Moratorium on inspections: business on preferential terms
Review by Caliber.Az

ANALYTICS  03 February 2023 - 12:15

For the last four years, Azerbaijan has implemented large-scale legislative and administrative reforms to improve its business environment. This work made it possible to reduce the fiscal burden, ensure transparency in labor relations, digitalize the participation of small and medium businesses in public procurement and tenders, implement customs reform, etc. The most important step to improve the business climate was the law "On Suspension of Inspections in Entrepreneurship" adopted in October 2015, which markedly reduced the pressure on the business environment. Due to the high effectiveness of the moratorium on inspections, it has been extended three times - in 2017, 2021, and 2022. On February 1 this year, the Milli Majlis passed another decision, extending the law for another year.

Adopted more than seven years ago on the initiative of Azerbaijani President Ilham Aliyev, the law "On Suspension of Inspections in Entrepreneurship" has become an important and very effective step to support investment and business activities. This decision was made in 2015, which was the peak year for the collapse of the global energy market, which led to the devaluation of the national currency, the manat. This was followed by a banking and credit crisis. In that difficult period, the state was forced to cut investment programmes and other projects that kept private initiatives running due to a decline in budget revenues. Under the circumstances, the law on a moratorium on business inspections became an extremely simple, low-cost but at the same time effective method of supporting the country's business circles, ridding them of bureaucratic pressure and abuse.

According to the document, only tax and customs audits were allowed. At the same time, a limited list of inspections of business facilities was approved, which were allowed only for cases posing serious danger to human life and health, state security, and the country's economic interests. Among those allowed were supervision of financial market entities under the law "On Counteracting Money Laundering and Financing of Terrorism", as well as state supervision of construction, private medical facilities, and the safety of medicines and foodstuffs. Another exception was the inspection of economic entities for tampering with electricity, water, heat, and gas meters and illegal connection to the grid.

Nevertheless, even with the above caveats, the moratorium on inspections has had a significant positive effect in ridding domestic businesses of excessive "tutelage" by government agencies. For comparison, while between 2010 and 2015, the number of inspections of entrepreneurs by various government agencies exceeded 260,000, between November 2015 and the end of 2020 there were only 19,400 inspections, which was mainly due to sanitary and quarantine measures during the pandemic. And in the post-pandemic period - 2021-2022 - the statistics for inspections of small and medium-sized enterprises (SMEs) fell even further. Compliance with the law "On Suspension of Inspections in Entrepreneurship" was ensured, including through the introduction of an effective mechanism preventing various attempts to circumvent it: all inspections are conducted with the consent of the Ministry of Economy of Azerbaijan and are recorded in a unified information registry. Also, prompt investigations are ensured into the calls and complaints made to the hotline by entrepreneurs, and in case any violations are identified, the relevant information is forwarded to the Prosecutor General's Office.

Overall, the successes achieved in the implementation of the inspection moratorium over the last seven years clearly demonstrate the effectiveness of the initiative. That is why, at Wednesday's meeting of the Milli Majlis, deputies voted to extend the law for another year - until January 1, 2024, adopting the final document in a first reading.

The law on suspension of inspections was one of the first initiatives to liberalise the business environment, and many other effective business support mechanisms have subsequently been established as part of a public-private partnership policy. In recent years, the number of licences has been reduced and the process of obtaining them has been made easier. Certificates of investment incentives have been introduced for legal entities and individuals with a number of tax and customs exemptions, and an export subsidy mechanism for the non-oil sector has been introduced. This also includes fiscal reforms that relaxed income taxation in the non-oil sector, which helped broaden the tax base, including by shifting unreported income from wage earners out of the shadows. And with legislative changes expected to take place soon, all procedures relating to employment relations, including the conclusion, amendment and termination of employment contracts, will now be carried out electronically. The digitalisation of employment contracts will create a regime of transparency and protect employees, including freelancers, from social risks by securing employers' obligations to employees in an accessible electronic format.

The Ministry of Economy's efforts to improve legislation and the mechanism of public procurement, including the creation of a level playing field for all producers and increasing the participation of micro, small and medium enterprises in public procurement, have been a crucial step in supporting SMEs. According to the Law on Public Procurement, procurement worth 50,000 manats and more should be carried out electronically through open tender procedures. The Decree of the Head of State adopted in autumn 2021 on amendments to the activities of JSC "Agrarian Procurement and Supply" and to the "Rules for centralized procurement of food products by state enterprises and organizations" serves the same purposes.

Partnership programs with businesses are expanding, including through the Small and Medium Business Development Agency (KOBİA), which specializes in providing training and advisory services to small businesses, facilitating their access to credit and insurance services. KOBİA also helps start-ups and business incubators to develop and supports small agricultural and other producers in supplying products to large retail chains.

Finally, last year the country launched a major transformation of the State Customs Committee (SCC), a sustained fight against corruption and bureaucratic delays, and the process of personnel reorganization of the customs authorities has started. The most worrying problems of entrepreneurs are being solved: transparent digital mechanisms are being introduced for determining the customs value of imported goods, and many problems relating to customs clearance procedures will also be simplified in the near future. There are also plans to increase the number of participants in the SCC Green Corridor by connecting more SMEs to the system.

"The reforms implemented last year, including those to improve the business environment, encourage healthy competition, fight against monopolies, and eliminate violations in the customs system, and personnel reforms, will certainly play a positive role in the development of the economy," President Ilham Aliyev said in an interview with local TV channels in early 2023. And there is no doubt that the reforms initiated by the head of state to ensure transparency in the business environment and remedy the accumulated negativity in business-state relations will encourage private investment in the non-oil sector, increasing the activity of SMEs.

Caliber.Az