TAJIKISTAN NAMED TOP REGULATORY REFORMER -- NOW FOURTH-WORST

UNCLAS SECTION 01 OF 03 DUSHANBE 001113 SENSITIVE SIPDIS DEPT FOR SCA/CEN E.O. 12958: N/A TAGS: EAID ECON EINV PREL TI SUBJECT: TAJIKISTAN NAMED TOP REGULATORY REFORMER -- NOW FOURTH-WORST IN ASIA REF: DUSHANBE 877 DUSHANBE 00001113 001.2 OF 003 ¶1. (SBU) Summary: Tajikistan has been named a "top 10 regulatory reformer" by the World Bank and International Finance Corporation (IFC),after improving in five of the ten areas the Bank uses to compute its annual "Doing Business" rankings. Tajikistan now ranks 152 out of 183 countries, up from 159 out of 181 countries last year. It remains the fourth worst country in Asia for business. Improvements were made in the categories "protecting investors," "ease of getting credit," "starting a business," "closing a business," and "dealing with construction permits." According to an IFC economist here, some improvements are genuine, but others are only skin deep. She disputed some of the conclusions reached by the Doing Business assessment team. ¶2. (SBU) Summary continued: The single biggest improvement this year came too late to be considered in the rankings. With assistance from USAID, Tajikistan has implemented a comprehensive single window business registration process. The new process, after being unexpectedly rolled out six months earlier than originally planned, is doing well, according to an EU-funded consultant. It reduces the cost of registering a new business by over 90% and the time by well over a month. There remain some challenges, including squabbling government ministries, technical difficulties, and a Soviet-era predilection for demanding more documentation from applicants than is legally required. End summary. MOVING ON UP? ¶3. (U) Tajikistan recently was named one of the world's "top 10 regulatory reformers" this year by the World Bank and the International Finance Corporation (IFC). The two organizations, members of the World Bank Group, collaborate on the annual "Doing Business" rankings that assess countries' regulatory and business environments. Tajikistan improved in five of the ten areas examined by the Doing Business team, lifting its overall ranking twelve spots to 152 out of 183 countries surveyed. (Note: Last year Tajikistan ranked 159 out of 181 countries. That ranking was (confusingly) recalibrated this year to 164 out of 183, allegedly to provide comparability with this year's rankings. End note.) Several key reforms were enacted with USAID assistance. ¶4. (U) Tajikistan's improvement in the rankings was the result of a targeted effort to craft reforms addressing the specific categories examined by the World Bank Group. Tajikistan improved in the "Starting a Business" category by reducing the minimum capital requirement for new business from 8,000 to 500 somoni ($1,805 to $113). The government did not receive credit in this year's rankings, however, for its most heralded reform, the establishment on July 1 of a single-window business registration process (ref A). Before the change, applicants had to register with at least four, and often several more, separate state agencies, and were frequently forced to pay bribes to make their way through the byzantine process. The new system went into effect too late to be included in the rankings and will likely be reflected in next year's assessment, according to Christine Bowers, an economist with the IFC. ¶5. (U) Tajikistan's largest increase in the rankings occurred in the "Protecting Investors" category. The government amended the joint stock company act making it easier for shareholders to sue company leadership by reducing the ownership threshold. It also established more stringent conflict of interest rules by adding to disclosure requirements. Both changes were supported with extensive technical assistance by USAID. Tajikistan also moved up in the "Ease of Getting Credit" category by passing a law on credit histories. This provides for the possibility of opening a private credit bureau in the future. To move any further in the rankings, not only must a credit bureau be established, but a certain percentage of the population must actually be registered with the bureau. According to Bowers, however, Tajikistan is at least five years away from this point. ¶6. (SBU) In the "Closing a Business" category, another USAID-supported reform made it easier for companies to declare bankruptcy. Tajikistan's bankruptcy procedures have been so difficult that many companies remained on the books long after becoming defunct, unnecessarily tying up the country's meager productive assets that might be used for new endeavors, according to Bowers. However, she was not convinced the new law should have been considered in this year's rankings because it had not yet been implemented. According to the "Doing Business" rules, a change must be implemented before being counted. Bowers had a similar complaint about the fifth and final reform, in the "Dealing with Construction Permits" category, saying DUSHANBE 00001113 002.2 OF 003 that, as far as she could tell, there was no change whatsoever. According to a USAID implementer on the project, however, eight of eleven envisioned changes have been made in the permitting legislation, and once the final three are complete, applicants should begin to see differences. BUT WHAT HAS REALLY CHANGED? ¶7. (SBU) Although several reforms for which Tajikistan was credited appeared to be serious, others were more questionable. For this reason, Bowers said she had the uneasy feeling that the World Bank team may have stacked the deck stacked ahead of time in Tajikistan's favor -- possibly to reward the country for finally explicitly addressing the Doing Business indicators. Regardless, she thought the overall ranking was about right, and noted that despite its "top 10" reformer status, it was still the fourth-lowest country in Asia, just ahead of Iraq (153rd), Afghanistan (160th),and Laos (167th). (Note: North Korea is not on the index. So maybe Tajikistan is fifth. End note.) She expressed mystification that Kyrgyzstan came in 41st in this year's survey. While Bishkek had certainly had a head-start and spent more time enacting reforms, the structural differences between Tajikistan and Kyrgyzstan were hardly large enough to separate the two countries by 111 places in the rankings. AFTER SOME HICCUPS, PROGRESS ON SINGLE WINDOW SYSTEM ¶8. (SBU) The single-window registration process, developed with assistance from USAID and the European Union, went into effect on July 1 of this year. USAID's Business Environment Improvement (BEI) project helped develop the legal framework for the new registration system, while the EU has been developing the technological capacity through a one million Euro grant. According to Arthur Luke, the EU's consultant on the project, the new process was originally supposed to take effect in January 2010. This April, however, the President abruptly announced that the single window would be up and running by July ¶1. Luke's team, which had not been consulted, was thrown into a panic. They ultimately were able to inaugurate the new registration system on time, but continue to work through some difficulties. ¶9. (U) Before the single-window went into effect, applicants for business licenses faced a byzantine registration process. At a minimum, forms had to be filed with four government agencies: the Tax Committee, the Ministry of Justice, the Ministry of Labor and Social Protection, and the State Statistical Committee. A separate registration number was received from each. In many cases, for instance where the prospective business dealt with food, medicine, or other restricted products, a number of other agencies were involved. The business registration process took months to complete and exposed applicants to numerous officials who sought bribes along the way. The new single-window system is housed in the Tax Committee. When an applicant registers, the Committee is required to distribute the relevant information electronically to the other government agencies involved in the process. Applicants are required to receive their registration numbers within five working days; Luke said most should be processed right away. If after five days an applicant has not heard from the Tax Committee, the presumption is that the business is registered. HERDING CATS, MAKING OFFICIALS PLAY NICE, AND OTHER CHALLENGES ¶10. (U) In a country with rudimentary technology, a lack of expertise among government officials, and endemic electricity shortages, a key challenge has been to develop the electronic network necessary to process and keep track of applicants. The EU team had to think of things that would not be necessary in other countries. For example, not only did computers and Internet connections need to be set up in each of the Tax Committee's 68 regional offices, but generators had to be supplied as well, otherwise the system would be useless during the country's frequent power outages. As of mid-September, 50 branch offices were up and running. The EU team had to work quickly to train staff to meet the July 1 deadline. They began by training 14 Tax Committee officials, who then immediately passed their knowledge along to a further 80 officials. ¶11. (SBU) Luke said there had been several challenges, many associated with the speeded-up start date. Training has so far been inadequate, and government officials are not yet able to process registrations according to regulations. There is a mentality issue as well: officials sometimes demand documents that are not required by the new legislation, and the "silence DUSHANBE 00001113 003.2 OF 003 is consent" presumption that businesses are automatically registered unless there is a specific complaint is difficult for some to get their minds around. Also, in the old system, banks demanded a registration number from the State Statistical Committee before allowing businesses to open an account. While the new Tax Committee number is all that is now legally required, some banks have been reluctant to open accounts with this number alone. For now, some continue to apply for Statistical Committee numbers, whether due to a lack of knowledge about the new system or to cover their bases in this interim period. ¶12. (SBU) One of the bigger challenges was getting all of the government agencies to work with each other. For agencies like the Ministry of Justice and the State Statistical Committee, the placement of the single window at the Tax Committee represents a loss of influence over the process, and they have been reluctant to cooperate. The Ministry of Justice, for example, has refused to share its registry of pre-existing registrations. Thus the Tax Committee must reformulate the registry from scratch, a process that Luke said has been frustrating, but is fortunately now underway. According to the new law, all existing businesses must re-register with the Tax Committee by June 30, 2010. Luke was not happy with this rule. Re-registering is supposed to be free, and Luke has not heard of any attempts to extract payments out of applicants, but the added burden of re-registering 30,000 to 35,000 existing businesses may strain the new system, especially toward the middle of next year, when many who have put off the process are likely to descend at once on the Tax Committee's offices. THE PATH AHEAD ¶13. (SBU) The EU, will finish its work at the end of December, no matter what happens. Because of the lengthy EU granting process, there is no way to re-fund this project before 2011. For that reason, Luke and his team will focus on two areas: consolidating the progress they have made and ensuring that the new system remains sustainable once it is on its own. Some computer glitches have proved difficult to resolve, but new hardware being brought online should solve the problems. The largest ongoing concern is making sure that the agencies involved work together. The Tax Committee received assurances of support from high up in the presidential administration, which should help make sure that wayward agencies fall into line. COMMENT: CAN THE MOMENTUM BE SUSTAINED? ¶14. (SBU) The government's focus on the business climate is relatively new. At a meeting just one year ago officials' eyes visibly glazed over when it was suggested they follow Kyrgyzstan's example of making targeted reforms to improve their "Doing Business" ranking. Since the financial crises began to pinch, the government appears to have made a genuine effort to push through some necessary changes, including the single-window registration process. The question is how much the government will support these reforms after the grant money has dried up and the fear of the financial crisis has faded. One thing is clear: if not carefully tended, these improvements will easily fall victim to an unfortunate culture of endemic graft and oppressive bureaucracy. End comment. GROSS