Why Azerbaijan falls behind in "Doing Business 2020" report

Azerbaijan has been involved in “Doing Business” three years later, which has been published since 2002, and is currently the most widely used international source in assessing the state of business in Azerbaijan.

In “Doing Business 2015” report, that Azerbaijan was also involved for the first time, it was ranked as 80th out of 189 countries. In the 2016 report, Azerbaijan improved its position among those countries by upgrading from 80th to 63rd. Azerbaijan was ranked as 65th in 2017, as 57th in 2018 reports. According to “Doing Business 2019” report, Azerbaijan, which was included in the list of the 10 most reformist countries in the world, was ranked 25th among 190 countries by increasing 32 ranks compared to the previous year. However, in the latest report, our country lost its position by 9 ranks, to which it reached 1 year ago, and dropped to 34th among 190 countries in “Doing Business 2020”. In fact, this rank is not bad, given that among the countries, which were ahead of us in the last ranking, Georgia is 7th, Lithuania is 11th, Estonia is 18th, Latvia is 19th, Kazakhstan is 25th, Russia is 28th, Turkey is 33rd, and Armenia, which was 41st last year, is currently 47th. However, the issue that is currently getting public attention is why Azerbaijan is on decline in “Doing Business 2020” report. Therefore, the purpose of this article is to answer the question of why doing business has become more difficult in the last year, while the goal of the reforms in Azerbaijan is to improve the business environment. Although Azerbaijan’s position in the final report is satisfactory, the deterioration of our country’s rating by 9 ranks over the past year is alarming and contrasts with “reforms”.

To better understand the changes that are taking place, let us look at the main objectives and the main methodological aspects of this report. The purpose of the report is to regulate entrepreneurship and to measure its impact on the creation of new businesses and business operations. The “Doing Business” report evaluates the business environment, the efficiency and effectiveness of business processes using 11 indicators and 45 sub-indicators. The 10 indicators reflected in the report together form the business conductivity index. Here the indicator of labor market efficiency and public procurement is not taken into account when calculating the overall rating.

The “Doing Business” registration process is consistently implemented as a step towards improving legislation, providing positive feedbacks as a result of practical implementation and use of entrepreneurs. Thus, four main sources of information are used in preparing the report: relevant laws and regulations, results of surveys conducted by respondents - entrepreneurs, information provided by the government of the country and regional employees of the World Bank.

According to the latest report, deterioration of Azerbaijan’s position was caused by the decline on the following five indicators:

1) “Paying Tax” - 40th place (20th place last year), 2) “Registering property” - 44th place (17th place last year), 3) “Resolving insolvency” - 47th place (45th place last year), 4) “Getting electricity” - 80th place (74th place last year) and 5) “Protecting minority investors” - 105th place (2nd last year). Therefore, let us stand separately for each indicator where Azerbaijan’s position decreased.

1) The “Paying Tax” indicator includes payments for the firm's compliance with all tax rules (by number per years), time (by hours per year), total tax rate (as a percentage of the profit) and post-filing processes (this includes the amount of time spent on replacements and refunds of VAT payments, and on corporate income tax adjustments). The 2020 report shows that the number of tax payments in Azerbaijan was 9, the time spent 159 hours, the total taxes and their contribution to profits was 40.7%, and the post-process index was 83.8 out of 100 points. Thus, Azerbaijan is ranked 40th with 84 points in this 100-point rating. However, last year Azerbaijan was 20th. One of the main reasons for the deterioration of Azerbaijan’s position on this indicator in the latest report is increased time spent on replacements and refunds of VAT payments and high share of social insurance payments to profit.

2) The “Registering property” indicator is measured by the number of procedures, time (in days), costs (as a percentage of the value of the property) and the quality of land management index. At present, if the number of registration procedures for property is reduced to 4 and time to 4.5 days, the costs remain high. Thus, despite the fact that the average share of property registration costs in the cost of property in Europe and Central Asia countries is 2.7%, in the OECD member countries, is 4.2%, the corresponding figure is 7% in Azerbaijan. By the way, I would like to note that there is no fee for registration of property in Saudi Arabia. At the same time, the potential for improving the property registration indicator is in the regional quality management index in Azerbaijan. According to this index, Azerbaijan lags behind the average of European and Central Asian countries, as well as OECD countries. Key reforms in this index should be made in the area of ​​dispute resolution, information transparency and infrastructure compatibility.

3) The “Resolving insolvency” indicator is measured by the payout ratio (by time and cost) and the strength of the bankruptcy framework. This is due to the low level of repayment of businesses operating in the country, which deteriorates Azerbaijan’s position on this indicator. Therefore, this figure is 39.2 cents per dollar in Azerbaijan, but in the OECD countries, it is 70.2 cents. The current position of Azerbaijan on this indicator has slightly worsened compared to last year.

4) The “Getting electricity” indicator is measured by the procedures for connecting to the power supply network (by number), time (in days), cost (as a percentage of national income per capita), and by the supply reliability and tariff transparency index. The “Doing Business 2020” report shows that the number of procedures for connecting to the power supply network in Azerbaijan is 7, which is worse than the average of the Europe and Central Asia, and OECD countries. Thus, this indicator is 5.1 in Europe and Central Asia, and 4.4 in OECD countries. On the other hand, the cost of connecting to power supply networks in Azerbaijan (125.7% of per capita income) is lower than in Europe and Central Asia countries (271.9% of per capita income), and more than in OECD member countries (61% of per capita income). By this indicator, large number of procedures for connecting to the power supply network worsens Azerbaijan’s position. The most time consuming of these procedures is the submission of documents for the acquisition of technical conditions at “Asan Communal” (12 calendar days) and waiting for the completion and approval of external communication design at “Azerishig” OJSC. (11 calendar days).

5) “Protecting minority investors” indicator consists of two elements - regulation of conflict of interests and shareholder management indexes. The “Doing Business 2020” report shows that this is the area where most reform should be done in Azerbaijan. Thus, our position on this indicator is 105th out of 190 countries. Azerbaijan was able to score 50 out of 100 possible points on this indicator. The main reason for this is that there is no work done on corporate transparency, ownership and control, nor the shareholders' rights indexes.

In conclusion, I would like to note that Azerbaijan’s deterioration in the “Doing Business 2020” index also due to the incomplete transition to a market economy, the existence of problems with the business environment and its regulation, the lack of independence of the judiciary and judicial bodies, the non-adoption of the Competition Code and other anti-trust laws, the poor protection of property rights, especially intellectual property, the ineffective management of labor, capital markets and portfolio investments, monetary and banking systems, exchange rate and currency policies, as well as the corruption and the transparency. Without solving all these problems, it is impossible to improve the business environment in the country.