BEI Annual Report 4.pdf

BUSINESS ENVIRONMENT

IMPROVEMENT PROJECT

ANNUAL REPORT #4

OCTOBER 2009 – SEPTEMBER 2010

October 12, 2010 This report was produced for review by the United Agency for International Development. It was prepared by the USAID Business Environment Improvement Project implemented by The Pragma Corporation.

BUSINESS ENVIRONMENT IMPROVEMENT PROJECT

ANNUAL REPORT #4

OCTOBER 2009 – SEPTEMBER 2010

Contract Number: 176-C-00-06-00007

COTR/USAID/CAR: Lora Kudaibergenova

Erin Cole PROJECT MANAGER: Mohammad Fatoorechie ACTING CHIEF OF PARTY: Jonathan Crum

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

TABLE OF CONTENTS

PROJECT HIGHLIGHTS

PERFORMANCE VERSUS TARGETS SUMMARY

PROJECT RESULT #1: WORLD BANK DOING BUSINESS INDICATORS

PROJECT RESULT #2: ECONOMIC IMPACT

GEOGRAPHIC COVERAGE

CONTEXT INDICATORS

KAZAKHSTAN

GENERAL

TECHNICAL

UPCOMING EVENTS

KYRGYZ REPUBLIC

GENERAL

TECHNICAL

UPCOMING EVENTS

TAJIKISTAN

GENERAL

TECHNICAL

BEI TAJIKISTAN FOLLOW-ON WORK FORECAST

BEI MEDIA ACTIVITY

BEI YEAR 4 WORK PLAN PROGRESS REPORT

SUPPLEMENTAL PROJECT RESULT 1 (PR1) ECONOMIC IMPACT TABLE

BUSINESS ENVIRONMENT IMPACT TABLE (PR2)

BEI CASE STUDIES (2009 – 2010)

CASE STUDY KAZAKHSTAN- IMPROVEMENT OF BUSINESS INSPECTIONS

SYSTEMS

CASE STUDY KYRGYZ REPUBLIC – STREAMLINED ISSUANCE OF TAX PATENTS . 71

CASE STUDY TAJIKISTAN - STREAMLINED STATISTICS REPORTING

REQUIREMENTS FOR SMES AND DEKHKAN FARMERS

APPENDIX I: BEI MUNICIPALITY COVERAGE (2009 – 2010)

APPENDIX II: BEI PARTICIPANT TRAINING REPORT (2009 – 2010)

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 1

The Business Environment Improvement project (BEI) is pleased to submit its fourth annual report to USAID detailing progress and achievements for the period October 2009 - September 2010. The report is divided into two sections – the first section discussing highlights from the period and a summary of BEI performance versus targets across indicators included in the Performance Monitoring Plan (PMP) and the second section reporting on progress toward achieving specific work plan objectives and performance versus targets details. This report also represents a final report on activities within the Republic of Tajikistan and for PMP Project Results #1 and #2, which are not continued under the extended, fifth project year.

PROJECT HIGHLIGHTS

During the past project year BEI strengthened host country cooperation and deepened World Bank Doing Business (WBDB)-related reforms and host-country cooperation with the World Bank in Kazakhstan and the Republic of Tajikistan. Significant successes were achieved in both countries as they continued high-profile reforms of WBDB-measured processes. In the Kyrgyz Republic reform efforts began well, but were sidelined by the political and social crisis following the collapse of the Bakiev administration on April 7. Due to the World Bank’s delay until November 2010 in issuing the new Doing Business 2011 Report, BEI’s Year 4 Annual Report remains forward-looking with regards to how the World Bank will assess reform work over the past year.

All three countries have adopted new or amended laws and regulations at the national levels that represent steps forward and produce large financial savings for their business communities in areas outside of Doing Business measurement. Both Kazakhstan and the Republic of Tajikistan also adopted reforms with significant economic impact at the local level. Common themes from Year 3 of programs for licensing regulatory guillotines and new inspections regimes with modernized risk-management systems continue to develop and produce results in Kazakhstan.

In the Kyrgyz Republic, BEI has served as a primary source of urgent and expert advice for stabilizing the macroeconomic situation in the country, and the Project continues to closely coordinate with USAID and other donor organizations to assist the Transitional Government.

PERFORMANCE VERSUS TARGETS SUMMARY

PROJECT RESULT #1: WORLD BANK DOING BUSINESS INDICATORS

Doing Business 2007, based on 2006 data, provides the baseline figures from which the project will achieve at least an aggregate 25% improvement over 4 years. In calculating the 25% average improvement, the underlying variables are equally weighted and calculations are based on DB 2007 versus DB 2011 (2010 data expected to be published in 2010).

As the World Bank retroactively revises historic data each year to reflect methodological changes and other factors, the updated historic figures are provided in the table below.

The table below compares published Doing Business 2010 Report indicators over time, tracking change versus baseline (revised WBDB 2010 Report data for 2006), and percent variance to date versus baseline.

Positive percent variance represents an improvement in the specific indicator. In the case of Tajikistan’s “Protecting Investors” measurement, change against baseline increases from a value of zero (0) on the 10-point scale, and a percentage increase is provided against that scale of 60% and 50% for indicator values of 6 and 5, respectively. Due to the World Bank’s delay in releasing the Doing Business 2011 Report, data for Year 4 remains blank.

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 2

Indicator

Kazakhstan Kyrgyz Republic Tajikistan

Notes 2006 2008 2009 2010 Change 2006 2008 2009 2010 Change 2006 2008 2009 2010 Change

PR1. DOING BUSINESS PROCESSES

Starting a Business For World Bank “Doing Business” Indicators, an average net improvement of 25% is targeted for the life of the project for at least 5 of 9 indicators per country addressed by BEI as reflected by activities in the annual work plan.

BEI will track these data as reported by the World Bank annually, but not set forward-looking annual targets for individual processes.

Final comparison data is expected to be published in fall 2010 in “Doing Business 2011”.

Baseline data are from the Doing Business 2007 report (2006 data), as revised in 2009, for World Bank Indicators, and 2005 for BEEPS.

Highlighted 2009 and 2010 indicator data represents areas of BEI’s activity during Year 3 and 4 work, respectively;

however change percentage is calculated over the

Procedures (Number) 8 8 7 12.50% 9 4 3 66.66% 14 13 12 14.28%

Time (days) 21 21 20 4.76% 21 15 11 47.61% 67 49 25 62.68%

Cost (% GNI) 7 5.2 4.8 31.42% 10.7 7.4 5.2 51.40% 75.1 27.6 24.3 67.64%

Min Capital (% GNI) 23.1 15.9 13.4 41.99% 0.5 0.4 0 100.00% 378.6 216.8 9.9 97.38% Total Indicator Change (average %) 22.67% 66.42% 60.50%

Dealing with Construction Permits

Procedures (Number) 38 38 37 2.63% 22 13 12 45.45% 33 33 32 3.03%

Time (days) 231 231 211 8.65% 332 159 137 58.73% 221 381 250 -13.12%

Cost (% GNI) 2350.7 1,431.8 119.7 94.90% 816.5 405.7 165.2 79.76% 2425.2 1,420.7 1,022.9 57.82% Total Indicator Change (average %) 35.39% 61.31% 15.91%

Employing Workers

Difficulty of Hiring Index 0 0 0 0.00% 33 33 33 0.00% 33 33 33 0.00%

Rigidity of Hours Index 40 20 20 50.00% 40 20 20 50.00% 80 73 73 8.75% Difficulty of Redundancy Index 20 30 30 -50.00% 40 30 0 100.00% 40 40 40 0.00% Rigidity of Employment Index 20 17 17 15.00% 38 28 18 52.63% 51 49 49 3.92% Redundancy costs (weeks of salary) 9 9 9 0.00% 17 17 17 0.00% 22 30 30 -36.36% Total Indicator Change (average %) 3.00% 40.53% -4.74%

Registering Property

Procedures (Number) 8 5 5 37.50% 7 7 4 42.85% 6 6 6 0.00%

Time (days) 52 40 40 23.08% 8 8 5 37.50% 37 37 37 0.00%

Cost (% value) 1.2 0.1 0.1 91.67% 1.9 3.9 2.8 -47.36% 1.9 1.8 4.6 -142.10% Total Indicator Change (average %) 50.75% 11.00% -47.37%

Getting Credit

Legal Rights Index 5 5 5 0.00% 7 7 10 42.85% 3 3 3 0.00% Credit Information Index 4 6 6 50.00% 2 3 3 50.00% 0 0 0 0.00%

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 3

Public Registry Coverage (% adults) 0 0 0 0.00% 0 0 0 0.00% 0 0 0 0.00% life of the BEI project.

Private Registry Coverage (% adults) 5.5 25.6 29.5 436.36% 0.4 3.7 5.9 1375.00% 0 0 0 0.00%

Total Indicator Change (average %) 121.59% 366.96% 12.50%

Protecting Investors

Disclosure Index 7 7 7 0.00% 8 8 8 0.00% 0 4 6 60.00%

Director Liability Index 1 1 1 0.00% 1 7 7 600.00% 0 1 5 50.00%

Shareholder Suits Index 9 9 9 0.00% 9 8 8 -11.11% 5 4 5 0.00% Investor Protection Index 5.7 5.7 5.7 0.00% 6 7.7 7.7 28.33% 1.7 3.3 5.3 211.76%

(average %) 0.00% 159.86% 80.44%

Paying Taxes

Payments (Number) 9 9 9 0.00% 75 75 75 0.00% 54 54 54 0.00%

Time (Hours) 271 271 271 0.00% 202 202 202 0.00% 224 224 224 0.00% Total Tax Rate (% profit) 44.4 41.7 35.9 19.14% 67.2 61.4 59.4 11.60% 82.1 85.5 85.9 -4.62%

(average %) 6.38% 3.87% -1.54%

Enforcing Contracts

Procedures (Number) 38 38 38 0.00% 39 39 39 0.00% 34 34 34 0.00%

Time (days) 390 390 390 0.00% 260 260 260 0.00% 430 430 430 0.00%

Cost (% debt) 22 22 22 0.00% 29 29 29 0.00% 25.5 25.5 25.5 0.00% Total Indicator Change (average %) 0.00% 0.00% 0.00%

Closing a Business

Time (years) 1.5 1.5 1.5 0.00% 4 4 4 0.00% 3 3 3 0.00%

Cost (% of estate) 15 15 15 0.00% 15 15 15 0.00% 9 9 9 0.00% Recovery Rate (cents on the dollar) 39.3 40.6 40.6 3.30% 14.7 14.2 14.2 -3.40% 23.6 25.4 25.4 7.63%

(average %) 1.10% -1.33% 2.54%

Total Change WBDB (average %, of nine indicators) 27.28% 86.83% 13.14%

Note: PR1 data is taken directly from the World Bank Doing Business reports. Baseline data is from the 2007 report (2006 data) as revised in 2009.

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 4

Inspections (BEEPS) Incl. fire, SES, police, environment, tax, customs and labor inspections. No exact data were available for the number of labor inspections per year;

data est. taken from 2005 BEEPS graphs.

Inspections (Number) 11.65 NR NR NR 13.93 NR NR NR 11.64 NR NR NR

Time (hours) 16.92 NR NR NR 58.47 NR NR NR 17.08 NR NR NR

Bribes (% frequent) 23 NR NR NR 52.8 NR NR NR 21.3 NR NR NR

NR = Not Reported. According to the EBRD, data for 2007 has reportedly been collected, but has not yet been published.

PROJECT RESULT #2: ECONOMIC IMPACT

The impact of individual reforms is presented in detail in the PR2 table. Following are the summary results for the 2009 – 2010 contract year.

Indicator Kazakhstan Kyrgyz Republic Tajikistan

2010 2010 2010 Target Actual Target Actual Target Actual

PR2. BUSINESS ENVIRONMENT IMPACT

Business environment total annual impact not attributable to national Doing Business reforms (in $mln) *

80 120.8 4.0 4.35 3.5 22.0

A: Business environment national-level, non- Doing Business annual impact (in $mln)

50 86.4 3.2 4.35 3.0 13.2

B: Business environment sub-national level, non- Doing Business annual impact (in $mln)

30 34.4 0.8 0.0 0.5 8.8

Note: BEI PR2 targets were sub-divided and specified to be reported as national not related to WBDB reforms and sub-national during the December 2008 PMP revision. 2008 impact includes WBDB-related reforms.

PR2 impact estimates are calculated anew each year, rather than cumulatively.

PR2 constraints reduced sooner than 6 months prior to September 2009 are validated preliminarily when possible

* Total of lines A and B, below

* Years 2009 and 2010 estimated PR2 totals not including impact estimates for improvements captured by PR1 changes

Indicator 2007 2008 2009 2010 Project Country

Total CUMULATIVE PR2 BUSINESS ENVIRONMENT IMPACT (millions USD)* Republic of Kazakhstan 131.67 289.90 209.40 120.80 751.77

Kyrgyz Republic 9.65 34.20 60.70 4.35 108.90

Republic of Tajikistan 4.78 249.77 23.00 22.00 299.55

Project Grand Totals 146.10 573.87 293.10 147.15 1,160.22

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 5

GEOGRAPHIC COVERAGE

Geographic coverage details are presented in Appendix I (below). Follow are the summary results for the 2009 – 2010 contract year.

Kazakhstan Kyrgyz Republic Tajikistan

2009 2010 2009 2010 2009 2010 Actual Target Actual Actual Target Actual Actual Target Actual

Contribution to USAID CAR MEASURES: EXPANDED GEOGRAPHIC COVERAGE Number of municipalities receiving BEI assistance 27 15 15 17 12 8 10 6 8 Yearly targets for BEI geographic coverage are developed between project and USAID on an annual basis, and are not specified in the PMP

CONTEXT INDICATORS

In accordance with the PMP, the following data is reported to provide additional information regarding the business environment.

Context Indicator Kazakhstan Kyrgyz Republic Tajikistan

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

SME contribution to GDP* 40.5% 35.8% 34.6% 31.2% 31.1% 43.6% 44.7% 45.4% 42.6% 45.7% 41.6% 42.3% 43.5% 48.0% 49%

Gross foreign direct investment (FDI) in sectors outside of extracting industries such as oil and gas, mining, metals, power generation (USD millions / % GDP*)

4651.4 / 8.14%

8107.6 / 10.01%

12,927.

2 /

12.45%

13,609.

6 /

10.18%

14367.9 / 9.13%

185.9 / 7.56%

280.5 / 10.41%

382.2 / 10.04%

858.7 / 16.74%

653.6 / 14.30%

104.4 / 5.00%

NR 202.3 /

5.45%

358.7 / 8.72%

188.1 / 3.4%

World Bank’s “Doing Business” Country Ranking*

63** 80*** 64 63 90** 99*** 80 41 133** 156*** 164 152

World Bank’s Government Effectiveness indicator*

-0.57 -0.52 -0.58 -0.47 -0.87 -0.77 -0.75 -0.70 -1.07 -1.02 -0.97 -0.88

World Bank’s Rule of Law indicator* -0.80 -0.91 -0.83 -0.78 -1.08 -1.23 -1.19 -1.26 -0.98 -1.06 -1.13 -1.12

World Bank’s Control of Corruption indicator*

-0.93 -0.88 -0.91 -0.95 -1.08 -1.10 -1.08 -1.06 -1.09 -0.93 -0.86 -0.99

World Bank’s Regulatory Quality indicator* -0.45 -0.49 -0.45 -0.37 -0.72 -0.60 -0.40 -0.32 -1.03 -1.05 -1.02 -0.97

Notes: World Bank data (Doing Business and Governance Indicators) from 2006, 2007 and 2008, revised in 2009 reports.

* Year indicates publication date of data, data lags one year and previous year’s data revised based on current official estimates. N/R = not reported.

** As of 2007 DB rankings. After methodology changes in 2008, this ranking is no longer available for comparison purposes in current WB publications.

*** As of 2008 DB rankings. After methodology changes in 2009, this ranking is no longer available for comparison purposes in current WB publications.

For World Bank’s “Doing Business” Country Rankings, 1 is best and 183 is worst.

For World Bank’s indicators, 2 is best and -2 is worst.

Data for SME contribution to GDP and FDI in non-extractive industries are taken from national statistics sources: the International Monetary Fund, Ministry of Industry and Trade of Kazakhstan, National Bank of Kazakhstan, Ministry of Economic Development and Trade of Kazakhstan, Kyrgyz National Statistical Committee, State Statistics Committee of Tajikistan, and State Committee for Investments and State Property Management of the Republic of Tajikistan. Kazakhstan has not consistently published data on the percent of SME contribution to GDP since 2006.

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 6

KAZAKHSTAN

GENERAL

BEI in Kazakhstan is co-financed jointly by the Government of Kazakhstan and USAID as part of the Program for Economic Development (PED)—part of the Houston Initiative agreement between the United States and the Republic of Kazakhstan. During the 4th Project Year the Government of Kazakhstan (GoKZ) continued cooperation with the private sector and BEI to simplify the business environment, creating in spring of 2010 the Joint Coordination Council (JCC) under the President and GoKZ to assist in improving the business climate for SMEs, eliminating administrative barriers, and realizing the President’s “Strategic Plan for Development of the Republic of Kazakhstan until 2020” and program “Road Map of Business 2020”. BEI Country Director Sergey Pizikov was included in the JCC, which combines the functions of the previous, high-level Anti-Crisis Council and Commission on Administrative Barriers in which BEI participated.

The President also ordered in April 2010 for local (oblast) administrations to begin revising and optimizing all permitting documents and procedures in accordance with his instructions for government (at all levels) to reduce by the end of 2010 by 30% the administrative expenses for business operation (with an additional 30% by the end of 2014). Ongoing activities under the JCC include optimization of inspections systems based on improved risk-management principles, simplification of procedures for voluntary administrative liquidation of a business, and revision of licensing and permitting systems at both national and local levels, with reductions in the number of types of permits and licenses based on the guillotine method.

TECHNICAL

In Kazakhstan, BEI had a successful year facilitating business environment improvement both directly and via partners.

BEI’s work with Government partners provided significant results this project year. The overall business environment impact (PR2) from BEI Year 4 is estimated at over $122.1 million (see Business Environment Results Table), divided into $34.4 million in sub-national impact and $87.7 million national non-Doing Business impact. An additional $27.7 million in estimated impact associated with WBDB-related reforms is presented for context purposes only.1 This is believed to be a very conservative estimate, as several changes with anecdotally larger costs were assessed at lower levels or excluded from assessment due to lack of quality data.

Based on BEI’s approved 2009-2010 work plan, of 121 items expecting completion during this project year, 86.78% (105) have been completed, and the remaining 16 items have been rescheduled to the following project year or discontinued to accommodate official government partner work schedules.

Doing Business Activity

During Project Year 4 BEI continued efforts with ministerial working group on improving the Doing Business indicators for: Starting a Business, Dealing with Construction Permits, Registering Property, Protecting Investors, Getting Credit, and Closing a Business, as well as the umbrella expert group under Vice-Prime Minister Orynbaev directing the overall WBDB-related reform effort. Direct technical

1 See Supplemental Project Result 1 (PR1) Economic Impact Table, below

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 7 assistance was provided by BEI to the Ministry of Justice, Ministry of Economic Development and Trade (MEDT), Construction Agency, Agency for Financial Control and Ministry of Finance. These efforts were bolstered by the first year of increased engagement in Kazakhstan from the World Bank Doing Business Reform Team, which developed its own reform memo with the Government, increased monitoring of reform efforts and positioned the Bank to take the lead on bankruptcy procedure improvements.

The World Bank has announced that the Doing Business 2011 Report will be available November 4, 2010, and not during September as previous reports were provided. This delays evaluation of improvement effects on KZ’s indicators for Year 4 as well as and lagging impact from reforms adopted during BEI Year 3.

Appropriate updates will be presented in the next quarterly report.

Following are short summaries of BEI-facilitated reforms in Kazakhstan during the 2009-2010 project year related to WBDB indicators. Due to the survey nature of the WBDB indicators, not all changes may be fully reflected in the Doing Business report even if they took place prior to the WB data-collection cut-off date of June 1. Though the WBDB records changes this year in multiple indicators, a portion of the relevant legal changes were enacted and implemented during the previous, 2007-2008 BEI project year, and are not reproduced here.

Starting Business 2009-2010

Law #239-IV of January 20, 2010, “Amendments and additions to some legislative acts of the RK regarding simplification of state registration for legal entities, branches and representative offices”, and Laws #257-IV and #258-IV of March 19, 2010, “On state statistics” and “On modification and additions in some acts of Republic Kazakhstan concerning state statistics and taxation” are designed to affect the measured Starting a Business (SaB) process in the following manner:

1) Reduce initial charter capital requirements for new businesses from 141,300 KZT (100 “Minimum Calculation Indexes” or about $961) to 100 tenge (about $0.68)

2) Eliminate SaB procedure #2 (Open bank account and deposit initial capital; pay registration fee into the account of the Ministry of Justice)

3) Reduce time required for SaB procedure #3 from 14 to 12 days (State registration of legal entity, statistical, and tax registration with the local department of Ministry of Justice)

4) Eliminate SaB procedure #5 (Notarize certificate of state registration and other post-registration documents)

These changes eliminate 2 procedures, 4 days and 8,500 KZT in costs (about $58), from the registration process based on World Bank evaluations, reducing time from 20 to 16 days and cost from about $294 to $236. The changes also remove about $960 in charter capital costs.

Dealing with Construction Permits 2009-2010

Government Decree #1467 of September 29, 2009, “On amendments and additions to Government Decree #425 of May 6, 2008, ‘On Some measures for improving issuing construction permits for building’”, Government Decree #1468 of September 29, 2009, “Some issues of implementation of The Law RK ‘On construction’”, and Government Decree #1656 signed October 23, 2009 “On adoption of rules for typing of buildings and constructions as technically complicated sites and on amendments to Government Decree of the Republic of Kazakhstan #918 of August 19, 2002” are designed to affect the measured “Dealing with Construction Permits” (DwCP) process in the following manner:

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 8

1) Reduce the time required for DwCP Procedure #1 from 20 to 10 days (Request and obtain land allocation permit from Akim of Almaty City)

2) Merge DwCP Procedure #2, Procedure #3, Procedure #4 and Procedure #7, reducing total time from 17 to 8 days (Request and obtain technical conditions from the water and sewage authority, Request and obtain technical conditions from the telephone authority, Request and obtain technical conditions from the electricity authority and Request and obtain architectural planning Assignment

(APZ))

3) Eliminate DwCP Procedure #5 (Notarize documents)

4) Reduce time required for DwCP Procedure #14 from 30 to 15 days (Request and obtain expert examination of project documentation)

5) Reduce time required for DwCP Procedure #16 from 14 to 7 days (Request and obtain Rendering Building and Assembly Jobs Permit from the State Architectural Supervision Authorities)

6) Eliminate DwCP Procedure #31 (Request acceptance of the building from Working Commission)

7) Eliminate DwCP Procedure #32 (Receive inspection by the Working Commission)

8) Eliminate DwCP Procedure #33 (Obtain Act from Working Commission)

9) Eliminate DwCP Procedure #36 (Obtain Akimat approval of State Acceptance Commission decision)

These changes eliminate 8 procedures, 84 days, and 29,663 KZT (about $201) from the permitting process based on World Bank evaluations, reducing time from 211 to 127 days, and cost from 1.006 million to .976 million KZT (about $6,643). Following discussions with and additional research work by World Bank Representative Igor Artemiev, these changes are expected to be considered in the DB 2011 Report, along with uncounted construction reforms from 2009.

Registering Property 2009-2010

Government Decree #393 of May 7, 2010 “On additions and changes into some decisions of the Government of Republic Kazakhstan” is designed to affect the measured “Registering Property” (RP) process in the following manner:

1) Reduce time required for RP procedure #5 from 17 to 5 days (Registration of the title at the Registration Service Committee)

This change will eliminate 12 days time from the process from the registration process based on World Bank evaluations, reducing days required from 40 to 28.

During March 2010 the Government submitted to Parliament the draft Law “On Amendments and Changes in the Law On Joint-Stock Companies” created with assistance from BEI, the Agency for Financial Supervision (AFS) and World Bank. The new Law contains provisions on:

the fiduciary duties and responsibilities of joint-stock company directors;

reduction of the threshold for “large transactions” from 25% of the company's assets to 10%;

approval and notification for major transactions and related-party transactions where the approval of an extraordinary meeting of shareholders is required;

external appraisal of related-party transactions now required prior to approval of the transactions;

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 9 a clear definition of directors’ responsibilities and liabilities for company management;

authorization for shareholders to file lawsuits against company directors and to claim damages and return profits, if it is possible to prove that the company had losses or failed to receive income due to deals concluded with inferior terms and conditions; and authorization for courts to recognize related-party transactions as invalid, if there is evidence that they damaged the company, and that they could be concluded on better terms without related-party interest.

The Law is expected to be adopted during the fall Parliament session as part of a package of legislature on mortgage, financial consumer rights protection, and investor’s protection and it may improve Kazakhstan’s “Protecting Investors” ranking by more than 20 places.

At the beginning of the project year BEI, together with the "First Credit Bureau", provided recommendations on the "Getting Credit" indicator to the working group under the AFS, and specifically regarding liberalization of loan procedures and the priority rights of secured creditors during bankruptcy and reorganization processes. Due to the financial-economic crises the recommendations on loan procedure liberalization have not found support among the Government and banking-sector working group members, however BEI’s advice on secured creditors is supported by the AFS, Ministry of Finance, Insolvency Committee and Association of Financiers.

Based on BEI’s recommendations to the Ministry of Finance’s Insolvency Committee, the Government has decided to improve the insolvency system and adopted a joint GoKZ/World Bank reform plan for the work. This plan begins during September 2010 with a Report on Observance of Standards and Codes conducted jointly with the World Bank, preparation during 2010 of a concept for insolvency system reformation, adoption of a new law on corporate bankruptcy in 2011, and adoption of a law on individual insolvency by 2014. BEI successfully passed leadership of these reform efforts to the World Bank, and though it will provide recommendations on drafts developed to improve the Closing a Business indicator, expects to focus Project effort toward other areas.

Non-Doing Business Activity

In April, 2010, in cooperation with the Construction Agency (CA), BEI developed basic construction rules for Kazakhstan’s oblasts, which were approved by the CA Head Mr. S.K. Nokin and entered effect in July 2010. These rules take precedence over local construction rules, which now must be amended for compliance. The 14 oblast construction departments have begun drafting changes to their local rules, which is expected to conclude in December 2010. The BEI Project is assisting with the development process, and at the CA’s request provided seminars for SMEs and municipal governments, and monitoring in 14 regions on construction regulatory changes. Monitoring results will feed into recommendations for additional national-level construction process improvements, to be provided to the CA during the 5th project year.

BEI developed a methodological guide to the process for voluntary liquidation of a business, which was approved by the Government and distributed to the business community in July 2010. BEI’s monitoring recommendations for streamlining improvements to the liquidation process were presented to the Ministry of Finance (MoF) and Ministry of Justice (MoJ) in January 2010, and have been incorporated into the new Law On State Registration of Legal Entities, now under review by Government with adoption expected by the end of 2010.

BEI, in cooperation with the USAID RTLC and EREC Projects, supported implementation of the Law On amending certain legal acts of the Republic of Kazakhstan on private entrepreneurship #188 of July 17, 2009, by

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 10 assisting 32 inspecting bodies to develop their checklists and planning systems based on risk management principles. Of these, the most significant GoKZ bodies receiving BEI assistance include the:

State Committee for Sanitary-Epidemiological Supervision of the Ministry of Healthcare, Tax Committee of the Ministry of Finance, Committee on Industry (Manufacturing) of the Ministry of Industry and Trade, Fire Security Committee of the Ministry of Emergency and Industrial Security, Construction, Housing and Public Utilities Agency (Construction Agency), and

Financial Supervision Agency.

BEI also developed with the MEDT a core concept for a risk management system, which serves as the base for individual systems tailored to the needs of each inspecting body. During February 2010 the 48 state inspecting bodies adopted required reporting, checklist, and risk assessment criteria for conducting inspections of private entrepreneurship, and posted inspections schedules for 2010 on the website of the General Prosecutor.

The adoption of improved inspections systems represents a paradigm shift toward responsiveness by Kazakhstan’s state bodies to the citizenry they serve. The Ministry of Economy and Budget Planning estimates that implementation of new risk-management systems, checklists, and other streamlined measures to reduce unwarranted inspections will eliminate half of state visits and reduce the time required for the remaining inspections of Kazakhstan’s 825,000 entrepreneurs by 30%, saving over $34.5 million USD per year, beginning March 2010 to April 2011. BEI will continue to assist the GoKZ with recommendations following monitoring of risk-management system and checklist implementation during Year 5.

To publicize changes, BEI conducted public seminars on the amendments and additions to the procedure of inspections of private entrepreneurship for representatives from state bodies and the private sector in the cities of Astana, Almaty, Oskemen, Pavlodar, Shymkent, Oral, Zyryanovsk, Ridder and Kokshetau between February and May 2010. BEI also monitored implementation of the new inspections system in Astana, Almaty, Oskemen, Pavlodar, Shymkent, and Oral cities on behalf of the MEDT and Committee on Legal Statistics and Special Accounting of the General Prosecutor. Based on monitoring results that showed the public to be widely unfamiliar with the inspections reforms, BEI developed the brochure What should private entrepreneurs know about questions of inspections?, which was presented to the media in July 2010 and distributed throughout Kazakhstan as well as on-line.

BEI continued licensing and permitting improvements during the 4th year, in conjunction with the USAID RTLC project and Government expert group. The draft Law On Changes and Amendments to Some Acts Concerning Improvement of Permitting System was passed to Parliament in June 2010 and is expected to be reviewed and accepted by the end of 2010. Once adopted, this law will reduce the number of licenses and permit types from 1015 to 684—a 33% reduction.

With the support of BEI, the Government has, however, moved forward with other, specific licensing reforms, including among others:

Elimination of licensing for customs warehousing, brokering, and related customs activities, expected to save 374 entrepreneurs over $3.9 million per year;

Adoption of definitions and mechanisms into the legal base for creating a national electronic registry of licenses and an E-licensing system to reduce opportunities for corruption and speed application processes; and

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 11

Amended licensing requirements for kindergartens, enabling these businesses to rent—rather than forcing them to buy outright—their operating premises, saving almost $25 million for an estimated 936 new kindergartens per year.

In fall 2009 the Ministry of Justice began implementation with BEI assistance of amendments to Resolution #840 On Approval of the Rules of Organization of Legislative Activities by the Authorized Bodies of the Republic of Kazakhstan, which effectively lay the foundation for analysis of benefits and costs for stakeholders, including entrepreneurs, from proposed regulations. The Resolution provides recommended methods for Government bodies to calculate financial and economic impact assessments of direct and indirect costs to national and local budget, regulating bodies, the income of individuals and businesses, as well as any other economic effects for implementing regulating acts. However, the Government has not yet provided specific instructions for Regulatory Impact Analysis (RIA) under Resolution #840, as RIA has not remained a consistent priority for the GoKZ.

From May 3-7, 2010, BEI sponsored a study tour to Rome, Italy, for two GoKZ representatives, with BEI Country Director Sergey Pizikov, to attend a training conference on international practice in implementation of Regulatory Impact Analysis. Representatives from the MEDT and Ministry of Industry and Innovation were trained during sessions provided by internationally recognized RIA experts Mr. Scott Jacobs, Dr. Andrea Renda and Mr. Cesar Cordova from Jacobs & Associates, and Mr. Wim Jansen from the Ministry of Finance of the Netherlands. Following this study tour and additional training by BEI on the practical implementation of impact analysis, the Government adopted a plan for gradual introduction of RIA use when drafting business regulations. Further steps have been slower than anticipated however, as the cooperation of the Government is needed to introduce RIA for the activities of regulating bodies at the national and sub-national levels and for expert groups: which will include development of relevant methodologies and trainings, with BEI assistance, during Project Year 5.

On June 24, 2010, the draft Law On improving entrepreneurship regulation transparency by restricting rule-making by state bodies under the subordination of Government (ministries, committees and agencies), developed with BEI assistance, was approved by the Government and sent to Parliament. This law will limit the power of Government ministries to develop legal acts regulating entrepreneurship themselves, without the approval of the Government or Parliament. Adoption by Parliament is expected during fall 2010.

Sub-National Activity

At the end of March 2010, BEI’s subcontractors in Kazakhstan (individual entrepreneur Zhanna Alexsandrova in Pavlodar, the Fund for Informational Support for Society Development (FIPRO) in Oskemen, association “Center of Small Business” in Oral, and Business Incubator SodBI in Shymkent) completed activities as called for by their 2009-2010 work plans and finished their contracts with BEI. The subcontracts performed BEI activities in Astana, Oskemen, Oral, Pavlodar, Shymkent and surrounding regions in close collaboration with the BEI country offices and facilitated with local administrations successful remove of oblast-level administrative barriers during the past year totaling over $16 million USD per year in estimated impact. These partners, equipped with the knowledge and methodologies received through BEI, will continue work along the lines set up by their cooperation with the Project. BEI expects to continue to technically support each subcontractor as partners in their ongoing local business environment improvement efforts throughout Project year 5, including subcontracting several local partners anew.

At the request of MEDT, BEI began assisting the Government and the Forum and Entrepreneurs of Kazakhstan with an additional local-level licensing and permitting guillotine patterned from and supported by the national expert group on licensing reform. Between May and August 2010 BEI worked with the Atyrau and Mangystau Oblast Akimats to review and optimize local-level licensing and permitting procedures. The review has identified the numbers of permit and license types for businesses (108 permits in Mangistau oblast and 333 in Atyrau Oblast), and BEI continues to assist the Government with developing

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 12 recommended standards for issuing regional and local licenses and permits, and broader recommendations for streamlining local level issuance procedures (such as to reduce time required for issuing permits, developing procedure process maps, implement streamlined “one-shop-stop” window services in state bodies, eliminate notary requirements and illegal documents, and etc.). BEI’s recommendations and draft standards were presented to MEDT in August and September, and are expected to be adopted by the end of 2010. During 2011, following adoption of the Law on Licenses and Permits, the Government will pursue additional removal of unnecessary local licenses and permits not eliminated by the new Law.

During Project Year 4, BEI and its partners conducted monitoring in the cities of Astana, Almaty, Oral, Oskemen, Shymkent for the Ministry of Justice of implementation by Public Service Centers (PSCs) of changes to legislation regulating registration of legal entities and property. Monitoring results were presented in May to the GoKZ and to regional seminars of PSC employees in the cities of Karaganda and Almaty, and show improvements in PSC work in providing information and reducing the number of processes, but also problems in high turnover and a lack of professionalism and professional training in the skills of PSC staff. BEI is developing a report with recommendations for further PSC improvements including on:

opening specialized educational institutions for PSC staff, training PSC employees in ethics and communication, developing electronic training manuals, creating electronic document archives, and increasing the number of regular PSC employees.

This report with recommendations is expected to be presented to the GoKZ, local akimats, PSCs, regional departments and private sector partners, during fall 2010.

UPCOMING EVENTS

Seminars on construction issues are planned in cooperation with the Construction Agency for local construction bodies and companies in Pavlodar, Karaganda and Kokshetau during October 2010

A series of round tables on implementation of amendments to the Law on Licensing and Permits is planned for Almaty, Atyrau, Aktau, Oskemen, Oral and Shymkent during November-December 2010

Regional seminar co-organized with the Ministry of Justice is planned in western Kazakhstan (cities of Aktau and Aktobe) on improving the quantity of Public Service Center services during November 2010

KYRGYZ REPUBLIC

GENERAL

During the first half of BEI’s 4th project year the Kyrgyz Republic passed the first stage of public administration reforms called for by the reorganization of the Government and President’s Administration announced October 20, 2009. Accordingly the Government was streamlined and the President established the Central Agency for Development, Investment and Innovations (CADII), responsible for the development of economic policy, and by virtue of their position a key contact for BEI.

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 13

During March opposition political parties and the Government held a series of meetings, first on March 17 with about 3,000 public attendees, and then on March 23 and 24 for 742 selected delegates. These meetings directly raised issues between the opposition and Government, particularly economic complaints regarding increased tariffs for electricity, hot water, and mobile communications.

Following violence surrounding April 7 and 8 opposition protests, former President Bakiev resigned and was replaced on April 8 by an Interim Government of the Kyrgyz Republic (GoKR) headed by Head of the Executive Committee of the People’s Assembly, Roza Otunbaeva. The Interim GoKR planned to operate for six months, allowing for adoption of a new constitution and arrangement of presidential and parliamentary elections. The Interim GoKR was headed by Roza Otunbaeva, with Almazbek Atambaev as her first deputy and responsible for the economic sector. Other deputies were: Temir Sariev as Minister of Finance, responsible for finance and credit; Omurbek Tekebaev, responsible for reforms; Azimbek Beknazarov, coordinator of prosecution bodies and courts; Ismail Isakov as Minister of Defense and coordinator of enforcement agencies; and Elmira Ibraimova as Publicity and Media Coordinator.

As its first acts, the GoKR dissolved the previous Government, Parliament and the President’s bodies of the Central Agency for Development, Investments and Innovations, President’s Secretariat and Office, and suspended the Central Elections Committee. Government and Parliament authorities are exercised by the GoKR itself; however local and state administrations are not affected, barring other, specific orders.

By decree of the GoKR of April 27, a new constitution was drafted and adopted by referendum on June 27.

Following adoption of the new constitution, the Interim GoKR was replaced by a Transitional GoKR with Roza Otunbaeva as President until December 2011, and parliamentary elections scheduled for October 2010.

TECHNICAL

On April 13, 2010, USAID/CAR issued a Notice to Proceed (NTP) instructing BEI to immediately cease implementation of its approved work plan in the Kyrgyz Republic, and during the period of KR political transition, exercise the priorities of USAID assistance to the authorities in Kyrgyzstan in meeting the immediate needs of the population and providing for the stability and planning of the GoKR. This and subsequent NTPs were superseded by a revised BEI work plan for assistance to the Interim and Transitional GoKR during July 2010.

Overall business environment impact from BEI Year 4 is estimated at $4.35 million (see Business Environment Results Table) from streamlining of the national tax patent payment system. Disruptions from the crises in KR prevented BEI from further reforms at the local level to meet the target of $0.8 million in local-level impact called for by its PMP.

Based on BEI’s approved 2009-2010 work plan, revised in July 2010, of 20 items expecting completion by this report date, 75% (15) have been completed, and the remaining 5 items have been rescheduled to the following project year or discontinued to accommodate shifting Interim GoKR work needs.

With BEI’s focus shifted in accordance with the NTP to assisting the GoKR in basic stability and crisis economic planning, most but not all reform initiatives begun under the Bakiev administration were suspended, including efforts under the Government’s February 12, 2010, Action Plan on Doing Business, which continued 3rd-phase work on all 10 DB indicators. On May 3, 2010, Decree #48 of the Interim Government (IG), BEI Country Director Nursulu Ahmetova was appointed Adviser on Economic Policy to the First Deputy Head of the KR Interim Government, continuing the close collaborative relationship between BEI and the GoKR begun during the Bakiev administration.

Both the Interim and Transitional GoKR requested BEI’s urgent assistance in advising them on diverse economic and stabilization issues, including in several areas of reform work begun during the Bakiev

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 14 administration. Below a brief timeline of these requests is provided, with further expansion on points of work later in this text.

Requests for BEI assistance from the Interim Government of KR, approved by USAID, include:

April 15, 2010 o BEI analysis of the draft Interim Government (IG) decree #12 "On Declaring a moratorium relating to the protection of private, public, municipal and other forms of property" of April 9, 2010, which suspended government property registration functions.

o BEI continue assistance for inspections-related reform work with the Ministry of Economic Regulation begun during the Bakiev administration, specifically in revising documents for the KR inspections risk-management systems and the list of KR controlling (inspecting) bodies.

o BEI urgent assistance to the MER on action plans for macroeconomic policy and other related areas, for the formation of the plan On Priority Measures of the Interim Government of the Kyrgyz Republic on Stabilization of the Socio-Economic Situation in the Country until 2011. This activity was further expanded by additional requests into a public-private expert group including 11 BEI-funded experts to assist the IG in economic stabilization planning.

April 16 o BEI comments on and assistance in finalizing the new reglament (rules, procedures) of the IG.

April 26 o Particular BEI assistance to Government reform of customs administration rules, specifically regarding closing loopholes and methods for circumvention of the customs system that may be on-going, and for assistance in subsequent publicity steps for these reforms. This work was closely coordinated with USAID to leverage other customs-related program resources and subordinated to macroeconomic planning work and advice on KR budget issues. Though the RTLC project remains active in customs areas, Executive Head of the KR State Customs Service, Mr. Kuban Kulmatov, approached BEI to provide this assistance due to the experience of Project experts in the licensing and permitting system reviews, and BEI Country Manager Nursulu Ahmetova’s experience with WTO accession processes.

o BEI assistance to the Economic Department of the IG regarding natural gas supplies and broader energy security in KR, domestic access to gasoline for citizens and reducing all possible fuel access costs to prevent macroeconomic instability. This activity was closely coordinated with USAID, PA Consulting and the Kyrgyz Energy Advisory Services Project, and subordinated to macroeconomic planning work.

April 28 o BEI analysis for the Deputy Minister of Labor, Employment and Migration Mr. Melis Djunushaliev of the situation regarding KR migrants in Kazakhstan and Russia, and similarly for Head of the Financial Department of the IG Ms. Zina Asankojoeva consultations on the cases of deported KR migrants from Kazakhstan, and their claims for compensation from the IG.

o BEI assistance to the Executive Mayor of Bishkek Mr. Isa Omurkulov for reforms to the structure of the Mayor’s Office, as a continuation of previously planned work supporting government structure reform.

o BEI review of the feasibility of and consultations on the process for authority delegation from Gosstroi to the Bishkek Mayors Office, as begun prior to the April 7 events.

USAID BEI Project, implemented by The Pragma Corporation – Annual Report #4 (Oct 2009 – Sep 2010) 15

May 5 o BEI assistance to the MER in crafting and implementing a media campaign to inform the public of the macroeconomic strategy of the IG, encourage input, build trust in KR macroeconomic plans and stabilize the business environment. The proposed media campaign covered economic reforms undertaken and proposed by the Interim Government in areas of economy and business, including points on economic stabilization, inspections and tourism.

May 6 o BEI co-financing with the Investment Council of a round table titled “Rehabilitation of business activity and further improvement of business environment” for members of the IG and representatives from business associations. This planned round-table did not take place and was postponed until after the October 2010 elections.

May 11 o BEI assistance for creation of a cross-cutting economic planning expert group to advise the IG.

This expert group would subsume the working group developing the Macroeconomic Stabilization Plan and combine competing advisory groups to encourage the long-term stability of economic governance and stability planning by the IG.

May 17 o BEI review of and verbal comments on the legal and macroeconomic implications of eliminating the KR Development Fund, for the 1st Deputy Head of the IG Mr. Atambaev, Head of the Finance Department of the IG Office Zina Asankojoeva, and Deputy Minister of the Finance Erik Usubaliev.

June 1 o BEI recommendations on the structure of the Government, including the classification of government bodies. This work was built as appropriate on previous comments and recommendations on Government structure provided by international STTA Mr. Christian Filipov.

Doing Business Activity

Following results of the WB Doing Business 2010 Report, BEI and the expert group on DB reforms assisted the Bakiev government to develop its implementation plan for Phase 3 WBDB reforms, the Government’s Action Plan on Doing Business approved in Resolution #101 of February 12, 2010, which continued work on all 10 indicators. Implementation of the Action Plan was suspended following the collapse of the Bakiev government and in light of the immediate stabilization needs of the Interim GoKR.

In January 2010, the Doing Business Reform Team in Washington responded positively, in part, to an official KR Government request for assistance supporting indicator reform efforts in 2010-2011.