of the Department for Support and Protection of Small and Medium Enterprise of the Ministry of Justice is growing: the share of those aware in 2003 increased by one-third, reaching 81%; 57% of the appeals entrepreneurs made to the Department were successful.

68% of entrepreneurs anticipated the quality of the business environment to improve on the whole in 2004. Almost 80% of those surveyed said that, based on past experience, they would start their business again.

SMEs are actively joining business associations and organizations: in 2003 the share of SMEs that are members of associations grew to 68% (up from 51% in 2002). Entrepreneurs are willing to pay for quality information and consulting services.

Main Findings

Attitude Toward Uzbek Government Authorities

Business Environment in the Regions

Legal Awareness of Entrepreneurs

The Department for the Support and Protection

of Small and Medium Enterprise

Membership in Business and Professional Associations

Recommendations

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Attitude Toward Uzbek Government Authorities

Analysis of the results of the three annual surveys shows that entrepreneurs/representatives of small and medium businesses had a neutral attitude toward government authorities in 2001-2002, with no major changes observed in those two years. But in 2003, survey respondents said that government authorities hinder more than help business development.

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The results of the 2003 survey showed that respondents gave the lowest ratings to those authorities they come into direct contact with (customs authorities, Agency for Foreign Economic Relations, Public Prosecutor) in performing business activities. It should be pointed out that year in and year out entrepreneurs rate the work of strategically important bodies such as Oliy Majilis, the country’s legislative body, and the Cabinet of Ministers, the country’s central executive branch body, as mediocre.

Business Environment in the Regions

In 2003, as was the case in previous years, all aspects of how enterprises do business varied greatly from region to region. This once again confirms the important relationship between the business environment and the effectiveness of regional government authorities.

Unlike the deterioration in entrepreneurs’ attitudes toward the performance of central government authorities that occurred in 2003 (see Chart 5.1), entrepreneurs’ attitudes toward local government authorities improved in more than half the country’s regions.

It should be said that the job Uzbekistan’s local government authorities are doing gets a positive evaluation in terms of national level indicators, there are differences from oblast to oblast. In 2003 Tashkent (city), Samarkand and Djizzak Oblasts, and the Republic of Karakalpakstan experienced the most problems in terms of business environment. Analysis of the ratings entrepreneurs gave of the honesty of local officials also revealed substantial regional differences. On average, 41% of those surveyed agreed with the assertion that government officials in their region are honest and do not demand unofficial payments.

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On average about a third of the respondents around the country said they cannot always solve their business problems with local government officials.

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The survey also revealed that business development and attraction of investments correlate strongly with local government officials’ scrupulously and invariably following the laws and normative acts.

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SMEs were rather positive about the changes they foresaw in the business environment in their region over the next 12 months. In the great majority of oblasts, more than half of those surveyed anticipate improvement.

By and large the outlook is changing for the better throughout the country. Whereas in 2002 only 42% of respondents predicted improvement in the business environment, in 2003 68% did.

Analysis of respondents’ answers to this question revealed that entrepreneurs working in the agricultural sector have the most positive outlook.

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The positive outlook of Uzbek entrepreneurs is borne out by yet another survey result: the share of respondents who would start their business again, if they had to do it over, rose to 79% in 2003.


Entrepreneurs’ knowledge of legislation governing their operations increased significantly in 2003, compared with what it was in 2001 and 2002. Whereas in 2002 only 24% of respondents reported having a good knowledge of such legislation, in 2003 the share of respondents rating their knowledge as good increased to 46%.

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This increase in the level of legal awareness may be related to greater use by respondents of information in the mass media and other sources to keep track of the latest changes in legislation in 2003. The increase may also be due to entrepreneurs perceiving a need to use information in conducting their business affairs to monitor the latest changes in legislation. Over 40 Decrees and Resolutions of the Cabinet of Ministers directly impacting SME operations were adopted in 2003.

And yet, despite the increase in the use of all sources of information, entrepreneurs (64% of respondents) still consult friends and colleagues with great regularity to obtain information, and turn, least of all, to lawyers or use the ‘Pravo’ system (17% and 16%, respectively) for assistance, perhaps because those options are so costly.

The Department for the Support and Protection of Small and Medium Enterprise

The Department for the Support and Protection of Small and Medium Enterprise1 (hereinafter the Department) of the Ministry of Justice has been in operation for over 4 years.

Survey results indicate that awareness of the existence of the Department increased in 2003. However, the percent of those who consulted the Department remained unchanged (6%), although only 58% of respondents reported having no need to consult it.

1 The Department was created in accordance with Resolution 57 of the Cabinet of Ministers of the Republic of Uzbekistan “On the Small and Medium Enterprise Coordination Council” dated February 17, 2000.

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According to survey results, awareness of the existence of the Department increased steadily on the regional level in 2003 as well. And, likewise, compared with 2002 some increase was observable in the share of entrepreneurs who were successful in consulting the Department for assistance.

Membership in Business and Professional Associations

Changes in Uzbekistan’s legislation directly impacting business development are made by Decrees of the President and by Resolutions of the Government without provision for consulting representatives of business circles to discuss the changes beforehand. This practice is cause for concern among entrepreneurs who feel their views should be taken into consideration when such decisions are made.2

“Why aren’t sub-legal acts that directly influence the business environment widely discussed with those who will be directly affected by them?” Focus group participant

Entrepreneurs can succeed in getting to participate in the decision making process by joining business associations and other organizations.

The survey showed that the number of enterprises that are members of various business associations and professional organizations is growing from year to year: in the 2001 survey only 39% of the respondents were members of an association or organization, in 2002 51% were, and in 2003 the figure rose to 68%.

2 In 2003 over 40 Decrees of the President and Resolutions of the Cabinet of Ministers were adopted which directly impacted SME operations.

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Chart 5.16 indicates that the overwhelming majority of entrepreneurs were members of two business associations – the Chamber of Commodity Producers and Entrepreneurs (as of July 2004 the Chamber of Trade and Industry3) and the Association of Dekhan and Private Farmers. The reason for that is that membership in these organizations is mandatory and state promoted.4 Among the other associations, respondents indicated they were members of the Business Fund, the Association of Business Women, and other specialized professional organizations.

SMEs that are not members of a business association cited lack of practical membership benefits as the main reason for not joining. Each year this opinion is expressed by more and more respondents. Furthermore, one out of every six entrepreneurs is completely unaware of the existence of business/professional associations in Uzbekistan.

The survey finding that more and more respondents see no practical benefits from membership in business associations makes one wonder why entrepreneurs have that opinion.

Analysis revealed that in 2003 the share of enterprises using the services of associations decreased (except for protection of entrepreneurs’ rights and lobbying for their interests).

3 Decree of the President of the Republic of Uzbekistan dated July 7, 2004. 4 Pursuant to Law of the Republic of Uzbekistan “On the Chamber of Commodity Producers and Entrepreneurs” dated April 24, 1997..

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On the other hand, for each type of service there was an increase in the share of respondents ready to pay for those services, indicating that supply of those services is not able to keep up with the increase in demand for them. This may be because the services business associations provide may not be of high enough quality. And that in turn may be because participation in Uzbekistan’s main business associations is mandatory rather than market-driven.

RECOMMENDATIONS:

1. Adopt the practice of enacting changes in legislation governing business operations after such changes have been discussed with representatives of the business community – primarily through changes in the laws of the Republic of Uzbekistan.

2. Create a permanent voluntary nongovernmental business forum regularly bringing together representatives of Uzbekistan’s business circles, foreign investors, international financial institutions, and donor organizations to organize an ongoing constructive dialogue between the business community and the Government of Uzbekistan for the purpose of cooperatively developing recommendations for providing sustainable economic development in Uzbekistan. The forum could likewise serve as a useful tool for monitoring the progress of reforms in the areas of attraction of foreign investments and business development in Uzbekistan.

3. Have local government authorities share experiences about their efforts to create an optimum business environment.

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Ï Ð Î Â Å Ð Ê ÈR E G I S T R A T I O N

MAIN FINDINGS:

The new registration system introduced on October 1, 2003 is proving to be effective:

- the time the registration process takes has been reduced, on average, to 16 working days;

- the share of respondents having to resort to unofficial payments during the registration process has gone down to 8%.

At the same time, length of registration time varies widely from region to region, which may be an indication that there are problems with adopting the new system on the regional level.

Some entrepreneurs are forced to themselves conclude a number of procedures that, by law, should be performed by registering bodies.

Main Findings

Improvement of the “One Window” Registration System

Adoption of the “One Window” Registration System at the

Regional Level

Registration Costs

Recommendations

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Improvement of the “One Window” Registration System

Executing business registration procedures gives an enterprise the right to conduct business and confers upon it the obligations of a legal entity.

Recently, namely in the years 2001 and 2003, the Government conducted two reforms of the registration system. On October 1, 2001 registration authorities were created at the local administration level (Khokimiyat) and the so-called “One Window” registration system was introduced. October 1, 2003, registration authorities were reorganized into Inspectorates and it became possible for entrepreneurs to obtain under the “One Window” system, in parallel with the registration process, certain kinds of permits (see Annex 3).

Survey results of entrepreneurs who registered under the “One Window” system prior to October 1, 2003 and entrepreneurs who registered under the “One Window” system with Khokimiyat Inspectorates served as the basis for a comparative analysis of these two procedures.

Respondents throughout the Republic of Uzbekistan reported that registration under the “One Window” system in effect prior to October 1, 2003 on average took 18 working days, whereas registration under the “One Window” system at Khokimiyat inspectorates on average took 16 working days. Despite the fact that the actual duration of the registration process exceeds the legally mandated (14 and 7 days, respectively) duration, the survey found that duration of the registration process has improved.

“If you yourself don’t delay and if you get all the necessary documents ready, you’ll have no trouble getting registered in two weeks.”

“Business registration today is not an issue. Compared with what it was like just a few years ago, it’s become signifi-cantly easier.”

Focus group participants

It should also be pointed out that for enterprises registering with Khokimiyat inspectorates after October 1, 2003, the necessity of making unofficial payments dropped dramatically. This is a welcome trend that speaks well for the effectiveness of the new registration system.

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Nearly half of the enterprises surveyed registering after October 1, 2003 reported no difficulties in registering with Khokimiyat Inspectorates. Others for the most part reported registration is a lengthy process entailing a great amount of unnecessary documentation and governmental bureaucracy.

Adoption of the “One Window” Registration System at the Regional Level

The survey revealed that the average length of registration varies widely across the various regions of Uzbekistan. This finding may be an indication that there are problems locally with adopting the new system, which, in turn may be related to entrepreneurs’ lack of familiarity with the package of documents that must be prepared, as well as to abuses by individual government officials.

In view of the fact that the “One Window” registration system went into effect for Khokimiyat Inspectorates only as of October 1, 2003, the number of respondents that registered their businesses through the Inspectorates was not always sufficient for making regional comparisons. Registering authorities (Inspectorates) are reorganized structures that were created on the basis of former regional and city Khokimiyat registration authorities. Taking this into consideration, as well as the fact that the list of documents required for registration did not change materially under the new system, responses of respondents who registered under the “One Window” system in effect prior to October 1, 2003, as well as responses of those who registered with Inspectorates under the new system were used in making the regional comparison for the 2003 survey.

The existence of such great variation by region is evidence of insufficient control over adoption of the system at the regional level. It is cause for alarm that in certain regions the average length of time required for registration was greater in 2003 than in 2002.

Even though the “One Window” registration system was adopted October 1, 2001, the fact that 33% of those respondents who went into business in 2003 registered under the old system (formally in effect until October 1, 2001) – that is, obtained documents associated with registration and registered at various bodies on their own – is another indication there are difficulties with adopting the system.

Survey results also revealed that enterprises themselves sometimes had to not only register a document with the appropriate agency (rather than obtaining it from especially established inspectorates) but had to pay to have it issued as well. Thus, to cite an example, the permit for creating a seal and stamp should, according to legislation, be obtained by the inspectorate which in turn issues it to the entrepreneur.1 But 57% of the respondents who obtained that permit had to apply for it themselves at the Ministry of Internal Affairs and pay on average 6,300 Soum (6.30 USD), even though no fee of any kind for the permit is stipulated in legislation.

1 Paragraph 23 of Regulations “On State Registration Procedures for Registering Entrepreneurial Entities and Permits Documents”, Annex 1 to Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 20, 2003.

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As a result of this practice, actual duration of registration of enterprises is double that mandated by legislation, and SMEs consider the costs they incur a burden, often resorting to informal payments.

BOX 6.1

Issues concerning new “One-Window” SME registration procedures were discussed at a seminar held at the Ministry of Economy of Uzbekistan at the end of 2003.2 According to the press release, Uzbekistan’s Deputy Prime Minister Rustam Azimov was harshly critical of the performance of Registration Inspectorates in certain regions. According to Azimov, Inspectorates do not have the right not to register a small or medium business enterprise. In response to entrepreneurs’ complaints that unofficial payments are often demanded of them during the registration process, the Government plans to monitor selectively several business Registration Inspectorates in the regions for evidence of corruption by government officials. The seminar brought to light many unresolved problems regarding how Inspectorates interact with statistical authorities, the MIA, tax services and technical support organizations.

Registration Costs

More than 35% of respondents reported that registration costs incurred are a burden and unjustifiably high.

According to calculations based on current legislation (see Box 6.2), the cost of registration should not exceed 50,000 Soum (50 USD). But registration costs for 46% of enterprises that registered in 2003 exceeded that amount (between 50,001 and 300,000 Soum).

BOX 6.2

Pursuant to legislation, during registration an enterprise is required to pay a registration fee equal to five minimum wages3 (amounting to 27,200 Soum in 2003).4 Enterprises that registered before the new registration procedures went into effect had to pay two minimum wages (amounting to 10, 880 Soum) for assignment of a name to their firms. That payment was repealed by the Resolution5 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 29, 2003. In addition, an entrepreneur incurs the cost of creating his company’s seal and stamp, whose cost focus group participants estimated to be between 20,000 and 25,000 Soum.6 Thus, an enterprise should not have paid more than 50,000 to 60,000 Soum (50 – 60 USD) to register in 2003.

Comparison of the average cost of “One Window” registration in 2003 with that of 2002, shows that the cost increased somewhat. If entrepreneurs in 2002 on average spent on the order of 53,000 Soum, in 2003 the figure rose to 62,000 Soum. This may be due to an increase in the

2 Information obtained from article “SME Registration Inspectorates Come Under Criticism” published November 28, 2003 on UzReport.com.3 Note: The registration fee for insurance and auditing organizations, stock markets and markets is four minimum wages.4 One minimum wage in 2003 amounted to 5,440 Soum.5 Paragraph 15 of Regulations “On State Registration Procedures for Registering Entrepreneurial Entities and Permits Documents”, Annex 1 to Resolution 357 of

the Cabinet of Ministers of the Republic of Uzbekistan dated August 20, 2003. 6 Private printing companies make seals and stamps and therefore their prices are negotiable.

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minimum wage to which registration fees are pegged. In 2002, the minimum wage was 4,535 Soum, while in 2003 it was 5,440 Soum.

The survey also demonstrated that respondents’ registration costs varied significantly by region.

Even though the registration process has been simplified, SMEs must still of necessity make unofficial payments. The share of respondents that had to make unofficial payments during the registration process exceeded 30% in certain regions.

The preceding discussion supports the conclusion that the Government is continually working to make it easier for entrepreneurial entities to register and that its efforts to do so are bringing positive results. However, adoption at the regional level of innovative administrative technology applications is often frustrated by individual corrupt officials and by the low level of legal awareness of entrepreneurs themselves. The existence of such barriers makes going into business difficult and that in turn holds back the development of the economy as a whole.

BOX 6.3. REFORM OF THE REGISTRATION SYSTEM IN MEXICO.

In the early 1980s Mexico experienced an economic downturn due to cuts in investment in the country as a result of administrative procedures and market monopolization that led to excessive regulation. It was precisely at this time that the Government made the decision to simplify administrative procedures.

Mexico’s reform of administrative procedures went through a number of planned phases. Starting in 1995, the simplification program began to impact business registration specifically. The government took the following measures:

a “one window” business registration system was adopted. The system was subsequently adopted by all ministries and departments issuing various sorts of permits and approvals;

In 2002, an accelerated enterprise registration system was fully adopted. The basic idea of the system was to decrease the number of documents submitted to a registering authority by enterprises and

7 Because of the small number of enterprises that registered in 2002-2003, the data in all the charts for this set of enterprises should be considered merely illustrative.

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individual entrepreneurs whose activities would minimally negatively impact the consumer (a list of documents was published in the national newspaper). Whereas registration could take up to 100 days before the accelerated system was adopted, after its adoption enterprises and individual entrepreneurs could be registered in one day. (It should be noted that the system proved effective. In 2002 alone over 226,000 individual entrepreneurs and 1,400 SMEs were registered under the accelerated registration system);

The law “On Federal Administrative Procedures” was amended to introduce the principle of “consent by silence”, whereby an enterprise submitting documents for review shall be fully authorized to conduct business, unless a registering authority or authority issuing permits notifies it in writing of a negative decision within the legally stipulated time limit. It should be noted that this principle applies mainly to enterprises whose activities will have minimal negative consumer impact. Pursuant to the law, severe penalties are imposed on government officials failing to register or issue requisite permits within the allotted time. This measure has made it possible to decrease significantly intentional slowdowns on the part of agencies authorized to issue registrations and permits.

The Law of Mexico “On Federal Administrative Procedures” contains a provision whereby, in the event documents are lost, the registering authority or the authority issuing the requisite permit is required to notify the enterprise within the legislatively mandated time allotted for making decisions on registrations and issuance of permits.

RECOMMENDATIONS:

1. Implement registration and permit issuance procedures at the regional level in a clear-cut fashion.

2. Adopt in stages a SME registration system based on the “application principle.”

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Ï Ð Î Â Å Ð Ê ÈP E R M I T S

MAIN FINDINGS

In 2003, each enterprise completing registration had to obtain, on its own, an average of 3 permits before launching operations. Enterprises in business over a year had to obtain on average one additional permit each.

About one-third of respondents continue to describe the process of obtaining permits as quite complex and problematic.

The existing legal basis governing the issuance of permits consists of numerous disparate interagency administrative rulings and regulations, most of which have not been scrutinized, as required, by legal experts.

SMEs do not have the open access they need to the entire legal basis governing procedures for obtaining permits.

The large number of documents required, long waits to obtain permits, and red tape continue to be the main problems entrepreneurs encounter in the process of obtaining permits and approvals.

The share of respondents having to make unofficial payments when obtaining permits and approvals has risen: in 2002 the share was 17%, in 2003 it was 25%.

Main Findings

Uzbekistan’s Permit System

Obtaining Permits and Approvals in 2003

Time and Fees Required to Obtain Permits

Lack of Uniformity in the Legislative Basis

Unofficial Payments

Steps Taken By the Government to Simplify the Process of

Obtaining Permits

Expansion of the Practice of Obtaining Permits and Approvals

Under the “One Window” System

Adoption of the “Self-Certification” Principle in Obtaining Certain

Types of Permits and Approvals

Recommendations:


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Uzbekistan’s Permit System

Obtaining permits and approvals is a procedure required, as is registration, to start up operations.1 For example, if an entrepreneur wants to engage in wholesale trade, he must not only register his company but must also obtain a special permit to carry out that type of activity.

A permit, or certificate of authorization, is an official document issued by a government-sanctioned authority allowing a firm to engage in a specific type of activity.2

Obtaining Permits and Approvals in 2003

According to the survey, 86.2% of respondents that began operations in 2003 obtained permits and approvals. One-quarter of all SMEs in operation went through the procedure in 2003. One reason for that is that at present there is a very high number of permits and approvals in Uzbekistan, another is that permits are issued by various and sundry state administrative bodies. Even an analysis of national legislation failed to turn up the exact number of permits.

SMEs starting operations in 2003 had to obtain on average 3 permits and approvals.

The process is a problem as well for enterprises that registered some time ago, and that at the time of the survey had been in operation for over a year: in 2003 they obtained on average one permit.

Time and Fees Required to Obtain Permits

As a rule, SMEs obtain all required permits and approvals immediately upon registering their enterprises so as to be able to begin business activities as quickly as possible.

Analysis reveals large variations in the time it takes to obtain a permit – from 3 to 38 working days. The chart below tracks the average number of days and costs enterprises spent in obtaining the most common permits and approvals.

1 The survey revealed that enterprises that registered in 2003 had to obtain permits and approvals on their own which a registering body is legislatively required to obtain for them (for details see Registration Chapter). Therefore analysis in the sequel ignored all such permits.

2 There is no one single legal definition of “permit” or “certificate of authorization” in Uzbekistan’s legislation. And yet the term is used in various legal and regulatory acts. The definition given was drafted on the basis of an analysis of legislative acts of the Republic of Uzbekistan that govern such questions, for example, Resolution 407 of the Cabinet of Ministers “On Measures for Streamlining Registration and Trading Operations of Legal Entities and Natural Persons” dated November 26, 2002, and The City Planning Codex of the Republic of Uzbekistan dated April 4, 2002.

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Considering that entrepreneurs often have to obtain permits and approvals in a certain order, the total amount of time they spend on all permit procedures can substantially increase the time it takes them to go into business. Lengthy document processing times, which created difficulties for one-quarter of respondents obtaining permits or approvals in 2003, became more acute in 2003 as compared to 2002.

In this connection, 27% of respondents going through permit procedures in 2003 reported that payments made in obtaining permits or approvals are a burden, while another 11% said the payments are unjustifiably high.

Besides the wait and the cost involved in obtaining permits and approvals, there is another whole set of permit-related problems that entrepreneurs expressed concern about once again in 2003. The large number of documents required and red tape were the most common concerns. An analysis of existing legislation reveals the reasons for this.

Lack of Uniformity in the Legislative Basis

TToday’s most pressing problem continues to be the lack of systematization in the regulatory basis of permits and approvals. The legal base still consists of a large number of completely disparate interagency administrative rulings and regulations, most of which have not been scrutinized, as required, by legal experts and are difficult for most entrepreneurs to access.

Often, each individual administrative body independently establishes procedures for issuing permits and approvals to entrepreneurs as well as sets time limits for their renewal. Entrepreneurs themselves, as a rule, see little if any difference between one type of permit or approval and another, they frequently do not understand the procedures for issuing permits and approvals, or the terms and conditions of, and the need for, obtaining them.

The existing problem is due largely to the lack of a legal definition of concepts such as “permit”, “certificate of authorization”, “approval”. Stipulating, through legislation, definitions that do not conflict with other normative acts would lay the foundation for the beginning of a solution to the abovementioned problems.

In addition, these problems are exacerbated by the absence of a clear-cut demarcation between an instrument such as a permit or approval and other state instruments employed to control


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entrepreneurial activity. The absence of such a demarcation is particularly telling in the case of permits and licensing.

The lack of transparent legislation governing permits and approvals, as well as the large number of agencies issuing permits, result in additional administrative barriers which have a negative impact on the development of Uzbekistan’s business environment. That is precisely why there is a need not only to unify legislation in this sphere but also to create a ‘one window’ mechanism for obtaining permits and approvals, i.e., through one specially established state body.

BOX 7.1

As an example of a normative act that does not spell out all the details for obtaining permits, one can cite the “Regulations3 for Registering and Conducting Retail and Wholesale Trade”. They do not provide:

a time frame for issuing a certificate of authorization once all necessary documentation has been submitted (specifying such a time frame is vital for any effective mechanism for interaction between an enterprise and a state administrative body;

an exhaustive list of the grounds for denying an application for a certificate of authorization, nor a mechanism for returning documentation (an exhaustive list prevents an agency from refusing to issue an authorization based on subjective criteria, as only listed grounds for rejection are valid).

Unofficial Payments

Compared with 2002, 2003 witnessed a steep increase in the number of respondents who were forced to make unofficial payments in the process of obtaining permits and approvals – from 17% to 25%. This trend is tracked by sector in the Chart 7.4.

Chart 7.5 provides a breakdown of the differences in frequency of unofficial payments by region.

3 Resolution 407 of the Cabinet of Ministers of the Republic of Uzbekistan dated November 26, 2002.

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Steps Taken By the Government to Simplify the Process of Obtaining Permits

The survey showed that obtaining permits and approvals was less problematic in 2003 than 2002. Thus, for example, the large number of documents and lack of access to information were considered less problematic by entrepreneurs (see Chart 7.3). Measures4 the government adopted in 2003 were a factor serving to render these problems less acute. As of October 1, 2003 a “one window” system for obtaining permits and approvals at special Khokimiyat Inspectorates was adopted in order to simplify these procedures. In this connection, the system can be used both by entrepreneurs who are going into business – in which case obtaining the necessary permits parallels the process of state registration of a firm – and by firms that are already registered but whose operations require a certain permit or approval.

Focus group participants made it clear that the new system, compared with the old, has a number of advantages. Today, under the new procedures:

instead of spending time on permit procedures, entrepreneurs obtain documents, already filled out, at an Inspectorate after a waiting period that has become shorter;

instead of dealing with a great number of agencies, entrepreneurs deal with only one, thereby reducing possibilities for unofficial payments.

“I don’t first have to register the business and then still have to go around to a lot of government departments to get their permission to start construction – now an official does all that for me.”

Focus group participant

At the same time, it must be pointed out that the number of types of permits and approvals that can be obtained at one window registration offices is limited to only 4: (1) construction of facilities; (2) reconfiguration of facilities to change the purpose they are used for, and renovation of facilities; (3) conversion of residential buildings to nonresidential category buildings; (4) construction of facilities on plots of land acquired at auction.

In addition, as was brought out in focus group discussions, in practice entrepreneurs come up against the fact that the time it takes to obtain a certificate of authorization under the new system exceeds the time provided for in legislation, and they have to resort to unofficial payments. Chart 7.1 illustrates the experience of a Tashkent entrepreneur in obtaining a permit to convert a residential building into a nonresidential building under the new system.

4 Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 20, 2003.


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In the opinion of focus group participants, such examples are related to the newness of the system, to difficulties in adopting the system at the local level, to abuses on the part of certain officials, and to deficiencies in certain aspects of the normative basis for permits.

Expansion of the Practice of Obtaining Permits and Approvals Under the “One Window” System

As already noted above, an Inspectorate is authorized to obtain permits for an entrepreneur, but only for 4 types of permits. This leaves a great number of other permits and approvals – for the right to use a plot of land, obtaining public health certificates, determinations as to compliance with fire safety rules, etc. – that an entrepreneur must obtain on his own. This can create additional barriers for an entrepreneur going into business. It is advisable that the process of obtaining certain permits be analyzed with a view to the possibility of including them in the “one window” system.

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In addition, the scope of the new “one window” system does not always cover all procedures an applicant goes through to obtain the four types of permits mentioned above. For example, in obtaining permits and approvals for construction of new facilities an entrepreneur must deal on his own with a whole series of authorities not included in the “one window” system (see Chart 7.2).

Adoption of the “Self-Certification” Principle in Obtaining Certain Types of Permits and Approvals

Entrepreneurs in many countries make extensive use of the “self-certification” system for administrative matters, particularly for procedures to obtain certain permits. Self-certification is a method whereby an entrepreneur gives his personal word in certifying that all documents and all future actions which he will undertake are in accordance with legislative norms. In this connection, an entrepreneur must duly abide by the self-certification procedure since he knows that a state agency may, and in all likelihood will, check whether his activities or actions are in compliance with legislation. Furthermore, the entrepreneur must bear in mind that in the event a violation is found, the responsibility he will bear will be all the greater. In adopting the self-certification system, the state is opting to verify the factual reliability of information provided, thus expressing a certain trust in the entrepreneur.


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BOX 7.2 REFORM OF ITALY’S PERMIT SYSTEM

Self-certification was adopted in Italy due to a sharp increase in procedures for obtaining various kinds of permits. With respect to construction permits, an administrative agency must ascertain that the self-certification process is trustworthy. If self-certification information provided to an administrative agency is untrustworthy, the agency can destroy the building under construction.

In less than 2 years the increase in trust in entrepreneurs made it possible to reduce the time involved in obtaining construction permits to a matter of hours, whereas before the adoption of the self-certification system it lasted for months. In the period from 1996 through 2000 the number of approvals (signatures) obtained in all the necessary agencies for construction permits dropped from 38.2 to 5.9 million per year. To further improve the self-certification system, the Ministry of State Management of Italy created a special department to track the quality of the adoption and work of the self-certification system, and to make appropriate recommendations to local authorities for improvement of the system.

What is more, the self-certification mechanism may foster the future development of a service sector of private companies specializing in expert examination of documents and issuance of relevant determinations. For the control of such matters in Italy, a law was adopted in which consolidated text on administrative documentation was included. The text incorporated all the rules for maintaining administrative documents (certificates, electronic documents, electronic signatures, electronic information exchange), which has made it possible to lay the groundwork for further simplification of administrative procedures for accepting documents and issuing relevant permits, for example, documents in electronic format.

RECOMMENDATIONS:

1. Systematize the existing legislative base governing the issuance of permits and approvals, including providing precise definitions of terms and concepts, and systematize all existing permits and approvals into one single list.

2. Facilitate free access to information on registration and on obtaining permits, and promote transparency of procedures (for example, prepare a standard kit of documents).

3. Expand the list of types of permits issued under the “one window” system.

4. Gradually phase-in a method of issuing particular permits and approvals on the basis of the “application” principle, in cases where requirements for obtaining a permit are sufficiently simple and the share of enterprises requiring the permit is sufficiently large.

5. Conduct an analysis, for purposes of further reducing the number of permits, of the advisability of retaining or not retaining various permits and approvals.

6. Develop, for inclusion in appropriate normative acts, precise regulations for issuing permits and approvals, which: indicate time limits for document review, specify the individual officials responsible for issuing concrete permits and approvals in each appropriate agency or department, and provide exhaustive lists of documents to be submitted as well as an exhaustive list of valid reasons for denial of a permit application.

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Ï Ð Î Â Å Ð Ê ÈT A X A T I O N

MAIN FINDINGS

SMEs continue to view taxation as the most problematic of all the processes they deal with in the course of their operations.

Over half of the respondents switched to the simplified taxation system after its adoption. The tax burden under the simplified system is lower than that under the general system: on average 17.6% and 19.7%, respectively.

Tax legislation was unstable in 2003: over 40 normative acts were adopted introducing over 90 changes in tax legislation. This was a major problem for 57% of respondents.

The existing tax system forces entrepreneurs “to go into the shadows”. One-third of the respondents who believe that SMEs conceal part of their business turnover indicated that over 20% of profits are hidden from taxation.

Uzbekistan’s taxation legislation consists of the Tax Code, laws, Decrees of the President, resolutions of the Cabinet of Ministers, and various normative acts of the State Tax Committee. In accordance with the Law of the Republic of Uzbekistan “On the State Tax Service” (amended) dated August 29, 1997, the State Tax Service consists of the State Tax Committee of the Republic of Uzbekistan, state tax departments of the Republic of Karakalpakstan, of Tashkent (city and oblast), as well as regional and city state tax inspectorates, and regional inspectorates in cities.

The State Tax Committee of the Republic of Uzbekistan is the central body ensuring that state tax policy is implemented and that the economic interests and property rights of the state are protected. Its oblast departments are the intermediate link in the tax administration system and act as an interface between central tax departments and regional level tax inspectorates. STI are grassroots tax inspectorates that constitute the backbone of Uzbekistan’s tax system. They interact directly with the taxpayers in carrying out their duties.

Main Findings

Taxation Difficulties

The Tax Burden

Payments to Non-Budgetary Funds

Simplified Tax System

Instability of Tax Legislation

Problems Related to Tax Charges and Paying Taxes

Concealment of Income From Taxation

Shared Responsibility

Recommendations

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Taxation Difficulties

The survey demonstrated that taxation continues to be the most problematic process SMEs encounter (See Chart 2.2 in the Executive Summary). High tax rates, the large number of taxes, and unstable tax legislation continue to be the key problems SMEs have.

The Tax Burden

The Government is taking measures to reduce the tax burden on firms – as of January 1, 2003 it reduced the tax rate on profits of legal entities from 24%1 to 20%,2 and on January 1, 2004 to 18%.3

Survey results indicate that in 2003 the average SME tax burden was 19% of gross revenue.

The survey showed that there are still marked regional differences in the tax burden: the highest being in Bukhara oblast (23%) and city of Tashkent (22%), the lowest in Fergana oblast (12%). However, this difference has decreased compared to 2001-2002 data.

1 Resolution 490 of the Cabinet of Ministers of the Republic of Uzbekistan dated December 31, 2001.2 Resolution 455 of the Cabinet of Ministers of the Republic of Uzbekistan dated December 30, 2002.3 Resolution 567 of the Cabinet of Ministers of the Republic of Uzbekistan dated December 25, 2003.

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This regional difference may be due to various factors. First, the tax burden varies by economic sector – being lower in industry, retail trade, and public catering than in wholesale trade and construction, while the share of firms active in each sector varies by region.

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According to focus group participants, large regional differences can be accounted for by the various unofficial transfers local authorities exact from entrepreneurs. For the most part, such transfers are registered as contributions to funds of various kinds and as assistance to welfare projects (see Annex 4).

“Our enterprise has branches in many oblasts of the Republic. And in every oblast the Governor forces us to contribute to some welfare project.”

“A government official from Tashkent recently visited our oblast. So he demands to be given a list of all the financially sound enterprises and then assigns each of them a street or kindergarten or school or clinic for them to repair and help out with their own money.”

“All of this is presented to look as though it’s our obligation to help. But then you have to wonder where our taxes are going. How come we still have to pay taxes?”


Payments to Non-Budgetary Funds

As pointed out in IFC’s 2002 report, in Uzbekistan there are, in addition to taxes, mandatory payments to various types of non-budgetary funds (Pension Fund, Labor Fund, Council of Federation of Trade Unions, Road Fund). It is mandatory for all enterprises – both those that pay taxes under the general system as well as those that have switched to the simplified system – to make payments to these funds. Depending on how they are designated, payments are made from an enterprise’s turnover or from its employee wages fund (see Annex 5).

Such payments have a major dampening effect on enterprise activities. Over and above their material costs, SMEs are obliged to make non-budgetary payments and regularly submit accounts of those payments, which, in the opinion of focus group participants, is very problematic for small enterprises which, as a rule, do not have highly trained accountants on their staff (see State Control chapter).

Simplified Tax System

At present, enterprises using the general tax system are obliged to pay a large number of different taxes and other mandatory allotments, totaling as many as 17 (see Annex 6). There are separate procedures for each allotment and payment is governed by not only by the Tax Code, but also by a large number of additional normative acts.

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A simplified tax system for small enterprises was adopted in Uzbekistan in 1998 to simplify tax accounting. It gave SMEs the option of paying a single tax instead of paying a multitude of statewide taxes and local taxes and fees. In 1999 agricultural cooperatives (shirkats), private farms, agro-firms, and other agricultural producers started paying a single land tax instead of a multitude of national and local taxes and fees.

According to the survey, these innovations have proven effective: each passing year sees an increase in the share of SMEs in every economic sector paying taxes under the simplified system.

This trend is due to the reduction in the tax burden. According to survey data, the tax burden of enterprises paying taxes under the simplified system averages 17.6% of gross receipts, whereas for enterprises paying under the general system it is 19.7%. This difference is particularly telling in the case of construction enterprises (17% and 26%, respectively).

The fact that there has been some decrease in the share of SMEs in the sphere of trade and public catering that pay taxes under the simplified system may be attributable to the fact that a tax on SME imputed income,4 calculated on floor space rather than actual profitability, was introduced in mid-2002. To avoid this tax many SMEs in these sectors switched back to the general system.

4 Decree of the President of the Republic of Uzbekistan UP-3076 dated May 20, 2002 and Resolution 249 of the Cabinet of Ministers of the Republic of Uzbekistan dated July 12, 2002.

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“The tax did not take into consideration whether you were working or had any customers or not or were out of com-mission for a month.”

“Many small café and cafeteria entrepreneurs started inflating their staff, registering new employees, anything to get out of the small business category the imputed tax targets.”


On January 1, 2004 the Government expanded the list of enterprises having the right to switch to the simplified tax system.5 Enterprises with as many as 100 employees in certain industrial sectors may make the switch (see Annex 2 for further details on classification of enterprises as small businesses). At the same time that the list was expanded, unified tax rates were increased for certain types of enterprises (see Table 8.1).

TABLE 8.1 RATES FOR SINGLE TAX AS A PERCENTAGE OF VOLUME OF SALES (OF GOODS AND SERVICES)6

TYPES OF ENTERPRISE ACTIVITY 20027 20038

Purchasing, supply-sales enterprises, brokerage firms (as percentage of gross income) 25% 30%

Notaries engaged in private practice 25% 50%

Enterprises obtaining income from winnings from running lotteries, auctions, gambling houses, and organizations running major entertainment events involving legal entities and individuals licensed to engage in concert tour activities9

25% 35%

Agricultural enterprises except agricultural producers paying single land tax 5% 6%

Enterprises in other economic sectors 10% 12%

Instability of Tax Legislation

For 57% of those surveyed, the frequent changes in tax legislation in 2003 continued to be an obstacle to business development. In 2003 over 40 normative acts were adopted which variously revised and expanded tax legislation in effect, and new normative acts were adopted which introduced over 90 changes to tax legislation. Specifically:

rates and procedures for paying taxes, fees and other mandatory budget payments were changed;

procedures for granting privileges to certain categories of taxpayers were changed;

tax calculation, tax payment, and other mandatory budget payment procedures were modified for some categories of taxpayers;

new taxes as well as exemptions from some taxes for certain taxpaying entities were introduced, etc.

Thus, Resolution 455 of the Cabinet of Ministers “On Forecasting the Basic Macroeconomic Indicators and Parameters of the State Budget of the Republic of Uzbekistan for the Year 2003” dated December 30, 2002 alone introduced over 60 changes in tax legislation.

5 Decree of the President of the Republic of Uzbekistan UP-3305 dated August 30, 2003 and Resolution 439 of the Cabinet of Ministers of the Republic of Uzbekistan dated October 11, 2003.

6 For leasing companies, as a percentage of lessor income.7 Annex 7 to Resolution 490 of the Cabinet of Ministers of the Republic of Uzbekistan dated December 31, 2001.8 Annex 6 to Resolution 455 of the Cabinet of Ministers of the Republic of Uzbekistan dated December 30, 2002.9 In 2003 brokerage activities and activities related to running lotteries, sweepstakes, and other games of chance ceased being subject to payment of the unified tax,

and major entertainment events were separated out from notaries.

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BOX 8.1.

Various sorts of limits provide stability for tax legislation in different countries. For example, in Kazakhstan, the tax system, tax payment mechanism, and tax rates are governed by the Tax Code. No change of any kind can be made to the Tax Code without a decision by a session of Parliament. The following norms make it possible to avoid frequent amendments and to provide taxpayers time to become familiar with amendments:

In the event of a conflict between the Tax Code and other legislative acts, for taxation purposes the Tax Code takes precedence. It is prohibited to put in the Tax Code norms governing tax relations, except as provided for by the Code;10

Legislative acts that revise and expand the Tax Code, establish new taxes and other mandatory budget payments, change tax rates and the taxation basis, may be adopted no later than December 1 of the current year and can be put into effect no earlier than January 1 of the year following the year adopted.11

Thus, legislation provides a period of at least one month for firms to adjust their activities to changes in tax terms and conditions.

Problems Related to Tax Charges and Paying Taxes

Procedures in effect today for tax charges and paying taxes, according to respondents, do not always consider the interests of firms. To be more specific, mandatory prepayment of certain taxes (legal entity12 income tax (profit tax), property13 tax, improvements tax, and social infrastructure development14 tax) diverts the available monetary resources of enterprises.

In addition, under Uzbek tax legislation now in effect the use of accelerated depreciation is permitted only for leased equipment. At the same time, the survey revealed that the share of SMEs acquiring fixed assets through leasing is negligible (around 1%). Accelerated depreciation privileges, however, do not apply to equipment acquired with one’s own resources or on credit.

According to the survey, frequent changes in tax legislation and a nontransparent legislative base (whereby each tax payment is governed by a large number of normative acts in addition to the Tax Code) create serious difficulties for SMEs.

BOX 8.2.

Taxation of micro-firms and small enterprises engaging in retail trade provides the most illustrative and striking example of frequent changes in tax legislation. For such entities:

the gross income tax was operative until July 2002;15

the gross income tax was replaced by the imputed income tax as of July 2002;16

the gross income tax was reinstated as of July 2003.17

10 Paragraph 4 of Article 2 of the Tax Code of the Republic of Kazakhstan.11 Paragraph 2 of Article 3 of the Tax Code of the Republic of Kazakhstan.12 Instructions for Procedures for Computation and Payment of Income (Profit) Tax by Legal Entities (revised), approved by Resolution 15 of the Ministry of Finance

and Resolution 2002-12 of the STC dated January 14, 2002.13 Instructions for Procedures for Computation and Payment of Property Tax to the Budget by Legal Entities, approved by Resolution 25 of the Ministry of Finance

and Resolution 2002-13 of the STC dated January 22, 2002.14 Instructions for Procedures for Computation and Payment of Landscaping and Social Infrastructure Development Tax to the Budget, approved by Resolution 9 of

the Ministry of Finance and Resolution 2002-6 of the STC dated January 14, 2002.15 Enacted by Resolution 153 of the Cabinet of Ministers of the Republic of Uzbekistan dated October 4, 1998.16 Enacted by Decree UP-3076 of the President of the Republic of Uzbekistan dated May 20, 2002, and Resolution 249 of the Cabinet of Ministers of the Republic

of Uzbekistan dated July 12, 2002.17 Enacted by Decree UP-3270 of the President of the Republic of Uzbekistan dated June 30, 2003, and Resolution 300 of the Cabinet of Ministers of the Republic

of Uzbekistan dated July 2, 2003.

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This problem is especially pressing for small enterprises that are unable to maintain a staff of highly skilled bookkeepers and lawyers. As was the case last year, focus group participants said that it is virtually impossible to obtain answers from state agencies they applied to for explanations. As a result of the non-transparency and inconsistency of the legislative basis, tax authorities, when conducting tax inspections, often interpret legislation to their own advantage to maximize the taxes and fees they collect.

“My accountant isn’t certain that all his bookkeeping entries were correct and that he did the taxes correctly – legislation changes so often that new rules apply to every transaction.”

“The tax inspectors came to my place. At that point I was in a situation where I wasn’t sure if I had kept proper account of all expenditures and calculated the taxes correctly. I was afraid I might have made a mistake and would be fined. So I myself was there for the inspection and in talking with the inspector tried to get him to clarify the questions I had. And can you believe it? He did not know the correct way to compute these things and wouldn’t say the first thing in response to my questions.”


Concealment of Income From Taxation

Because of all of the factors enumerated above, a significant share of enterprises try to conceal part of their income for tax purposes. Respondents are reluctant to answer questions that might allude to illegal activities. The survey asked that they answer this question: “Please estimate, given today’s business conditions, the share of turnover that enterprises similar to yours concealed from taxes in 2003.” Only half of respondents claimed that they do not conceal income, 29% refused to answer, and one-fifth said that tax evasion does occur – 35% believe that SMEs conceal up to 20% of their revenue from taxation.

In the opinion of focus group participants, these figures are too low, and in practice every entrepreneur cheats on a part of his receipts, bypassing standard banking channels, and often official accounting statements do not reflect even half of actual revenues.

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“I’m willing to do an honest job. But in these conditions I don’t even cover my expenses. So I’m forced to cheat and don’t put down part of my revenue on paper.”

“All enterprises try to show a loss or minimum profit in their monthly financial statements, when in actual fact their receipts may be in the millions of Soum.”


According to entrepreneurs, the existing tax system is the reason why they do not reflect their revenues and why they conceal income from taxation.

BOX 8.3

According to data provided by the Uzbek National Information Agency18 (UzA), more than 12,000 administrative actions were brought against violators of tax and foreign currency legislation in Uzbekistan in 2003… In the course of investigative operations more than 200 fictitious firms were uncovered which had concealed over 100 billion Soum in trade turnover… About 4000 violations linked to goods illegally imported into the country and traded on the domestic market were discovered. As a result, 4.14 billion Soum worth of goods and materials were confiscated from violators. In addition, about a thousand unregistered underground shops were shut down…

Shared Responsibility

Entrepreneurs acknowledged in focus groups that taxes should be paid but at the same time there is no counterpart responsibility at all on the part of the state for the end use of the monies it collects. Entrepreneurs believe that the state must assume obligations to stabilize the tax regime, simplify the system of calculating taxes, and provide transparency as to how the revenues collected are spent. According to an analysis done by the World Bank,19 a very large set of economic, financial, and socio-demographic indicators is not made public in Uzbekistan at the present time. In the World Bank’s estimation, the existing level of restrictiveness is not compatible with the development of a market economy or with quality government rule. Conducting regular on-site seminars and roundtables on taxation for entrepreneurs will help promote the sharing of responsibility. Broad dissemination by the media of detailed information about how collected revenues are spent will also contribute in that respect.

“The state has to have respect for us and interact with us according to rules that have been established once and for all and that everybody can understand. But how can you do an honest job when the state is forever diddling with the rules?”

“The state takes a ‘gimme gimme’ approach… But where does the money we pay go? Nobody knows. But in our schools everything costs money, and in the hospital you have to buy your own medicine. Where are the taxes I pay going? I have to find out.”


18 National Information Agency of Uzbekistan.19 World Bank Report 25625-U3 “Republic of Uzbekistan. Country Economic Memorandum” dated April 30, 2003.

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Thus, high taxes (including various fees charged by local authorities) and the non-transparency and inconsistency of tax legislation constantly in flux are the main difficulties with the taxation process. As a result of these difficulties, many SMEs leave revenues out of financial statements and conceal income from taxation. The bottom line is that the budget is not receiving all the taxes and fees it should. That hinders the establishment of good working relationships between authorities and small businesses because the latter are forced to violate existing legislation.

RECOMMENDATIONS:

1. Promote sharing of responsibility between SMEs and tax authorities by conducting roundtables and seminars, distributing information about taxes collected and how taxes are spent.

2. Guarantee entrepreneurs protection against adverse changes in the tax regime during the period they are launching their businesses (specifically, amend article 16 of the Law “On Guarantees of Freedom of Entrepreneurial Activities” to provide a precise definition of the criteria for linking changes in the tax system and tax rates to indexation).

3. Permit changes in the tax system to come into force only at the beginning of the tax year while maintaining a mandatory time limit (at least 3 months) between their adoption and their entry into force.

4. Allow borrowers to deduct interest paid on loans (regardless of time allotted for repayment) and accelerated depreciation from their gross income when calculating their taxes.

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MAIN FINDINGS

In 2003 the average number of inspections per SME dropped significantly to 1.9 (down from 4.2 in 2002 and 6.2 in 2001) while the “time tax”1 dropped on average to 4.4 working days (down from 8.5 days in 2002 and 13.5 days in 2001).

The procedures and principles for selection of enterprises for inspections as well as inspection regulations and parameters still lack transparency, as noted by both entrepreneurs and representatives of a number of controlling agencies.

The share of entrepreneurs with an adequate grasp of legislation governing inspections rose significantly in 2003, but that share is still not high enough.

Inspections Registration Books, more widely disseminated in 2003, were in the possession of 88% of those surveyed.

Controlling agencies are vested with excessive powers which deprive or severely limit the rights of entrepreneurs to carry out normal business activities.

Small enterprises spend a significant amount of time submitting reports and statements to government agencies and to banks performing controlling functions. Micro-firms and small enterprises paying taxes under the simplified system must submit up to 174 documents a year.

I N S P E C T I O N S

1 A relative notion referring to time workers spend on inspections.

Main Findings:

General Trends


Unofficial Payments

SME Reporting System

Recommendations

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General Trends

The most positive changes in procedures affecting SMEs revealed by the 2003 survey pertained to inspections. The number of enterprises undergoing no inspections in 2003 went up by a factor of 3.3, with over half of surveyed firms undergoing no inspections. On average, each firm underwent 1.9 inspections which took up 4.4 working days and kept 1.9 employees from doing their regular work, as compared with 4.2 inspections and 8.5 working days and 1.8 employees in 2002.

As in 2002, trade and industrial enterprises were inspected more often than firms in other economic sectors.

Analysis of the average number of inspections and the “time tax” broken down by region and economic sector show a similar downward trend. However, regional differences for these indicators persist: ranging from less than one inspection in the Djizzak region to somewhat over three in the city of Tashkent, and from 2.4 days in the Bukhara and Djizzak regions to nearly 8 in the Samarkand oblast.

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If inspections are looked at in terms of inspection bodies, one can see that the overall drop in inspections is due to the fact that the leaders in this sphere - tax, fire, and SES inspectorates - have carried out fewer inspections over the last three years.

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But, on the other hand, the number of SME inspections conducted by the Public Prosecutor’s Office did not decrease, and as a result of that the Public Prosecutor’s share of the grand total of all inspections conducted increased from 5% in 2002 to 10% in 2003.

“In the early 90s the tax inspectors were ‘throwing their weight around’, in the mid- to late- 90s it was the same with the Ministry of Internal Affairs, a couple of years ago the Public Prosecutor’s Office got its turn...”


All of the indicators cited above are the outcome of a whole series of factors. In particular, the Government of Uzbekistan is exerting considerable effort to reduce the number of inspections of entrepreneurial enterprises by inspection bodies. Here are just a few examples.

Upon the recommendation of the Ministry of Justice, one of the internal regulations of the State Committee of the Republic of Uzbekistan on Demonopolization and the Development of Competition was rescinded. These regulations had given the Committee the right to “monitor” implementation of normative acts concerning the protection of consumer rights and advertising, which for entrepreneurs has essentially amounted to an additional type of inspection. Following a decision of the Inspections Coordination Council,2 producers of agricultural products3 meeting raw cotton purchase quotas on time are exempt from standard inspections4 for a one-year period. Each year the Council reduces the number of enterprises for which complex inspections are scheduled.

“As a tax inspectorate employee, I am able to see how determinedly the Inspections Coordination Council is cutting back the number of enterprises listed on the Schedule for Firms to be Inspected, so that each year the number is about 10% fewer than the year before, even though the number of the country’s firms is growing.”


On the other hand, with the creation of the Tax and Currency Crimes Department within the Public Prosecutor’s Office,5 the latter’s role has been significantly enhanced in matters relating to control of the country’s enterprises’ financial management activities. In specific instances, it can conduct inspections without the consent of the Inspections Coordination Council.


Enhanced legal awareness on the part of entrepreneurs can be cited as one of the factors contributing to the decrease in the number of inspections. It makes it possible both to prevent unsanctioned inspections as well as to protect entrepreneurs during the inspection process.

According to survey results, the share of respondents unfamiliar with legislation governing inspections dropped from 14% to 5% while the share of respondents with “adequate knowledge” of legislation went up from 30% to 51%.

2 Minutes No 2 of meeting of the Inspections Coordination Council dated May 3, 2003.3 This category accounts for the majority (56.5%) of 2003 survey participants. 4 Information on the kinds of inspections is provided in Annex 7.5 Resolution 415 of the Cabinet of Ministers of the Republic of Uzbekistan dated November 28, 2002.

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As noted in previous reports, the Inspections Registration Book6 (IRB), introduced in Uzbekistan in 2001, has become an effective tool for controlling the frequency of inspections. Results of the 2003 survey show the share of entrepreneurs in possession of an IRB has risen to 88% (up from 86% in 2002 and 58% in 2001). In comparison with 2002, entries are being made in IRBs with noticeably greater frequency, however there are still cases where inspectors do not abide by requirements set forth in regulations pertaining to IRB entries.

Increased legal awareness is likewise borne out by increased confidence of entrepreneurs in the effectiveness and usefulness of IRBs, not only as a means of protection against illegal actions by inspection bodies, but also as an effective way to reduce the number of inspections. Thus, in answering a question about ways to reduce the number of inspections, 45% of the respondents listed using the IRB. Another manifestation of the growth of legal awareness among entrepreneurs is that a significant percentage of those surveyed consider improvement of legislation governing inspections an effective means of reducing the number of inspections.

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Nonetheless, notwithstanding the fact that legal awareness has increased, the principles regarding the purposes and conduct of inspections are still not transparent to entrepreneurs. During the survey a number of focus groups attended by both entrepreneurs and representatives of inspection bodies met to discuss inspection features designated by respondents as poorly or inadequately understood. To be specific, entrepreneurs said that the least transparent features of inspections are the principles pertaining to the purposes of inspections, which enterprises are selected for inspection, the criteria by which they are selected, and how the parameters of the scope of an inspection are determined.

“I am conscientious about paying my taxes but for some reason I get inspected three and four times a year but my neighbor who has a store one street over from here hasn’t been inspected for the last three years.”


Representatives of fire and SES inspectorates pointed out during a focus group discussion that in order to resolve this issue, the purpose of the inspections they conduct needs to be geared to risk assessment of business activities and to how those risks impact public health and safety issues. Development and adoption of such a system would make their inspections and public health and public safety protection significantly more effective.

BOX 9.1. REFORM OF LATVIA’S INSPECTION SYSTEM

Comprehensive reform of Latvia’s control system was begun in 1999 as part of a broader program of eliminating administrative barriers in order to attract investment to Latvia. Prior to the reform, as was the case in many other countries during the transition period, there were problems with cumbersome and needless visits by inspectors, lack of access to information about procedures, and disregard for “client” needs. All of which, basically, involved failures to interpret and implement laws and normative acts properly, absence of reliable and expeditious appeals mechanisms, insufficient information exchange or lack theirof among government offices and between state and private sectors, as well.

A study the World Bank conducted at the end of 1998 revealed that the basic complaint Latvian entrepreneurs had was that despite the enactment of adequate legislation, instances of noncompliance with it were impeding enterprises from conducting their activities normally. In many cases, police and bureaucratic styles of management continued to predominate in government offices (including those exercising inspection functions). Furthermore, the concept that an enterprise that complies with government established requirements for safeguarding the public’s well-being is a “client” who deserves its encouragement and support was nearly or completed nonexistent.

The study also showed that the majority of inspection bodies tended to take an “enforcement” stance, placing primary emphasis on monitoring compliance with government directives (unofficial payments, however, were prevalent), ferreting out violations, and imposing fines and other penalties (e.g., freezing bank accounts, impounding equipment, or even shutting a business down).

In 1999-2000, following an official dialogue with representatives of the business community and bilateral talks between the Government of Latvia and the World Bank, a program was developed to reform inspection bodies specifically providing for:

a check-list, to be drawn up by certain inspection bodies, clearly defining the scope of inspections;

training for inspectors on issues relating to changes in regulatory strategy and the adoption of “client-oriented” inspection principles;

creation of a system to assess the effectiveness of the work of inspection bodies;

adoption of internal operational rules and regulations by each inspection body;

unification of inspection procedures.

The reform produced the following changes:

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The burden of frequent inspections by key inspection agencies was significantly reduced:

The time (in hours) spent on regular inspections was reduced:

Unofficial payments associated with inspections were reduced:

Key inspection bodies began concentrating on assisting their “clients” to understand government requirements and to abide by those requirements:

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Inspection bodies and entrepreneurs continue to have disagreements during inspections about the scope of an inspection. In the opinion of the majority of entrepreneurs participating in focus groups, there are no inspection parameters or rules and regulations, and it is the inspectors who, at their own discretion, determine what to inspect and how. Entrepreneurs recommended that inspection bodies adopt standard checklists of questions for specific types of enterprises, which will increase inspection transparency substantially.

“It’s hard to understand why one inspector asks for certain documents while another inspector from the same agency checks something entirely different. How do they determine what to inspect and how? Is it according to their own discretion or are they following some set of instructions?”


Special mention should be made of the fact that both entrepreneurs and representatives of inspection bodies agreed on the need to revise or abolish provisions whereby inspectorates may impose sanctions which can have a major impact on enterprise activities (e.g., suspension or cessation of such activities, cancellation of a lease, removal of goods from circulation, putting a bank account on hold or impounding it, imposition of severe fines, etc.).

“Draconian fines not only paralyze a company’s business, they can actually bankrupt the entrepreneur. It’s not just that fines are incommensurate with the violation, it’s that they are utterly unrealistic.”


The survey brought out the fact that the share of entrepreneurs protesting what they view as unlawful actions on the part of inspection bodies continues to remain low. The reason for that may be reluctance to formally oppose inspection bodies for fear of possible reprisals or the reason may be the availability of alternative means of resolving disputes.

Unofficial Payments

The problem of unofficial payments continues to be a very serious one. Results of the 2003 survey indicate an increase in the number of respondents reporting that they made unofficial payments in the course of inspections. However such reports may be evidence not of an actual increase in unofficial payments, but of increased openness amongst entrepreneurs responding to the survey.

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All of the foregoing provides evidence that the Government of Uzbekistan understands the importance of decreasing the pressure inspection bodies exert on entrepreneurial entities, and that it is taking definite measures in that direction. Inspections of SMEs in Uzbekistan are no longer aimed at the entire SME sector but are instead conducted on a more selective basis. Yet at the same time there are a number of unresolved problems both with extending the policy to the regions and with systematizing the purpose and conduct of inspections.

A pilot program the IFC developed in conjunction with a number of inspection bodies to optimize the designation of inspections and to create partnerships between entrepreneurs and inspection bodies is designed to solve this issue.

SME Reporting System

One of the elements of state control of entrepreneurial activities is the SME reporting system. Although the Government of Uzbekistan has taken measures to reduce and streamline small business reporting,8 there are cases when regional authorities demand reports not required by legislation or more frequently than required by legislation. In addition, legislative limits on reporting frequency do not apply to monthly statements. This hinders SMEs trying to set up a system for submitting documents on a quarterly basis. Today, micro-firms and small enterprises, regardless of their form of ownership and sector of activity, which pay the single tax submit up to 29 various (monthly, quarterly, and annual) kinds of reports and statements. Which means the number of reports and statements an enterprise must submit to various authorized agencies over the course of a year can be as many as 174.9

TABLE 9.1REPORTING FREQUENCY NUMBER OF KINDS OF REPORTS AND

STATEMENTS CAN BE UP TO:TOTAL REPORTS AND STATEMENTS

SUBMITTED PER YEAR:

Monthly 11 132

Quarterly 8 32

Annual 10 10

Total 29 174

“My accountant spends half his time filling out all these reports, so he has no time for financial planning and handling finances.”


By a decision of the Small and Medium Enterprise Coordination Council,10 the State Tax Committee and State Statistics Committee are working together on further reducing the kinds and numbers of reports submitted by small and private enterprise.

8 Law 69-II of the Republic of Uzbekistan dated May 25, 2000 “On Guarantees of Freedom of Entrepreneurial Activity”; Resolution 65 of the Cabinet of Ministers of Uzbekistan dated February 23, 2000 “On Measures to Decrease and Streamline Reporting for Small Business Enterprises”; National Bookkeeping Standard 20 “On Procedures for Simplified Bookkeeping and Compilation of Reports by Small Enterprise Entities” dated January 24, 2000.

9 This analysis is borne out in Table 9.1, using certain enterprises as examples. 10 Minutes No. 09-22 dated September 13, 2004.

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RECOMMENDATIONS:

1. Adopt criteria for selecting small businesses for inspection based on estimates of the level of risk their business activities pose to public safety and health.

2. Develop and adopt model regulations for the work of controlling agencies, clearly stipulating the rights and obligations of both inspectors who conduct inspections as well as those of firms being inspected. The rules and regulations must contain the authorization to perform inspection activities and must contain unified regulatory procedures.

3. For inspections not pertaining to financial operations (for example those carried out by the fire and sanitary services), develop and adopt checklists of questions for regulatory bodies to when conducting site-checks. Checklists are an effective tool for clearly marking the jurisdiction of inspectors during site-checks at enterprises.

4. Implement programs to increase the legal awareness of entrepreneurs for the purpose of forging partnership relations between regulatory bodies and enterprises (conduct joint roundtable discussions and seminars, make information about inspection selection and procedures accessible).

5. Explore the possibility of transferring to the court system powers now exercised by controlling agencies to impose sanctions, as a result of an inspection, that can profoundly impact an enterprise’s operations (for example, suspension or cessation of an enterprise’s operations, cancellation of a license, removal of goods from circulation, impounding the use of a bank account, imposition of severe fines, etc.)

6. Reduce the number of reports required of SMEs by various state bodies as well as eliminate reports not mandated by legislation.

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Ï Ð Î Â Å Ð Ê ÈS M E s A N D F I N A N C I A L I N S T I T U T I O N S

MAIN FINDINGS

It was more difficult than ever in 2003 for entrepreneurs to withdraw cash from their accounts. Lack of access to cash is most acute for enterprises in the real sector of the economy.

The share of respondents reporting that banks disclose information on their business transactions to third parties more than doubled in 2003.

SME demand for bank loans remained steady (29% of respondents applied for bank loans in 2003, 25% did in 2002). Access to sources of preferential financing is still limited.

The practice of making unofficial payments to bank employees continues. According to respondents, the average unofficial payment amounted to 8% of the loan granted.

Main Findings:

SMEs and Financial Institutions

Decline in Investment Activity

Problems of Access to Cash

Access to External Financing

SMEs Lack Collateral Required for Loans

Client Relations

Alternative Forms of Financing - Leasing

Financing Through Preferential Lending Funds

Microfinancing for SMEs

Disclosure of Information on Clients to Outside Organizations

Recommendations

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SMEs and Financial Institutions

According to official data, total capital, assets and credit investments of commercial banks increased significantly in 2003. Assets on January 1, 2003 totaled 3 trillion 918 billion Soum (4 billion USD) whereas at the beginning of 2004 assets had risen by 12.8% to 4 trillion 419 million Soum (4.5 billion USD). Total capital as of January 1, 2003 stood at 715 billion Soum (737 million USD) and had risen to 791 billion Soum (807 million USD) by January 1, 2004.

Banks have begun devoting serious attention to expanding the mini-bank network.1 As a result, while there were 530 mini-banks as of January 1, 2003, by the end of 2003 they numbered 795, which should make it significantly easier for both firms and the public to have access to banking services.

According to data provided by the State Committee on Statistics the Republic of Uzbekistan, commercial banks provided SMEs 13% more financing in 2003 than in 2002.

Decline in Investment Activity

The decline in SME investment activity observed in recent years is cause for concern. The share of respondents who did not make any investments over a two-year period practically doubled: the latest survey has revealed that four out of five entrepreneurs made no investments in fixed assets. This factor – which is a key factor in evaluating the investment climate – is fraught with very serious negative consequences for the country’s economy since fixed assets investments are what drive economic growth.

1 There is no legal definition of the term mini-bank in legislation. Neither the Law “On Banks and Banking” nor the Regulations “On Procedures for Registering and Licensing Banks” contain the notion of mini-bank. The term mini-bank, however, is used often and widely in Uzbekistan. Given that a bank branch is a distinct subdivision that performs all or some bank operations on behalf of a bank, including representational functions, and that within the limits of the powers granted to it by the bank a bank branch operates on the basis of the Bank Branch and License Regulations, one may presume that a mini-bank is a bank subdivision that performs some bank operations (account transactions, cash receipts, etc.). This is inferred from an analysis of the Law of the Republic of Uzbekistan “On Banks and Banking” which firmly establishes that banks may open branches in the Republic of Uzbekistan.

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In the view of focus group participants, investor apathy is basically due to the fact that at the present time making investments in Uzbekistan is a low-profit very high-risk proposition compounded by the fact that many enterprises lack the financial resources to make major capital investments.

“Why should I invest money in new equipment, if I risk not just not making any money but also risk not being able to sell it to get my money back?”

“Any number of business people have moved to neighboring Kazakhstan. Walk into any club in Almaty and you are sure to meet lots of them relaxing there. They have moved their businesses there from Tashkent.”

“I bought some sewing equipment from acquaintances who later moved to Russia. I’ve since had production problems here I’ve not been able to work out. Now I’m thinking of moving production to Kazakhstan. I already have a brick fac-tory in operation there, not far from the border with Uzbekistan.”


The Survey affirmed that the number of entrepreneurs investing their firm’s internal resources has gone way down from what it was in 2002.

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As was the case in 2002, SMEs invested least in foreign investor funds and various state funds.

“I’m not going to risk investing my own money for such a long period of time. If I could get a loan, I would risk investing it. If I were to make money on the investment, I would gladly repay the bank in full. But if the situation in the country were to deteriorate, and I were to go bankrupt, the bank would be too busy with more serious problems than to go running after me.”


Problems with Access to Cash

Even though the ‘cash plan’ has been formally repealed and a number of resolutions have been enacted to improve access to cash,2 problems SMEs have in obtaining cash become more acute with each passing year, and traditionally rank as the number one problem SMEs have with account transactions.

As the survey shows, construction and agricultural enterprises experience the greatest difficulties in obtaining cash – two-thirds of the respondents in those sectors had problems obtaining cash in Soum.

2 Decree UP 2564 of the President of the Republic of Uzbekistan dated March 21, 2000; Decree UP3077 of the President of the Republic of Uzbekistan “On Amending and Expanding Certain Decrees of the President of the Republic of Uzbekistan” dated May 20, 2002 amended Decree UP 2564 of the President of the Republic of Uzbekistan, dated March 21, 2000; Resolution 280 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 5, 2002; Resolution 63 of the Cabinet of Ministers of the Republic of Uzbekistan dated February 4, 2003.

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That is the result of the Central Bank’s tight money/credit policy whereby the bank is constantly removing money from circulation. According to official data, the M2 money supply3 dropped by 12.5% last year to 10.9% of GDP. There were two reasons for this: accounts with budget organizations were regularly put on hold (focus group participants report such holds can last up to 3 or 4 months) and cash was regularly removed from commercial banks.

BOX 10.1.

Regulating the money supply is a function of central banks all over the world. Unchecked growth of the money supply can set major inflationary processes in motion. At the same time, a sharp drop in the amount of money in circulation and available for servicing the country’s trading transactions can have a negative impact on the rate of economic development as a whole. So the negative consequences of a sharp drop can outweigh the positive ones. For that reason the central banks of many countries opt against extreme shrinkage of the money supply as a means of controlling inflation.

Chart 10.1.1 Relation Between the M2 Money Supply and GDP in Certain Countries in 2003.

Source: Database: GDF & WDI central (August 2004) and the 2003 Analytical Survey of the Center for Effective Economic Policy.

The survey also demonstrated that despite the official repeal of the ‘cash plan’,4 regulation of cash turnover was tightened in 2003.

3 Cash in circulation plus money in current bank accounts plus time deposits and savings deposits in commercial banks.4 Resolution 63 of the Cabinet of Ministers of the Republic of Uzbekistan dated February 4, 2003.

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In this connection, at the end of 2002 functions relating to monitoring turnover of the money supply were placed upon not only commercial banks but also upon tax authorities, the public prosecutor, and local authorities.

BOX 10.2.

Resolution 280 of the Cabinet of Ministers “On Measures for Further Reducing Extra-Bank Turnover of Money” dated August 5, 2002 stipulates that when cash proceeds of business firms are deposited, that State Tax Service officials with the right to inspect deposit sites must be present.

Officials of the State Tax Service and the Department for Combating Tax and Foreign Exchange Crimes under the Public Prosecutor’s Office of the Republic of Uzbekistan are granted the right, if the Inspections Coordination Council agrees, to carry out ad hoc inspections of operations to verify compliance with rules governing trading, and with surrender of retail and wholesale trade receipts as well as public catering receipts and receipts for payments made for services rendered.

It is incumbent upon the State Tax Committee and the Department for Combating Tax and Foreign Exchange Crimes under the Public Prosecutor’s Office of the Republic of Uzbekistan to establish stringent regulations ensuring that corporations and individual entrepreneurs comply totally with established rules of trade, placing particular emphasis on making sure that goods are prevented from being sold at wholesale for cash, that cash registers are there on the premises, and that cash is deposited promptly.

“When a bank employee visits us these days, tax inspection and public prosecutor employees come with him. And if you don’t regularly meet the cash surrender plan, you are called in by the Khokimiyat for a very serious talking to; they can revoke your trading license, your lease.”

“A tax agent visits us each evening with a collector.”Focus group participants

All SMEs to one extent or another make payments in cash: they pay employee salaries, they buy various raw materials, materials in markets, etc. Focus group participants believe that measures limiting access to cash have the opposite effect: enterprises are shifting an ever increasing portion of their trade into the shadow sector, where all transactions are conducted in cash.

BOX 10.3

Exerpt from a press article devoted to combating extra-bank turnover of the money supply:5

“… during a ten-month period in 2003 the Tashkent Department of the State Tax Committee conducted more than 7,300 procedural inspections to decrease extra-bank turnover of money … Illegal violations, found during the overwhelming majority of inspections, netted 1.41 billion Soum in fines. ‘We examined the activities of 3,400 legal entities and discovered violations in nearly every case. They included the illegal use of cash registers, changing tax records, installation of special chips,’ noted Sobir Rasulov, Deputy Director of the Tashkent Department of the State Tax Office.

5 UzReport.com dated November 6, 2003.

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Entrepreneurs are inclined to explain this by pointing to problems with obtaining cash from banks. ‘We surrender our entire daily receipts to the bank but we never obtain cash on time. Sometimes it takes up to 10 days to get our money back. That’s what makes us resort to such actions,’ someone from Tashkent’s central market said in a program interview.

Similar statements, obtained during inspections by State Tax Committee offices, established that over 3000 entrepreneurs had been unable to obtain their money on time.”

As pointed out in a previous report, this situation has spawned an entire industry whose business is “cashification” – “helping” enterprises convert non-cash bank account holdings into cash. Their commission is usually 20% of the amount converted.

For the most part, SMEs manufacture consumer goods and provide services whose demand is dependent on the purchasing capacity of the public. According to focus group participants, this factor has been a major deterrent to growth in trade since a major portion of the country’s population has had to cut its spending because its wages are systematically delayed.

“I can’t sell my goods. People just don’t have the money. Factory workers’ salaries haven’t been paid for three months, and what’s going on in the countryside is simply awful.”

“We have a factory in the area at which a large part of the population works. So now they’ve started giving out wages in scrip – you could buy food products and necessities in a few stores with this ‘money’.”


As enterprises lack the opportunity to freely manage their money, and due to the drop in consumer demand, government revenues from taxes and fees are down since enterprises are doing less trading and more and more SMEs are bypassing official banking channels in conducting their operations.

Access to External Financing

The survey showed that demand for external financing in industrial sectors of the economy dropped by one-half, on average, between 2001 and 2003.

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SMEs in need of external financing applied for loans primarily for investment projects and replenishing working capital. It must be noted that in 2003 SMEs’ needs for external financing to replenish working capital had the same priority as those for acquiring fixed assets.

The share of SMEs obtaining bank loans in 2003 compared with the share in 2002 decreased slightly from 65% to 59%. Half of respondents needing financing to obtain fixed assets in 2003 succeeded in securing the financing required.

According to the survey, loans for trade operations and working capital were usually granted for up to one year. As for loans for fixed assets, 95% of even those loans are granted for no more than three years.

International financial institutions such as the European Bank for Reconstruction and Development, the Asian Development Bank, and the International Finance Corporation, have opened a number of lines of credit for SMEs. These are refinanced through commercial banks of the Republic and are aimed primarily at financing investment projects. In 2003 the volume of such loans was 20% lower than in 2002.

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“Our bank has funds from foreign lines of credit. We’re always catching it because these lines of credit move so slowly. But there just aren’t any good projects. As you examine projects, you become more and more convinced that most of them can’t make a profit.”

“I get called names for refusing a client a loan. But I’m not so sure I wouldn’t come in for even stronger criticism, includ-ing criminal charges, for granting the loan and then having the client default on it.”


SMEs Lack Collateral Required for Loans

The survey showed that the most common reasons banks turn down SME loan applications are the lack of collateral required for repayment and unwillingness to make unofficial payments to bank employees.

Commercial banks have very strict requirements for securing guarantees for loan repayment. Requirements are dictated by the desire to insure against negative consequences, should a borrower not be able to pay off a loan with his own money. A standard requirement for granting a loan to finance an investment project is that a repayment guarantee amounting to 120% of the loan be provided. The specific conditions for securing the collateral are dictated by the Central Bank, by annual credit policies of individual banks, and, if a bank is not financing a loan with its own funds, by the original creditor (e.g., by international financial institutions). Hence, high tech equipment obtained on credit, real estate, a third party guarantee, bank deposits, bank guarantees, insurance policies may serve as collateral surety.

The majority of enterprises endeavor to minimize profits when preparing accounting statements. For this reason real estate is the most commonly used form of collateral. One of the most controversial issues in this connection is determining the estimated value and the surety value of the collateral. Uzbekistan’s real estate market is undeveloped and no reliable information on real estate transactions is available, with the result that each commercial bank determines, on its own, the value of property put up as collateral. The bank’s appraisal officer makes the evaluation based

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on personal experience. Real estate put up for collateral is accepted at 60%-80% of the estimated value. Banks take this step to cut their losses from the outset, should sale of collateral property be necessary. For the majority of SMEs this policy complicates already problematic collateral demands (an example of how collateral is calculated in granting loans is given in Annex9).

Client Relations

Focus group participants observed that they frequently face formidable bank bureaucracy. Informal relations with bank personnel have to be established in order to get past the bureaucracy and expedite review of a loan application. According to the survey, 10% of respondents granted loans in 2003 had to make unofficial payments, which on average amounted to 8% of the amount of the loan.

As the preceding survey pointed out, this problem is related to continuing regulation of bank employee salaries by the Central Bank and to the fact that commercial banks face a problem of high turnover rates for their most qualified, least corruptible personnel. In the opinion of focus group participants, large banks having some involvement with the government have the worst client relations, while new private banks have more acceptable client relations. However private banks as a rule do not have the resources to make major loans and don’t have extensive branch bank networks.

“It’s standard for all banks to ‘skim’ 10% of the amount of a loan. If you don’t agree right away, you’ll spend years chasing after a loan.”

“It should come as no surprise. A specialist deciding whether to make a million dollar loan earns, at the very most, 100 dollars a month. And he’s got a family, kids. You have to pay him to speed up the paperwork and have to pay the manager who has the final say in the matter.”


Alternative Forms of Financing - Leasing

The share of respondents utilizing leasing to obtain fixed assets was greater in 2003 than in 2002.

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This growth is due to two basic reasons: increased popularity of this form of financing and changes in legal norms. The government’s revamping of legislation has made leasing operations more advantageous both to lessors and lessees. In 2003 three new leasing companies – two private and one state – were created and commercial banks stepped up their leasing operations.

BOX 10.5.

CHANGES IN LEGISLATION PERTAINING TO LEASING OPERATIONS

The main impetus for developing leasing operations was provided by the Decree of the President of Uzbekistan DP-3122, dated August 28, 2002, “On Measures to Stimulate Further Development of Leasing Operations” which removed a number of tax barriers.

At the same time, the Oliy Majlis (Parliament) made over 40 amendments in 2002-2003 to the country’s Civil, Tax, and Economic Procedural Codes, and to the Law “On Leasing” and the Law “On the Customs Tariff”.

In April 2004, the Resolution of the Cabinet of Ministers “On Measures for Further Development of Leasing Services” was adopted, making it possible for lessees to apply accelerated depreciation for tax purposes. In accordance with the Resolution, certain normative acts aimed at improving the legislative basis governing leasing operations were amended.

Despite the increased demand for this alternative type of financing, the share of respondents obtaining fixed assets through leasing decreased. The reasons why are the same as those for rejection of standard loan applications: insufficient collateral, insufficient funds of one’s own to invest in a project, etc.

The survey showed that the share of SMEs applying to specialized leasing companies to lease fixed assets increased in 2003 compared with 2002.

Financing Through Preferential Lending Funds

Several programs exist in Uzbekistan for providing loans to SMEs on preferential terms: the Commercial Bank Preferential Lending Fund, the Fund of the Association of Dekhan Farms and Private Farms. Details concerning the financing terms of these funds are given in Annex 10 and in IFC’s 2002 Report.

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According to the results of the 2003 survey, the awareness of and access of SMEs to such sources of preferential lending remain limited; when compared with 2002, awareness and access decreased in 2003. As already noted in the preceding report, this situation is due to the fact that commercial banks are not interested in using preferential financing mechanisms, since they are frequently unprofitable for banks.


In 2002 a number of legislative acts6 were enacted that paved the way for a new type of financing – microfinancing. Prior to this, microfinancing was carried out exclusively by commercial banks and nongovernmental noncommercial organizations. At present, 17 credit unions are operating in the country.

The survey revealed that in 2003, as compared with 2002, the number of applications for micro loans increased and the share of respondents obtaining micro loans doubled.

Even today commercial banks play the leading role in microfinancing, with 90% of all micro loans7 being made by commercial banks. Furthermore, there is still no legislative basis regulating the activities of micro-financing organizations, other than credit unions and banks. On the whole, microfinancing is attractive for small private enterprises as it helps entrepreneurs just starting out in business, with no credit history, to get on their feet. It helps those whom commercial banks don’t see as clients, since operating costs to cover small loans are frequently higher than the profits earned from the interest paid.

BOX 10.6

The ability of microfinancing institutions to provide services to micro clients and small clients is critically important for raising the standard of living and creating additional jobs. The development of non-banking sources of financing, including microfinancing, renders the capital market more competitive, which in turn lowers the cost of providing financial services to small enterprises.

However, although World Bank experts consider Uzbekistan’s market to be one of the fastest growing markets in the region,8 a number of factors, including the inadequacy of laws regulating the microfinancing sphere, are holding back the stable development of microfinancing organizations. Specifically, the concept of microfinancing has not been developed, there is no precise definition of the legal status of commercial

6 Law of the Republic of Uzbekistan 355-II “On Credit Unions” dated April 4, 2002; Resolution 309 of the Cabinet of Ministers of the Republic of Uzbekistan “On Measures for the Development of Microfinancing in the Republic of Uzbekistan” dated August 30, 2002.

7 IFC Project Report “Microfinancing in Uzbekistan: Sector Survey, Legal Diagnostic, and Recommendations for Legislative Reform” dated October 31, 2003.8 Source: World Bank Study “Central Asia. Microfinancing and Poverty” June 2003, prepared by Microfinance Study Team ECSSD.

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and non-commercial microfinancing organizations, there are no regulations to provide for the creation of commercial microfinancing institutions, and, unlike credit unions and banks, microfinancing institutions do not have their own specialized tax regime.9

Disclosure of Information on Clients to Outside Organizations

As noted in the previous report, functions inappropriate for financial intermediaries - monitoring cash flow, tax payments and other payments - are imposed on banks in Uzbekistan. When violations are found, commercial banks are obligated to notify tax authorities and the public prosecutor of those violations (see Box 11.3 in the section on SME foreign trade operations).

According to the survey, commercial bank monitoring of the activities of clients increased significantly in 2003. Half of all respondents reported not only being asked to provide their bank with information about their business activities, but also reported that such information was subsequently provided to outside organizations.

Survey participants believe that banks provide the information they receive from their clients not only to tax authorities (91% of all respondents believe so) but also to the office of the public prosecutor and to municipal authorities (khokimiyats).

Focus group participants are of the opinion that most SMEs do not perceive bank staff members as commercial establishment employees required to serve their clients and defend their clients’ interests; rather they perceive them as employees of state regulatory agencies. This situation creates conditions conducive to corruption among bank employees.

“A client says to me: You’re my bank. You have to keep all my banking operations secret. Then how do the tax authori-ties, the khokimiyat, and public prosecutor know about them – and everybody else? So what am I supposed to say in reply? I have my instructions and if I don’t provide all the information on time, they can not only fire me, they can bring charges against me too.”

“If a large sum of money appears in your account, you can rest assured that they’ll be coming to check up, and you’ll be called into the khokimiyat and be made to finance some public construction project or something or other of that sort.”


9 IFC Project Report “Microfinancing in Uzbekistan: Sector Survey, Legal Diagnostic, and Recommendations for Legislative Reform” dated October 31, 2003.

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According to the results of the 2003 survey, the awareness of and access of SMEs to such sources of preferential lending remain limited; when compared with 2002, awareness and access decreased in 2003. As already noted in the preceding report, this situation is due to the fact that commercial banks are not interested in using preferential financing mechanisms, since they are frequently unprofitable for banks.


In 2002 a number of legislative acts6 were enacted that paved the way for a new type of financing – microfinancing. Prior to this, microfinancing was carried out exclusively by commercial banks and nongovernmental noncommercial organizations. At present, 17 credit unions are operating in the country.

The survey revealed that in 2003, as compared with 2002, the number of applications for micro loans increased and the share of respondents obtaining micro loans doubled.

Even today commercial banks play the leading role in microfinancing, with 90% of all micro loans7 being made by commercial banks. Furthermore, there is still no legislative basis regulating the activities of micro-financing organizations, other than credit unions and banks. On the whole, microfinancing is attractive for small private enterprises as it helps entrepreneurs just starting out in business, with no credit history, to get on their feet. It helps those whom commercial banks don’t see as clients, since operating costs to cover small loans are frequently higher than the profits earned from the interest paid.

BOX 10.6

The ability of microfinancing institutions to provide services to micro clients and small clients is critically important for raising the standard of living and creating additional jobs. The development of non-banking sources of financing, including microfinancing, renders the capital market more competitive, which in turn lowers the cost of providing financial services to small enterprises.

However, although World Bank experts consider Uzbekistan’s market to be one of the fastest growing markets in the region,8 a number of factors, including the inadequacy of laws regulating the microfinancing sphere, are holding back the stable development of microfinancing organizations. Specifically, the concept of microfinancing has not been developed, there is no precise definition of the legal status of commercial

6 Law of the Republic of Uzbekistan 355-II “On Credit Unions” dated April 4, 2002; Resolution 309 of the Cabinet of Ministers of the Republic of Uzbekistan “On Measures for the Development of Microfinancing in the Republic of Uzbekistan” dated August 30, 2002.

7 IFC Project Report “Microfinancing in Uzbekistan: Sector Survey, Legal Diagnostic, and Recommendations for Legislative Reform” dated October 31, 2003.8 Source: World Bank Study “Central Asia. Microfinancing and Poverty” June 2003, prepared by Microfinance Study Team ECSSD.

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Ï Ð Î Â Å Ð Ê ÈF O R E I G N T R A D E O P E R A T I O N S

MAIN FINDINGS

Of SMEs surveyed in 2003, 1% and 3% engaged in export and import operations, respectively (in 2002 those indicators were 3% and 6%, respectively).

One-third of entrepreneurs don’t engage in export-import operations because of the difficulty of export-import procedures, which are a major disincentive to engage in those activities.

Alongside positive changes in legislation, there are restrictions and added requirements negatively impacting the growth of the number of SMEs engaging in imports, namely:

- special requirements for entrepreneurs involved in wholesale trade (e.g., amount of charter capital, mandatory warehouse facilities);

- mandatory certification, introduced at the end of 2002, of a whole series of imported consumer goods.

The Government took a series of steps in 2003 to liberalize foreign economic activities, but as the steps are ambiguous they do not always achieve their intended goals.

In the opinion of 71% of importers surveyed, the fact that the customs value of goods is vaguely defined in current legislation has a negative impact on foreign trade operations.

Three-fifths of exporters and importers surveyed reported that the unofficial payments they are forced to resort to during foreign trade transactions constitute a major problem for their business.

Main Findings

Exports

Imports

Changes in Legislation Governing Import Operations

Assessment of Difficulties with Import Procedures

The Inequitable Position of SMEs

Conclusion

Recommendations

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In October of 2003 the Government of Uzbekistan officially assumed the obligations under the terms in Article VIII of the Articles of Agreement of the International Monetary Fund stipulating that limitations on current payments and that discriminatory foreign currency practices be eliminated and that currency conversion in current transactions be introduced. This fact is of major importance for the country’s entire economy. However, it will be possible to track its practical influence on the economy only after analyzing the results of the 2004 Survey.

According to data from the State Committee on Statistics of the Republic of Uzbekistan, SME import activities in 2003 (their share of the total volume of Uzbekistan’s imports, according to 2003 results, was 33.7%)1 were greater than SME export activities (SME exports accounted for 7.3% of the total volume of exports2). The survey corroborated these trends – 3% of respondents reported conducting import operations, while only 1% reported engagement in export operations.

Exports

According to official data, the increase in the share of respondents conducting export operations was negligible (up from 0.43% in 2002 to 0.52% in 2003).3 And yet, the volume of products SMEs exported in 2003 was 1.5 times greater than in 2002.4 This would suggest, therefore, that the increase in the volume of exports was not due to new enterprises entering foreign markets for the first time but to an increase in the volume of goods exported by established exporters.

According to the survey, the share of SMEs answering in 2003 that they engaged in export operations remained small (in 2003 it was only 1%, as compared with 3% in 2002). At the same time, these figures are double the figures given by official sources, suggesting that some exporting SMEs are bypassing official channels.

1 In 2002 the SME imports share was 24.9%.2 In 2002 the SME exports share was 7.5%.3 Letter from SSC No. 18-15-05/153 dated October 22, 2004.4 Letter from SSC No. 18-15-05/61 dated April 15, 2004.

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The share of respondents engaged in export operations remains small even though exporters in Uzbekistan are afforded various privileges. The privileges are, as a rule, in the form of tax breaks (profit tax, property tax, etc.) that vary in proportion to the ratio of an firm’s export sales to total sales. At the beginning of 2004 the Government introduced certain changes to existing privileges (see Annex 11).

Drop in Competitiveness of Uzbek Goods

The significant increase in the exchange rate of the Soum – from between 1200 and 1300 Soum to the US dollar at the beginning of the year (the exchange rate on the so-called “parallel”5 exchange market which, according to focus group participants, is used in all settlements) to 980 Soum at the end of the year6 (see Chart 11.3) – was one of the reasons which may have inhibited the growth of the number of exporters in 2003. The Central Bank’s tight money-credit policy did away with the difference between the official and “parallel” exchange markets. The steep increase in the Soum’s exchange rate occurred against the background of an increase in manufacturing costs in Soum due to higher energy7 and domestic raw materials prices. All countries shoring up their national currency’s exchange rate typically experience such problems.

5 The unofficial foreign currency exchange market.6 World Bank data.7 According to World Bank data, in 2003 the cost of, for example, electric power for agricultural enterprises increased from 10.3 Soum per kwh to 16.8 Soum

per kwh, and for industrial enterprises using over 750 kwh it increased from 9.05 Soum per kwh to 14.75 Soum per kwh. The price of 1000 cubic meters of natural gas for wholesale users increased from 13 800 Soum to 22 700 Soum.

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“A manufacturer who was selling an item for USD 0.6-0.7 on the export market (the “parallel” exchange rate was 1 USD = 1400-1500 Soum) and which cost him 1000 Soum to make, at the end of the year had to sell the very same item for one dollar due to the increase in costs.”


With manufacturing costs for local goods rising in some cases 1.5 times, local goods began to lose their competitive price edge over goods produced in neighboring countries.

Assessment of Difficulties with Export Procedures

The most popular answer to the question: “Why didn’t you export goods in 2003?” was “With local market demand, there was no need,” given by 64% of respondents. This shows that most SMEs are not focusing on foreign markets. Of the remaining 36% of respondents, half cited difficulties with export procedures, and 35% cited customs procedures as the reason they had not exported goods, which suggests that they might be willing to enter foreign markets if the regulatory environment were to become more supportive of exporters.

As Char 11.4 shows, the main reasons cited by respondents involve the various kinds of administrative barriers encountered in export procedures.

Respondents who actually completed all phases of exporting in 2003 confirmed that export and customs procedures are complicated. Half of them rated the procedures as “problematic” or “very problematic.”

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The survey demonstrated that the chief concern of trading companies continues to be the mandatory requirement to sell 50% of foreign currency receipts. Last year’s report described this problem in detail. The problem remains as acute as ever for SMEs.

“When I get foreign currency for goods I sell, they make me sell half of it to the state immediately. But on the other hand, when I need to get currency, buying it can drag on for several weeks.”

“It’s been almost a month already, and I haven’t been able to exchange my Soum for foreign currency. They say that after May 15 currency exchange was pretty much suspended.”

Focus group participants (June 2004)

Legislation fairly clearly defines the stages in executing an export contract (see Annex 12). However, the practical example given in Diagram 11.1 sheds light on how difficult it is in practice to carry out export procedures. Even with state support, entrepreneurs had to go through over 10 stages and make frequent unofficial payments in executing an export contract.

8 In view of the small number of export enterprises (1% or less of the total sample), the data in all the charts for this set of enterprises should be considered merely illustrative.

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Restrictions on Access to Privileges in Executing Export Contract Procedures

Export-related privileges granted to members of the Association of Dekhan and Private Farmers were reduced somewhat in 2004. That is, before then barter contracts for fresh and processed vegetables used to be exempt from requirements for mandatory priority delivery of imported goods and exempt from requirements for granting of bank guarantees and mandatory sale of foreign currency.9 Revocation10 of these privileges on April 1, 2004, in the opinion of focus group participants, will have a negative impact on the volume of goods exported by agricultural enterprises.

“We fought long and hard to be allowed to export vegetable produce on a barter basis. It was both to our advantage and to the advantage of our Russian partners who provided us with wood and metal in return, and which we sold at a profit in Uzbekistan. Now they’ve gone and revoked it again.”


What is more, as noted above, enterprises that export goods for freely convertible currency (FCC) are granted various kinds of tax privileges. But the currencies of the CIS and Baltic states are not recognized as freely convertible, and Uzbek entrepreneurs are required to demand that buyers settle with them in FCC. At the same time, most exporters are also importers: in 2003 56% of exporting respondents were also importers. As focus group participants observed, many enterprises from Russia, due to the strengthening of the ruble in relation to the dollar, were demanding that imports of Russian goods be paid for in rubles rather than FCC. The large number of such additional requirements and the need for numerous currency conversions complicate settlements, cause delays, and make goods more expensive.

As IFC’s 2002 report pointed out, Uzbek exporting enterprises are exempt from the mandatory sale of 50% of foreign currency receipts.11 However, that privilege does not apply to an enterprise reselling products.

Restrictions on Settlement Operations

The prohibition against opening settlement accounts outside Uzbekistan,12 unless a special exemption from the Central Bank of Uzbekistan is granted, is another difficulty enterprises must deal with. According to focus group participants, export-import companies sometimes incur substantial additional costs from having to work through Uzbek banks.

“We don’t just export. We buy products abroad with foreign currency and import them. And we have to make all settlements through our bank. That doesn’t mean just added expenditures, it sometimes means serious delays… And there are times when one day, even one hour, can make all the difference in our costs.”


Such measures are common practice in developing countries whose governments are attempting to stem the outflow of capital. In most developed countries, where every effort is made to simplify foreign economic operations, entrepreneurs merely notify their central banks that they have settlement accounts outside the country.

9 Per paragraph 2.5.5 of the previous version of “Regulations for Procedures for Registering and Monitoring Export and Barter Contracts by Authorized Banks” approved by Central Bank Resolution registered by the Ministry of Justice August 9, 2000, 954.

10 Central Bank Board Resolution “On Amending and Expanding the Regulations for Procedures for Registering and Monitoring Export and Barter Contracts by Au-thorized Banks” registered by the Ministry of Justice March 29, 2004, 954-2.

11 Resolution 263 of the Cabinet of Ministers of the Republic of Uzbekistan dated June 22, 2001.12 Procedures for Issuing Permits to Open Accounts Abroad, approved by Central Bank Board Resolution 390 dated March 28, 1998.

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Uzbekistan’s Participation in International Trading Unions

Uzbek exporting enterprises frequently have to work under conditions less favorable than those of their competitors from neighboring countries.

CIS and Baltic countries continue to be the major sales market for Uzbek SMEs. These are the regions with which Uzbekistan has longstanding ties, going back to the Soviet era, and that have markets with high consumer demand but with quality standards that are not particularly high.

At the initiative of Uzbekistan, a decision was made in May of 2004 to launch a common market within the framework of the Organization of Central Asian Cooperation (OCAC), founded in February of 2002 as the successor to the abolished Central Asian Economic Commonwealth (CAEC). OCAC is made up of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, and the decision has been made that Russia will accede to OCAC.

At the same time, Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan have joined together in the CIS Customs Union with standardized foreign trade procedures and numerous privileges pertaining to the delivery of goods. In the view of focus group members, Uzbekistan’s not joining the Customs Union from the very outset put Uzbek enterprises at a disadvantage vis-à-vis their competitors from neighboring countries – Kazakhstan and Tajikistan, to cite two examples.

“Our goods wait for days at a time at the Kazakh-Russian border and are very rigorously inspected, while goods from Tajikistan and Kazakhstan sail through.”

“This makes our fruits and vegetables 20% to 30% more expensive on the Russian market than those grown in Kazakhstan are.”

“Goods are regularly smuggled into Kazakhstan where they are certified as being of Kazakhstan origin and then go on into Russia as goods produced in Kazakhstan.”


Uzbekistan is in the process of making preparations to join the World Trade Organization (WTO). This undertaking, requiring a great deal of time and effort, may eventually facilitate Uzbekistan’s gaining access to the more than 150 foreign markets of WTO’s member countries.

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BOX 11.1. UZBEKISTAN AND THE WTO – A CHRONOLOGY.

1994:

Observer status for Uzbekistan in GATT/WTO. Signing of declaration of Uzbekistan’s intention to join WTO as a full member.

1998:

Active preparations get under way for Uzbekistan’s entry into WTO. Government Resolution establishes the Interagency Commission on Working with WTO whose members come from key ministries, departments, and organizations;

Memorandum on Foreign Trade Operations of Uzbekistan submitted to WTO Secretariat in full compliance with relevant procedures.

1999:

Adoption of Comprehensive Program for Implementation (1999-2005) of Agreement on Partnership Between the Republic of Uzbekistan and the European Union on cooperation with EU regarding Uzbekistan’s entry into WTO.

2002:

Working Group on Entry of Uzbekistan into WTO meets for first time in Switzerland for discussion of revised and expanded Memorandum on Foreign Trade Operations of Uzbekistan;

Interagency Commission on Working with WTO meets in expanded composition session for discussion of results of first meeting of Working Group on Entry of Uzbekistan into WTO, and discussion of plan for preparations for second meeting.

2003:

Interagency Commission on Entry of Uzbekistan into WTO adopts at end of December Action Plan for Preparations for Uzbekistan’s Entry into WTO. Plan calls for negotiations to be held with WTO member countries on implementation of measures to further harmonize national legislation with rules and regulations in GATT/WTO agreements, and provides for other measures.

And so, the main administrative barriers to the development of exports are a lack of flexible settlement mechanisms and difficulties with customs procedures. Further complications arise due to Uzbekistan’s failure to participate in common customs zones with neighboring countries. The upshot of these shortcomings is that the country’s economy misses out on the advantages derived from exporting goods to foreign markets.

Imports

Analysis of the dynamics of the development of SME imports reveals a trend similar to that for exports. According to official data, the increase in the share of SMEs engaged in import trade was negligible (1.15% in 2003 compared with 1.04% in 2002).13 In this connection, the volume of goods SMEs imported in 2003 was twice the volume imported in 2002.14 This suggests that the increase in the volume of imports was not due to new enterprises entering foreign markets for the first time but to an increase in the volume of goods imported by established importers.

13 Letter from GosKomStat No. 18-15-05/153 dated October 22, 200414 Letter from GosKomStat No. 18-15-05/61 dated April 15, 2004

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At the same time, the survey showed that the share of SMEs involved in import operations in 2003 has decreased as compared with 2002, and constitutes only 3% of those surveyed (down from 6% in 2002). Yet even with this drop, these figures are nearly triple the official figures. The implication is that some SMEs involved in imports are bypassing official channels.

The reduction in the overall proportion of SME importers is due mainly to a drop in the share of companies importing finished goods - which went from 70% in 2002 to 49% in 2003.

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This trend is the result of the Government’s policy of restricting the import of finished goods and, as focus group participants indicated, of the steep drop in consumer demand for goods in Uzbekistan in 2003. The drop is a reaction to recent restrictions in the money supply, in accordance with the tight money-credit policy of the Central Bank and the Ministry of Finance.

Moreover, in 2002, Government requirements for importing firms became more stringent, which also served to curtail imports. For details on requirements placed on wholesale trade and import companies, see IFC’s 2002 Business Environment in Uzbekistan report as well as this report’s Annex 13.

Changes in Legislation Governing Import Operations

Positive effects of introducing convertibility

Current accounts currency conversion has become decidedly easier since SMEs began entering foreign markets (pursuant to the obligations assumed by the Government of Uzbekistan under the Articles of Agreement of the IMF). Certain indicators are showing that this is already having an effect: the share of those taking advantage of currency exchange or obtaining credit in FCC in 2003 was considerably higher than in 2002. Nevertheless, most respondents continued to use their own hard currency for their import operations.

Positive Initiatives That Are Works in Progress

The Government of Uzbekistan implemented a number of measures to liberalize foreign trade transactions for firms in 2003. In July-August of that year a package of legislative and normative acts was adopted that repealed the long list of formerly existing restrictions on foreign trade operations.15

15 Resolution 317 of the Cabinet of Ministers of the Republic of Uzbekistan “On Measures for Further Liberalization of the Domistic Foreign Currency Market” dated July 16, 2003; Resolution 355 of the Cabinet of Ministers of the Republic of Uzbekistan “On Measures for Liberalization of Foreign Currency Operations in Foreign Economic Operations” dated August 15, 2003; Decree of the President of Uzbekistan UP-3276 “On Amending Certain Decrees of the President of Uzbekistan” dated July 16, 2003; Decree of the President of Uzbekistan UP-3321 “On Measures for Further Liberalization of Foreign Trade Operations in the Republic of Uzbekistan” dated September 26, 2003.

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BOX 11.2

To simplify import contract operations the Government abolished the following series of restrictions whereby:

foreign currency could be purchased only with one’s own personal funds;

contract payments could not be made in favor of nonresidents other than contract partners;

advance payments to transfer hard currency obtained from currency conversion during import operations were permitted only up to 15% of the value of the contract but not more than the equivalent of USD 100,000 and only on the basis of a counter bank guarantee of a correspondent bank. Advance payments in excess of USD 100,000 were made only with the permission of the Cabinet of Ministers upon a determination by AFER;

import agreement advance payments were made prior to the arrival of goods (provision of services) on Uzbek soil on the condition that an additional amount of money in Soum equal to the advance payment had been set aside in a block account (except for import contracts financed by centralized sources in Soum). The funds set aside were returned after submission of a document attesting that the goods (services) had in fact been imported;

conversion of Soum into foreign currency was permitted if there were no outstanding debts to the state budget, no overdue debts to suppliers, no bank loans in arrears, on the condition that conversion occurred no sooner than 6 months after the date of registration, etc.

The Government partially simplified the rules for settlements on import operations but simultaneously tightened regulations on importing firms by expanding the oversight functions of commercial banks. Authorized banks are obliged to keep track of business dealings that will be concluded on the terms and conditions cited above and to provide information about them to tax authorities to be used the next time their operations undergo a comprehensive inspection16 (see Box 11.3).

BOX 11.3.

“…An authorized bank shall provide the State Tax Committee of the Republic of Uzbekistan with information concerning clients’ hard currency operations with any of the following features:

à) an agreement that does not provide for, or provides for only in an amount equal to no more than 15% of the value of the contract, payment of penalty sanctions by nonresident contract partners for failure to comply with the scheduled delivery of goods, failure to provide import services, and failure to ensure or perform obligations;

b) an agreement (contract) that provides for payments for import of goods (services) in favor of nonresidents registered in states and in territories with a preferential tax regime and (or) does not provide for disclosure and reporting of information pertaining to financial operations (offshore zones, etc.)…

c) third party nonresidents who are not parties to the import agreement who are recipients of monetary funds or goods (services);

d) an agreement provides for an advance payment in favor of a nonresident exceeding 30% of the price of the goods (services) imported or exceeding 100,000 USD…

… State Tax Service authorities shall analyze information received from authorized banks and customs authorities and, if duly established evidence of hard currency violations is found, shall file a request with the Inspections Coordination Council… that the firm that concluded the contract in question be scheduled for an inspection the following quarter…”

Regulations for Procedures for Monitoring the Legitimacy of Hard Currency Operations of Legal Entities and Individuals

16 “Regulations for Procedures for Monitoring the Legitimacy of Hard Currency Operations of Legal Entities and Natural Persons” approved by STC Resolution 2003-67, SCC Resolution 01-02/19-36 and CB Board Resolution 240-B dated September 12, 2003, registered at the Ministry of Justice on October 14, 2003, 1281.

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Additional obstacles bank and customs authorities put in the way of importers registering contracts containing an advance payment clause, as focus group participants noted, discourage SMEs from availing themselves of that form of settlement.

“If we want to make an advance payment on an import contract, the bank is never going to officially tell us we can’t. But what they do do is go on and on about how risky it is and all the problems we can bring on our company. The same goes for customs. They examine the entire contract extremely thoroughly and you have to run around a lot to make all sorts of corrections. But even then, only if you really stick to your guns, do you finally manage to get the contract registered, get money converted, and get the payment made.”

“We prefer to do things the old way. Otherwise, all the agencies start asking all sorts of questions and you never know whether half a year later they won’t appear asking you ‘And why did you do it this way’?”


So the entrepreneur has to choose – whether to use the more flexible settlement mechanism the legislature recently established, but which is likely to result in closer scrutiny by controlling agencies, or whether to do things the old way. The results are in, and, as confirmed by focus group participants, only a few SMEs have used the new settlement options, while most prefer to stick with the old ways of doing things – by going through various intermediaries.

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Reduced Access to Privileges in Importing Technology Equipment

Technology equipment that one imports into Uzbekistan for one’s own technology needs,17 or for transfer under a license, is exempt from VAT and customs duties, upon appropriate certification by an authorized bank.18 At the beginning of 2004 a List of Machines, Machinery, and Technology Equipment, including that used for making construction materials, equipment, and designs, was approved.19 No import customs duties are levied on items on the list that are imported by legal entities for their own needs, or through leasing companies and foreign trade companies of government ministries, departments and of commercial associations.

There are at present two types of privileges in effect which have different application mechanisms. However, as focus group participants point out, the absence of a definition of the term “technology equipment” in legislation complicates matters when obtaining the approval of authorized banks and of customs clearance officials who certify that goods are exempt from customs duties and VAT. After promulgation of Resolution 4 of the Cabinet of Ministers at the beginning of 2004, agricultural equipment, construction equipment, medical equipment and equipment for personal services not on the Resolution approved list has not been being treated by customs authorities as technology equipment, even though an authorized bank has recognized it as such in accordance with current legislation. Consequently, the exemption from VAT and customs duties provided for by legislation is not applied to such equipment.

Moreover, Resolution 4 provides that the zero-rate customs duty for equipment on the List of Equipment be used only by leasing companies, but not by all lessors, and specifically, not by commercial banks with large financial and client bases (only 10 of the 25 lessors operating in Uzbekistan today are leasing companies).

Modernization of technology equipment is held back by difficulties of another sort when entrepreneurs sell obsolete imported equipment. According to legislation, when selling equipment, enterprises are required to pay VAT20 and customs duties21 on the original (contract) value of the equipment and pay a penalty assessed for the period between the date the equipment was imported into Uzbekistan and the date it was sold, which makes selling such equipment hardly an option. This problem was described in detail in IFC’s 2002 report.

It is true that the Government is working to simplify technology import procedures, however the measures it is taking to do so are contradictory.

Assessment of Difficulties with Import Procedures

Chart 11.11 presents respondents’ assessments of problems with various aspects of import operations.

17 Decree of the President of Uzbekistan UP-1987 dated April 9, 1998 and Decree of the President of Uzbekistan UP-2065 dated August 3, 1998.18 Article 71 of the Tax Code of the Republic of Uzbekistan and Article 33 of Law 470-1 of the Republic of Uzbekistan “On Customs Tarifs” dated August

29, 1997; Decree of the President of Uzbekistan UP-3122 “On Measures for Further Stimulation of the Development of Leasing” dated August 28, 2002.19 Resolution 4 of the Cabinet of Ministers of the Republic of Uzbekistan dated January 7, 2004.20 The tax is calculated based on the original cost of the equipment and is not subject to offset at resale – Annex to Order 447-F of the Cabinet of Minis

ters.21 Procedures for exemption of small and medium businesses from payment of import customs duties on technology equipment for their own production use,

registered by the Ministry of Justice April 8, 1999, No. 694.

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As in the case with exports, legislation fairly clearly defines the stages in executing import contracts (see Annexes 14 and 15). Annex 16 provides a practical example illustrating difficulties encountered in actually carrying out import procedures.

The Inequitable Position of SMEs

According to official data, the average weighted customs duties rate – defined as the ratio of all payments received to the sum total of imports – is on the order of 4.8%. This indicator does not fully reflect the position of SMEs: large holding companies and state associations frequently import goods on preferential terms while the entire burden of customs duties payments falls on private enterprises (see Box 11.5). SMEs importing finished goods or raw materials pay all customs fees in full.

BOX 11.5. EXAMPLES OF IMPORT PRIVILEGES GRANTED TO STATE ENTERPRISES

Resolution 172 of the Cabinet of Ministers dated April 28, 2000 exempts the enterprises of Uzsel’khozsnabremont from payment of customs fees (except customs clearance fees) for the period 2000-2005 when importing agricultural technology, assembly and spare parts, imported per government rulings.

Resolution 207 of the Cabinet of Ministers dated May 2, 2003 exempts GA Tashgorpasstrans from payment of customs fees (except customs clearance fees) for Mercedes-Benz buses, spare parts, special materiel, equipment, and other operating materials imported into Uzbekistan.

Resolution 201 of the Cabinet of Ministers dated May 1, 2003 exempts GAK Uzprommashimpeks from payment of customs fees (except customs clearance fees) for Case agricultural equipment, spare parts and technology imported into Uzbekistan.

Resolution 43 of the Cabinet of Ministers dated January 24, 2003 exempts GAZHK Uzbekistontemir iullari and State Concern Uzavtoiul from payment of customs fees (except customs clearance fees) for equipment and material brought in for use in the construction of a new railway line for the duration of construction.

22 In view of the small number of import enterprises (3% or less of the total sample), the data in all the charts for this set of enterprises should be considered merely illustrative.

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Thus, personal privileges granted to individual enterprises violates the principles of market regulation. From the outset such privileges place other importers at a disadvantage which has a negative impact on the development of economic relations.

High Customs Fees

The survey showed in 2002 and in 2003 that entrepreneurs identified the problem of high customs duties on import operations as their number one problem. In this connection, in 2002-2004 excise tax and customs duties on a whole series of groups of goods were raised (see Annexes 17 and 18).

TABLE 11.1. CUSTOMS DUTY AND EXCISE TAX RATES ON CERTAIN TYPES OF GOODS (AS A % OF CUSTOMS VALUE OF THOSE GOODS)

NAME OF GROUP OF GOODS 2002 2003 2004

Customs duty rates:

New tractors - - 5

Cane or beet sugar and chemically pure saccharose, in solid form - - 30

Yeast (active or inactive), other nonliving one-celled organisms (except vaccines), ready-made powders used in baked goods

10 10 30

Excise tax rates:

Household refrigerators 10 20 30

Lubricants - - 30

Clothing and clothing accessories, except knits - - 10

Rice - 33 40

Furniture 15 10 30

SMEs importing finished goods or raw materials pay all customs fees in full.

Difficulties With Import-Related Customs Procedures

As pointed out above, import contract procedures are fairly clearly described in legislation. On the whole, entrepreneurs report a discernible trend toward simplification of import procedures.

“We’re still having a rough time but compared to a few years ago, the difference is like night and day.”


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About two-thirds of respondents who did not import goods said they did not need to. The other third gave the following reasons: difficulties with import procedures in general and with customs procedures in particular; lack of information about foreign markets; restrictions on import contract settlements.

The existing difficulties with import procedures drive importers to resort to unofficial payments. To be specific, among respondents importing goods in 2003, 6% said unofficial payments were a very significant problem in their import operations.

Definition of Customs Value of Goods

The definition of the customs value of goods continues to present a serious problem for enterprises. A special data base has now been created – the Unified Foreign Economic Operations Electronic Information System – into which service banks and customs authorities input all contract data, including prices. However, as focus group participants commented, even if at registration customs authorities register a contract at one price, and after the goods reach Uzbek soil, clear customs, and the required fees are paid, it is at that point that another value– a greater one – can be determined at the customs booth.

As a rule, customs authorities refuse to accept the value indicated in the contract, if the goods arrive without a complete set of documents (for example, if an export waybill from the shipper indicating the price and specifying the entire itinerary is missing). Some documents go awry due to technical problems (shippers themselves often fail to send the entire package of documents, or some of the documents disappear en route) while others disappear because in a number of cases importers themselves conceal them or substitute fake ones recording lowered rates for imported goods.

“Customs officials obviously have a plan they have to fulfill for collecting customs fees, and they do everything in their power to up the value of goods so they can collect more money. They immediately try to knock out the contract value. Only informed entrepreneurs, well-versed in all the various procedures and armed with a complete set of documents, can make their case stick.”

“There’s no proving anything to a customs official. They can pick any document to pieces and they can find any price on the Internet, so the whole exercise becomes meaningless. Paying them off is always cheaper.”

“In my opinion, this all started when a few entrepreneurs faked shipping documents and now customs officials presume all of us are guilty.”


Procedures for Paying Customs Fees

Regulations set out by current legislation are contradictory: when customs duties are paid, customs officials levy VAT based on what they themselves decide the value of the goods is, but the amount of VAT used for tax purposes is the value recorded in the contract.

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All customs fees are paid according to a “tax-on-tax” system: first the customs value of goods is determined, then that value is used to calculate customs duties and excise (if the goods are subject to excise). VAT is then paid on the aggregate: customs value of the goods + customs duties + excise.23 As a result, the VAT actually paid and the VAT rate on paper can differ by as much as 10%, which, for a large volume of goods, can appreciably increase costs for an entrepreneur.

Mandatory Certification and Labeling Requirements for Imported Products

Mandatory certification and labeling requirements for imported products were introduced in Uzbekistan at the end of 2002.25 While the Government took this step to protect consumers from poor quality goods, these requirements have made implementation of import contracts more complicated and have increased costs for importing firms. Small enterprises have been particularly hard hit: the smaller the volume of goods involved, the greater the impact each time such costs are incurred. Large importing companies draft certification and labeling requirements clauses in Uzbek when ordering goods.

Importing goods into Uzbekistan is complicated by the fact that importers frequently have to do double certification – first through Uzstandart and then through a customs laboratory. As reported by focus group participants, it is not uncommon for Uzstandart to classify goods under one TN FEA code26 while customs laboratory officials put it under another. Duplication of procedures and lack of coordination among state agencies cause delays and make customs procedures more costly.

23 Articles 76 and 80 of the Tax Code of the Republic of Uzbekistan. 24 Instructions For Procedures for Calculating and Paying Value Added Tax on Goods (Services) Manufactured and Sold, approved by Resolution 43 of the Ministry

of Finance and by Resolution 2003-37 of the State Tax Committee dated March 7, 2003, registered at the Ministry of Justice April 29, 2003, No. 1238. 25 Resolution 427 of the Cabinet of Ministers “On the Implementation of Measures for the Improvement of the Importation of Consumer Goods into Uzbekistan”

dated December 5, 2002. Note: Resolution 318 of the Cabinet of Ministers “On Additional Measures for the Simplification of Procedures for Product Certification” adopted July 6, 2004, replaced the list of consumer goods subject to certification approved by Resolution 427 of the Cabinet of Ministers of the Republic of Uzbekistan, dated December 5, 2002 and the list of goods approved by Resolution 409, dated August 12, 1994 with a single list that includes both consumer goods and industrial goods. Moreover, a number of subgroups of consumer goods were deleted from the new list.

26 Trade nomenclature code for foreign economic activities (TN FEA). The code a product is assigned determines how much an importer pays in import customs fees.

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“The customs laboratory never accepts certificates issued by Uzstandart and it always thinks it has the last word. This means you have to give the customs laboratory 3 samples of each product for their expert examination, you have to make arrangements with somebody so that that individual can speed up the certification process for you and so that they don’t assign a TN FEA code that conflicts with the one assigned by Uzstandart.”

“If the customs laboratory gives you a different code, then you have to re-register the whole contract and then pay customs fees according to the schedule for the new code. Often customs officials just pick the category with the high-est duties for you.”


In June of 2004 the Government made the decision27 to introduce, as of October 1, 2004, a declaration system for attesting product compliance with established requirements as a measure designed to simplify import certification procedures somewhat. In this connection, Uzstandart was given two months to develop the regulations for procedures for declaring products compliant.

BOX 11.7.

Pursuant to Resolution 318 of the Cabinet of Ministers “On Further Measures for the Simplification of Procedures for Product Certification” dated July 6, 2004, a declaration system for attesting product compliance with requirements was introduced in the Republic, as of October 1, 2004.

Groups of goods such as coffee, tea and spices; cereal grains; flour and hulled grains; kaolin, marble, granite, gravel, cement, asbestos and other mineral products; splint-slabs and wood-fiber sheets soaked in resin, glued plywood; aluminum tableware and kitchenware for preparing and eating food; articles made of natural cork, etc. are among the goods subject to the declaration system of attesting product compliance.

A supplier can only execute a declaration of compliance for a product being imported, if there is an agreement for mutual recognition of compliance declarations between the Republic of Uzbekistan and the country of origin of the product (or between bodies they so authorize).

For further details on obtaining certificates see the chapter on Standardization and Certification.

In sum, the main barriers to imports are excessive demands placed on trading companies, lack of flexible settlement mechanisms, and difficulties with customs procedures. Lack of coordination among state bodies on a number of issues forces SMEs to resort to various schemes to get around the problems created, and feeds corruption in regulatory and oversight bodies. As a result “shadow” transactions grow in number while the cost of imports to end users increases. The resultant decrease in foreign economic operations of business entities impacts the growth rate of the economy as a whole.

Conclusion

From the foregoing discussion, one can conclude that the share of SMEs engaged in foreign trade remains low. The main barriers to foreign trade operations are a lack of settlement mechanisms, problematic customs procedures, and excessive demands placed on trading companies. The practice of introducing privileges applying to a restricted number of market players has a negative impact on market functioning. Uzbekistan’s failure to participate in common customs zones with neighboring countries creates further problems.

27 Resolution 318 of the Cabinet of Ministers dated July 6, 2004.

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Given the lack of coordination among state bodies, SMEs are often forced to resort to various kinds of schemes to avoid difficulties, while opportunities grow for corruption amongst regulatory officials. In addition, the frequency of “shadow” transactions increases, while the resulting increase in cost of imports is passed on to end users. In the end, putting the brakes on import and export operations for Uzbek firms results in a slowdown in economic development.

BOX 11.8

Pursuant to a decision28 of the SME Coordination Council, the Agency for Foreign Economic Relations is working to further improve small business import and export procedures and to simplify and reduce the amount of documentation related to permits.

RECOMMENDATIONS:

1. Simplify export-import procedures for private business:

further liberalize settlement of accounts during foreign trade transactions;

eliminate the practice of non-legislated demands made by various state agencies when registering foreign trade contracts, gradually changing the role of such agencies from regulation to monitoring.

2. Distribute materials to SMEs explaining procedures for registering export-import operations in detail, including samples of completed forms and applications.

3. Exempt, in stages, trading intermediaries from the mandatory sale of 50% of hard currency receipts obtained from exports, redirecting those resources to the promotion of export of products made in Uzbekistan.

4. Move forward with Uzbekistan’s integration into international (including WTO) and regional economic, trade, and customs unions to create an open market economy.

5. Incorporate a precise definition of the concept “technology equipment” into legislation.

6. Exempt technology equipment imported into Uzbekistan (regardless of purpose it is imported for) from VAT and customs duties.

7. Eliminate the practice of granting personal privileges to a limited number of enterprises.

28 Minutes 09-22 of Meeting, dated September 13, 2004.

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Ï Ð Î Â Å Ð Ê ÈS T A N D A R D I Z A T I O N A N D C E R T I F I C A T I O N

MAIN FINDINGS:

Uzbekistan has an excessive number of standards and certificates. Entrepreneurs are required to obtain them but information about the procedures for obtaining them is difficult to find.

In the opinion of 25% of those entrepreneurs who obtained standards, many of Uzbekistan’s GOSTs (National Standards) are outdated and in need of revision.

Additional expenditures entrepreneurs must make for mandatory certification of consumer goods they export make those goods less competitive in foreign markets.

Manufacturing enterprises using a compliancy mark incur additional costs that are not legal and not in accordance with international practice.

Main Findings

Standardization in Uzbekistan

Certification in Uzbekistan

Recommendations

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Standardization in Uzbekistan

At the present time 73,0001 standards for products and services are in effect in Uzbekistan, most of them mandatory.

The excessive number of standards is a remnant of the Soviet era and, in the opinion of respondents, that number is no longer necessary. One quarter of all respondents said that Uzbekistan’s GOST (National) Standards are outdated, in need of revision, and need to be adapted to today’s manufacturing conditions. Consequently, even with the enormous number of existing standards, 6% of respondents still had to develop their own standards and technical specifications or translate international standards, for lack of appropriate ones in Uzbekistan.

Obviously, the problem of outdated standards is complex and its solution requires a complex approach. The Government of Uzbekistan is already taking important steps in this direction.

Certification in Uzbekistan

Problems with certification in Uzbekistan are largely analogous to those that SMEs encounter with standardization.

Survey results indicate that 23% of respondents certified their products (goods, services) in 2003 and that in 68% of those cases certificates were mandatory. Analysis revealed that not all of the over 2,500 items on the list of goods and services subject to mandatory certification are listed for justifiable reasons.

1 According to data from the Pragma/USAID Project on Trade Development and Investments.

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For example, in 2002 a Resolution of the Cabinet of Ministers2 was adopted whereby as of October 1, 2002 specific consumer goods could be imported or exported for commercial purposes only if provided with a mandatory certificate of compliance.3 The government’s concern about domestic consumers is fully justified. But mandatory certification of exported consumer goods can hardly be justified from the point of view of their competitiveness since mandatory certification imposes additional expenditures on entrepreneurs and limits their ability to market cheaper, and therefore more attractive, goods abroad.

Due to the excessive number of mandatory certificates and because the country has no systematized informational base and no standardization and certification handbooks accessible to anyone wishing to consult or study them, an entrepreneur has to write to Uzstandart and go through a complicated bureaucratic procedure in order to obtain information about what has to be done to obtain the necessary certification. An analysis of survey data shows that access to such information was cause for concern for a significant portion of respondents who obtained the most popular certificates (65% registered compliance certificates for manufactured products, 18% for imported and exported products, 11% for work performed) in 2003.

Analysis of the survey brought another serious problem to light. In accordance with paragraph 5.5 of Uzstandart’s Guideline “Procedures for Payment for Work”,4 if certification providing for use of a compliancy mark5 is successfully issued, then the certifying agency and the applicant conclude a licensing agreement pursuant to which the applicant makes payments to the certifying agency so long as the agreement is in force calculated on the volume of sales of the certified product, according to the following rates:

for mass produced items – from 0.05% to 0.1%;

for batch produced items – from 0.1% to 0.5%;

for items produced individually – from 0.5% to 1%.

Focus group participants attested to the seriousness of this problem.

“Even though I had already paid all expenses associated with certifying my product, Uzstandart forces me to agree to make them regular payments, get this, for up to the amount of money earned from the sale of my product, and for what reason I have no idea…”


Thus, under the Guideline, manufacturing enterprises using a compliancy mark incur additional costs that are not legal and not in accordance with international practice, which requires that only

2 Resolution 427 of the Cabinet of Ministers of the Republic of Uzbekistan “On Implementation of Measures to Improve the Importation of Consumer Goods into the Republic of Uzbekistan” dated December 5, 2002. (Resolution 318 of the Cabinet of Ministers “On Additional Measures for the Simplification of Procedures for Product Certification” adopted July 6, 2004, replaced the list of consumer goods subject to certification approved by Resolution 427 of the Cabinet of Ministers of the Republic of Uzbekistan, dated December 5, 2002 and the list of consumer goods subject to certification approved by Resolution 409, dated August 12, 1994 with a single list that includes both consumer goods and industrial goods. Moreover, a number of subgroups of consumer goods were deleted from the new list.)

3 Issued by Uzstandart or other authorized body.4 Guideline approved by Uzstandart and Ministry of Finance Decree 722 registered by the Ministry of Justice May 11, 1999. 5 A “compliancy mark” is a duly registered symbol with which a product or the documentation of a service is marked to attest that a given product or service

meets a specific standard or other normative document (article 1 of Law of the Republic of Uzbekistan 1006-XII “On Certification of Products and Services” dated December 28, 1993.

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one one-time payment be made for the use of a compliancy mark.

For further survey results concerning enterprises that went through the certification procedure in 2003, see Annex 19.

Over the last 6 years the Republic of Uzbekistan has been intensifying the negotiating process for entry into the World Trade Organization (WTO). One of the key substantive issues under discussion is adoption and implementation of the obligations under the Agreement on Technical Barriers to Trade (TBT), which defines the conditions for the application of standards, technical rules and regulations, and certification procedures.

As part of its preparations for entry into WTO, Uzbekistan is participating with Kazakhstan, Kyrgyzstan, and Tajikistan in a USAID financed Regional Program on Metrology, Accreditation, Standardization and Quality. Vigorous efforts are now under way to harmonize the country’s national legislation governing standardization with the WTO TBT and WTO SFSM (Sanitary and Phyto-Sanitary Measures) Agreements, whose requirements regarding technical rules and regulations are mandatory but whose standards are merely voluntary. In this connection, technical rules and regulations are introduced solely for the protection of human and animal life, the environment, and national security, which is in keeping with the legal objectives defined by WTO TBT. To that end, a transitional period is required during which a state develops a plan for introducing mandatory rules and regulations and at the same time develops a plan for the transition to voluntary standards. There will also be a requirement to modernize the laboratories, which will carry out the procedures for certifying compliance, including the procedures for issuing certificates.

Beyond that, Uzbekistan is collaborating with a number of countries on reciprocal recognition of certificates. To date it has concluded such agreements only with the CIS and Turkey. Despite that, there are problems with carrying out the procedures for reciprocal recognition of certificates, including those of CIS countries. All the measures mentioned here will entail the development and implementation of an extensive educational program amongst local manufacturers and entrepreneurs to get them involved in the development of new technical rules and regulations consistent with WTO TBT and SFSM Agreements requirements.

RECOMMENDATIONS:

1. Continue efforts to streamline the legislative basis for certification and standardization.

2. Introduce the practice of using non-state forms of control analogous to those in use in countries with a market economy (this practice implies that enterprises will voluntarily introduce additional standards on the products they manufacture and will serve as a guarantee they are of high quality).

3. Abolish the practice of continual payments by manufacturing enterprises for using a compliancy mark to certification bodies.

4. Encourage firms wishing to switch to the manufacture of products meeting international standards and thereby increase their export potential.

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MAIN FINDINGS

The legal basis for licensing is being improved through unification of the normative acts governing licensing.

According to survey results, the share of respondents obtaining licenses remains small.

The share of short-term (valid up to one year) licenses increased noticeably in 2003, although according to legislation all licenses should be issued with a validity of not less than 5 years.

Regional differences in the time it takes to issue licenses continue to be an unresolved problem and require the attention of the Government

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L I C E N S I N G

Main Findings

Improvement of Licensing Procedures

Length of Time Licenses Are Valid

Length of Time Spent Obtaining Licenses

Recommendations

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Improvement of Licensing Procedures

2003 Survey data indicate that the share of respondents obtaining licenses remains small. Chart 13.1 shows that entrepreneurs working in the trade and public catering sectors need to obtain licenses most often, whereas agricultural enterprises have no need for a license unless they are involved in veterinary activities or other activities subject to licensing.

The decline in the share of respondents going through the licensing process was influenced by a decision by the Government, in mid-2002,1 to decrease the list of activities subject to licensing. In addition, other possible causes for the decline in the share of respondents obtaining licenses include: an enterprise’s changeover to an activity not subject to licensing; termination of business activity in an area subject to licensing; use by entrepreneurs of long-term licenses obtained in previous years.

There are 712 types of activities currently subject to licensing in Uzbekistan. Some of these have a number of subcategories3 of activities subject to licensing. Work on systematizing and unifying legislation governing licensing continued in 2003. Separate provisions4 have been developed for many kinds of licensed entrepreneurial activities (tourist trade; urban, suburban, inter-urban, and international transport of passengers and cargo; medical and pharmaceutical activities, etc.) to govern the entire process of registering and issuing licenses.

In the opinion of entrepreneurs, these solutions made the problems related to licensing noticeably less acute in 2003 than they had been in 2002.

The noticeable decrease in the share of respondents obtaining licenses in 2003 and the decrease in the acuteness of problems related to the licensing process are evidence that the regulatory climate in this sphere is improving in Uzbekistan. However, a number of unresolved problems require the attention of the Government. These concern the length of time licenses are valid and regional differences in the time it takes to issue licenses to entrepreneurs.

1 Resolution 236 of the Cabinet of Ministers dated June 28, 2002 “On Measures for the Implementation of the Law of the Republic of Uzbekistan ‘On Licensing Certain Types of Activities’”.

2 Resolution 236 of the Cabinet of Ministers of the Republic of Uzbekistan dated June 28, 2002.3 For example, urban and suburban passenger and cargo transport by motor vehicle is subdivided into urban and suburban passenger transport, interurban pas

senger transport, international passenger transport, urban and suburban cargo transport, interurban cargo transport, and international cargo transport.4 Regulations on Licensing Medical Activities, Regulations on Licensing Pharmaceutical Activities (Annexes 1 and 2 to Resolution 477 of the Cabinet of Ministers of

the Republic of Uzbekistan dated October 31, 2003); Regulations on Licensing Tourist Trade Activities (Annex to Resolution 497 of the Cabinet of Ministers of the Republic of Uzbekistan dated November 11, 2003); Regulations on Licensing Urban, Suburban, Interurban and International Transport of Passengers and Cargo by Motor Vehicle (Annex 5 to Resolution 360 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 21, 2003).

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Length of Time Licenses Are Valid

As noted in previous IFC surveys, according to legislation, licenses are issued for 5 or more years (i.e. their validity is not limited). A time limit on the validity of a license may be introduced only upon request of the applicant, or in the event the Cabinet of Ministers introduces a monopoly on a particular kind of activity.5

Survey results, however, indicate that the majority of entrepreneurs obtain licenses valid for no more than one year.

The growth in the number of respondents needing longer term licenses (from 3 to 5 years) may be due to the development of business trends (newly opened gas stations, pharmacies, etc.) where, as a rule, longer term licenses are required.

Focus group discussions of the discrepancy between the validity terms of issued licenses and legislative requirements revealed that entrepreneurs themselves often do not insist on long-term licenses. This is due to an unstable business environment and lack of visible guarantees of successful near-term business development. On the other hand, it is the view of focus group participants that since no additional fee is levied for obtaining licenses valid for 5-years, authorities not infrequently take it upon themselves to issue shorter term licenses, making it necessary for entrepreneurs to renew licenses and incur additional expenses which fill the budgetary coffers of the licensing authority.

5 Article 12 of Law 71-II of the Republic of Uzbekistan “On Licensing Certain Types of Activities” dated May 25, 2000.

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Time Spent Obtaining LicensesAccording to legislation, a license should be issued within 30 days of the date the application, with all required documents attached, is filed.6 In the event of refusal of a license, the licensing authority is required to provide the applicant with a written justification for the denial.7

According to survey results, review of a license application takes on average from one week to nearly four weeks. These figures are in keeping with legal requirements. Be that as it may, license registration time varies significantly when analyzed by region.

Focus group participants confirmed the existence of this problem and said that entrepreneurs have to resort to unofficial payments to resolve it.

“Unfortunately, for us in the regions, legislation mandated time limits are not taken into account. Strike a bargain with the right person and you’ll get your license in short order.”


Focus group discussions and analysis of survey data demonstrate that in completing licensing procedures, it is not always possible for entrepreneurs to make decisions on matters which, from a legal standpoint, should depend on them alone (for example, deciding how long a license will be valid). State officials continue to limit entrepreneurs in making these decisions—a fact which requires the attention and the intervention of the Government. For further details on the legal basis governing the licensing process, see Annex 20.

RECOMMENDATIONS:

1. Review the practice of using licensing fees as a source of income for issuing authorities. This will reduce costs dedicated to launching business activities for SMEs (in addition, the cost of issuing a license should not exceed costs for license registration and monitoring fulfillment of the terms of the license, and must not depend on the length of the validity of the license);

2. Increase oversight over issuing bodies to ensure licensing procedures are meticulously carried out at the regional level;

3. Analyze existing normative acts governing licensing to study the possibility of unifying requirements into one single normative act.

6 Paragraph 1 of Article 16 of the Law of the Republic of Uzbekistan “On Licensing Certain Types of Activities”.7 Paragraph 6 of Article 16 of the Law of the Republic of Uzbekistan “On Licensing Certain Types of Activities”.

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P E R S O N N E L T R A I N I N G A N D I N F O R M A T I O N T E C H N O L O G Y

MAIN FINDINGS

As in past years, the demand for paid personnel training services continues to be strong.

Entrepreneurs are still not making sufficient use of information technology. Among those surveyed in 2003, the share of PC users was on average 14% (almost one-third of them were SMEs). Entrepreneurs use computers mostly for financial reporting and to provide services to their customers.

The share of Internet users remained largely unchanged in 2003. However, the number of respondents planning to start using the Internet in the next 2 to 3 years rose to 26% (up from 15% in 2002).

Training

The survey shows that the general educational level of entrepreneurs is rather high. Business owners, directors, and chief accountants took part in the survey. Almost half of them have a college degree, 39% have technical backgrounds, and only 14% ended their education with a high school diploma.

According to the survey, the demand for specialized training remains quite high. More specifically, one-third expressed a need for staff training in accounting, and one-fifth in production management. Such high demand for continuing education in accounting may be associated with the frequent changes in tax legislation and the great number of accounting statements/reports SMEs submit to state authorities.1 There is a high demand for more training in areas such as sales, marketing, financial management, and information technology.

1 This problem is discussed in more detail in the Inspections chapter.

Main Findings

Training

Information Technology

Recommendation

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TABLE 14.1. SHARE OF RESPONDENTS INDICATING THEIR STAFF NEEDS FURTHER TRAININGBUSINESS

PLANNINGFINANCIAL

MANAGEMENTACCOUNTING MARKETING SALES

% of respondents by sector

Wholesale trade and public catering 18% 12% 29% 17% 21%

Construction 17% 13% 31% 17% 9%

Agriculture 25% 16% 38% 11% 7%

Industry 28% 19% 29% 29% 17%

% of respondents by enterprise size

Micro-firm/enterprise 23% 15% 35% 15% 11%

Small enterprise 27% 20% 35% 20% 16%

Medium enterprise 10% 16% 25% 21% 12%

One in three entrepreneurs is willing to pay for staff training in accounting, and one in four for business planning. It must also be noted that the share of entrepreneurs indicating a need for personnel training coincides exactly with the share of entrepreneurs willing to pay for a given type of training.

TABLE 14.2.% OF RESPONDENTS WILLING TO PAY

FOR GIVEN TYPE OF TRAINING WILLING TO SPEND ON TRAINING PER

EMPLOYEE PER YEAR (THOUSANDS OF SOUM)

Accounting 34 72

Business planning 23 64

Production management 21 73

Financial management 16 74

Marketing 15 64

Information TechnologyThe overwhelming majority of SMEs in Uzbekistan do not use computer technology in their work, while the share of enterprises that have computers has not increased: in 2003 it was only 14%. Yet those respondents that do have computers on average own two. Usually, it is medium and small enterprises as well as construction and wholesale trade enterprises that use computers. Computers are practically unused in agriculture.

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Generally, computers are used for financial reporting (85%) and customer services (62%).

According to official data,2 there was an overall increase of almost 80% in the number of Internet users in Uzbekistan in 2003 (up from 275,000 in 2002 to 492,000 in 2003). Yet this growth trend bypassed SMEs. According to the survey, only 6.4% of respondents are Internet users, compared with 5% last year.3 Around 28% have plans to get connected, which is a significant increase over previous years. The rest, however, do not plan to use the Internet in the future, mainly citing a lack of Internet providers nearby (31%), and a lack of any practical use for the Internet (28%).

2 According to National Information Agency of Uzbekistan (UzA) data.3 Reported growth is tentative insofar as it is subject to statistical error.

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Entrepreneurs with Internet access use the it mainly in their work in local markets. In particular, 46% use it to search for goods, raw materials, and services in the local market, 36% use it to search for partners, and 35% to analyze the local market.

Two-thirds of enterprises connected to the Internet are in Tashkent.

RECOMMENDATION:

1. Web sites of state organizations should be regularly updated and contain more information of practical use to entrepreneurs. This would encourage entrepreneurs to use computer and Internet technology.