Ennablinng Envvironmment foor Susttainabble Ennterprrises in Armmenia                   March 20016 The enabling environment for sustainable enterprises in Armenia International Labour Organization Copyright © International Labour Organization 2016 First published 2016 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office welcomes such applications. Libraries, institutions and other users registered with reproduction rights organizations may make copies in accordance with the licences issued to them for this purpose. Visit http://www.ifrro.org to find the reproduction rights organization in your country. The enabling environment for sustainable enterprises in Armenia / International Labour Office, Enterprises Department. - Geneva: ILO, 2016 ISBN: 978-92-2-131152-2 (print) ISBN :978-92-2-131011-2 (web pdf) International Labour Office; Enterprises Department enterprise creation / business economics / social dialogue / sustainable development / informal economy / Armenia 03.04.5 Also available in Armenian: ՆՊԱՍՏԱՎՈՐ ՄԻՋԱՎԱՅՐ ՀԱՅԱՍՏԱՆՈՒՄ ԿԱՅՈՒՆ ՁԵՌՆԱՐԿՈՒԹՅՈՒՆՆԵՐԻ ՀԱՄԱՐ, ISBN: 978-92-2-831123-5 (pdf), ISBN: 978-92-2-831124-2 (web pdf), Yerevan, 2016. 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ILO publications and digital products can be obtained through major booksellers and digital distribution platforms or ordered directly from [email protected] For more information, visit our website http://www.ilo.org/publns or contact [email protected] Printed in A rmenia ii Foreword The Republican Union of Employers of Armenia (RUEA), in line with its mandate to contribute to the development of a conducive environment for enterprises in Armenia, has called upon the ILO to assist the organisation to assess the current business environment in the country and to identify areas for improvement. The information gathered through the assessment enables ILO constituents to identify priorities for the promotion of sustainable enterprises and the transition to formality. For RUEA, the analysis of the enabling environment provides an entry points for the development of policy positions and structured and evidence- based advocacy efforts. The assessment was conducted in line with the ILO methodology on the Enabling Environment for Sustainable Enterprises (EESE). This methodology assesses the business environment in terms of the economic, social, political and environmental aspects of doing business. The EESE methodology was developed in response to the June 2007 International Labour Conference (ILC), which discussed the promotion of sustainable enterprises and which called for the strengthening of the institutions and governance systems which nurture enterprises. The conclusions reached at the 2007 ILC discussion on the promotion of sustainable enterprises identified 17 pillars for an environment conducive to the promotion of sustainable enterprises, which form the basis of the EESE methodology. The process of improvement of the enabling environment according to the EESE methodology promotes social dialogue and enhances tripartism as a means of consensus building, economic and social development, and good governance and is embedded entirely in the promotion of Decent Work. SMEs play a crucial role in poverty reduction and job creation in Armenia, employing nearly 25% of the country’s work force and contributing 27% of GDP in 2012. A number of policies and regulations have been enacted in Armenia to promote sustainable growth through job creation, develop the business environment and improve environmental management. In 2014, the Armenian Development Strategy for 2014-2025 was adopted, which among other priorities, is focused on the improvement of business environment and investment climate and innovative SME development (and in 2015 SME Development Strategy was accepted for 2016-2018). The Strategy clearly stipulates that the state framework policy to increase the employment, among other things, will be aimed “at facilitating the establishment of businesses and investments. It also references to the problem of informal employment, which is over 50% of total employment in sectors as agriculture. This report provides an overview of the research findings of the EESE assessment. It identifies the relative strengths and weaknesses of the enabling environment for sustainable enterprises. The purpose of the assessment is to stimulate debate and to provide an evidence base for policy reforms, leading to an environment that is more conducive to the promotion of sustainable enterprises. The report reflects information gathered through a review of secondary data and through a national opinion or perceptions survey comprised of 300 in-depth interviews, and several focus groups. This report has been written by external consultant M. Muleskovic, under the coordination of ILO Moscow’s Senior Enterprise Specialist J. Bliek and with the support of Senior Employers’ Specialist V. Curovic. A complementary action plan by a tripartite EESE committee based on the findings of this report will ensure the implementation of specific measures geared towards policy advocacy and reform. Gagik Makaryan Dimitrina Dimitrova Chairman of the Republican Union Director ILO Decent Work Technical Support of Employers of Armenia (RUEA) Team and Country Office for Eastern Europe and Central Asia Yerevan, Armenia Moscow, Russia iii Contents Foreword .............................................................................................................................................................. iii Contents ................................................................................................................................................................ v Executive summary .......................................................................................................................................... vii 1. Introduction ................................................................................................................................................. 2 2. Political elements ....................................................................................................................................... 6 2.1. Peace and political stability .................................................................................................................... 7 2.2. Good governance .................................................................................................................................... 8 2.3. Social Dialogue ..................................................................................................................................... 16 2.4. Respect for universal human rights and international labour standards ................................................ 17 3. Economic elements ................................................................................................................................. 19 3.1. Sound and stable macroeconomic policy and good management of the economy ............................... 20 3.2. Trade and sustainable economic integration ......................................................................................... 26 3.3. Enabling legal and regulatory environment .......................................................................................... 35 3.4. Rule of law and secure property rights ................................................................................................. 39 3.5. Fair competition .................................................................................................................................... 41 3.6. Information and communication technologies ...................................................................................... 46 3.7. Access to financial services .................................................................................................................. 51 3.8. Physical infrastructure .......................................................................................................................... 57 4. Social Elements ........................................................................................................................................ 62 4.1. Entrepreneurial culture ......................................................................................................................... 64 4.2. Education, training and lifelong learning .............................................................................................. 65 4.3. Social justice and social inclusion ........................................................................................................ 73 4.4. Adequate social protection .................................................................................................................... 75 5. Environmental elements ........................................................................................................................ 78 5.1. Responsible stewardship of the environment ........................................................................................ 80 6. Assessment results and ways forward .............................................................................................. 83 Bibliography ....................................................................................................................................................... 86 v Executive summary The 96th session of International Labour Conference held in Geneva in 2007, adopted conclusions for the promotion of sustainable enterprises and identified 17 conditions for an enabling environment. An environment conducive to the creation and growth of sustainable enterprises combines the legitimate quest for profit with the need for development that respects human dignity, environmental sustainability and decent work. In that context, Armenia is one of the countries chosen for the implementation of the EESE process that is developed as the ILO flagship programme following the conclusions of the Conference. During this process, Republican Union of Employers of Armenia (RUEA) expressed the interest to be the leading national partner for ILO in the implementation of the process in Armenia. During this process, RUEA used the applied and tested EESE methodology - to collect and analyse all the necessary data and to present the report on the findings. Following the methodology, RUEA organized four focus groups to identify the most important pillars for the deeper analyses. With the support of external researchers and using the EESE questionnaire, RUEA conducted a survey among 300 companies throughout Armenia. Based on the methodology, there are 4 main segments which are analysed in this report: Political elements, Economic elements, Social and Environmental elements. Political elements In the context of the political elements, there seem to be alleged discontent with the lack of the Government’s ability to meet expectations with regard to unemployment, corruption and inequalities. Political instability also caused some problems in the country’s economy but the most important is uneven regional development. For 43.7% of the companies in Armenia regional stability is very important for current operational planning by the private sector. Armenia chose not to pursuit signing of an EU association agreement any further, but seeking the partnership in the Eurasian Economic Union (EAEU) instead. Nevertheless, the country continues to pursue deeper cooperation with EU. One of the problems in political elements and in the context of good governance is the existence of corruption in the country. Based on the EESE survey, 51.4% of the companies name bribery and other forms of corrupt payments, as an issue that has consistent impact on firms. The majority of firms are not informed about the existence of effective and independent anti-corruption institutions responsible for handling complaints made by the private sector. The second problem identified by companies is public procurement processes and procedures. The main complaint about procurement refers to the lack of transparency. Also, a crucial problem in political elements is the low level of effectiveness of government. In a range of values from -2.5 to 2.5 with higher values indicating better performance, Armenia recorded a score of 0.07 in 2013. Furthermore, Armenian companies are not satisfied with the regulatory framework and 41.7% of the companies are of the opinion that the Government doesn’t provide a regulatory framework that sufficiently encourages firms to expand their operations. Economic elements Economic indicators in Armenia show slow improvements while the situation in regards to macroeconomic indicators points to slight growth. Based on the current situation, and according to projections, the Armenian economy will also record a slow growth of GDP in 2016 after (3.1% growth in 2015). It is clear that the period prior to 2009 was a period of strong growth of the Armenian economy with a GDP growth rate in excess of 10%. However, with the influence of the global economic crisis, the Armenian economy reached the biggest drop of GDP in 2009. After that period, GDP constantly grew, but at a decreased rate. Despite the fact that the Armenian market has become more flexible for foreign investors in the past few years, FDI net inflow/GDP data show some negative trends. The biggest share of FDI net inflow was during the period 2006-2009 when this indicator reached a maximum value of 8.79% of GDP. In 2014, this indicator at 3.52% of GDP was at the lowest level since 2003. One of the most important problems for Armenian companies is the level of inflation, but also the instability of the currency exchange rate. According to the EESE survey 40.3% of Armenian companies think vii that the inflation rate has a very significant impact on the competitiveness of firms. Armenian employers identified labour costs, skills shortages and negative attitudes of employees as the main obstacles for improving the companies’ productivity. Trade data reveal that Armenia is improving its situation in this sector from year to year. Despite the fact that regulation had been changed, employers still identified it as one of the most important factors influencing low export levels along with procedures for export. Surveys among companies showed that firms that rely exclusively on the domestic market do so because they lack the capacity to export, i.e. dealing with licenses, regulations, etc. The regulatory framework is recognized as crucial for the improvement of the business environment in Armenia. Nearly half of the enterprises in the survey (41%) agree with the statement: “The amount of overall management time firms spend dealing with the requirements of government regulation is a major issue for firms.” Also, the overlapping competences of regulatory bodies (agencies, inspections) represent one of the big problems undermining the business environment in Armenia. The size of the tax burden along with tax administration is recognized as a main obstacle for doing business in Armenia. Concerning fair competition, informal economic activities represent a big issue for the registered companies in Armenia. For 38% of the companies this is a major source of competition. Access to funding presents one of the main barriers for doing and starting a business in Armenia. The majority of companies agreed that interest rates are excessively high (15-25%) and that there are no specialized credit lines for some sectors (all credit lines offer the same terms). Furthermore, the collateral to secure loans is demanding and represents significant problems to employers. Additionally, 37.7% of the companies think that financial products are not adapted to the needs of SMEs. Energy and energy supply present another important challenge for Armenian companies. More than 80% of the companies in Armenia said that power outages are a significant issue for the private sector, with 37.7% of companies confirming that power outages often cause damage to electronic equipment, such as computers which again results in significant expenses for them. Social elements In regards to social elements, there are two main fields identified that require improvement in the coming period: entrepreneurial culture and education, training and lifelong learning. Even if the process of establishing a company in Armenia is very simple, some of the main indicators showed a decrease in the number of newly registered business in the country during the past period. The general conclusion is that the entrepreneurial culture should not be looked at only in the sense of simplifying the procedures for companies’ registration. Once they start a business, entrepreneurs face a whole range of other problems including high interest rates, a great number of fiscal burdens and fees imposed by the state and local authorities, and unfair competition. On the other hand, education, training and lifelong learning represents a big obstacle for employers. Public expenditure on education consists of current and capital public expenditure on education plus subsidies to private education at primary, secondary and tertiary levels. Based on this indicator Armenia spends about 2% of GDP on education per year. This is a small share and needs to be improved in the future. In general employers are not satisfied with the skills of school leavers. Almost 30% of participants in the survey think that school leavers are not generally equipped with the literacy and numeracy skills required by firms in the private sector. Skill shortages negatively affect businesses in the private sector according to more than 70% of the surveyed companies. From the total number of companies, 56.7% don’t have a department or a person responsible for training and 64.3% of companies don’t have a training budget. Environmental elements Armenia’s Government launched a Sustainable Development Programme, but at the same time made substantial investments in mining and other extractive industries. The Teghut copper-molybdenum mining project in particular poses a threat both to the environment and to sustainable development. The issues of pollution, deforestation, soil degradation, and other environmental issues are still in need of adequate address. In the coming period, State authorities are expected to focus more on the following: viii environmental risks associated with the expansion of the mining industry as a result of higher prices of metals in international markets; illegal forest logging resulting from higher gas prices; overexploitation of water resources due to rapid development of subsectors using underground water resources and as a result of climate change; increased desertification risk. Assessment results and ways forward The Armenian business climate has been changing over the past several years and the majority of international reports recognized significant improvement to the business environment in the country. According to data collected in this report, it becomes clear that doing business in Armenia is relatively easy. Nevertheless, there are still issues related to transparency and the implementation of the Armenian regulatory system. The application of tax, customs (especially valuation) and regulatory rules (especially in the area of trade) is often inconsistent, creating uncertainty for medium-size businesses and market entrants. Although, the Armenian legal system has improved significantly in recent years, there remains a significant gap between the quality of the laws enacted in Armenia and their implementation by government agencies and courts. Poor enforcement of court decisions is also a problem. According to the latest Enterprise Survey (2013), the top 3 obstacles to running a business in Armenia include tax rates, tax administration and political instability. Armenia moved up 4 ranks in the Doing Business ranking between 2015 and 2016, from 38 to 35. However, conditions worsened in terms of getting credit, protecting minority investors and resolving insolvency. Armenia, in 2015, made starting a business easier by reducing the time to obtain an electronic signature for online tax registration. Armenia made paying taxes easier by merging the employee and employer social contributions and individual income tax into one unified income tax; and made starting a business easier by eliminating company registration fees. Nevertheless, there is need and room for the improvement of the business environment in the coming period. Based on employers’ responses, the most important pillars that need to be improved in the coming period are: (cid:120) good governance and some issues pertaining to political stability (cid:120) sound and stable macroeconomic policy and good management of the economy including energy supply (cid:120) trade and sustainable economic integration (cid:120) enabling legal and regulatory environment (cid:120) fair competition (cid:120) access to financial services (cid:120) education, training and lifelong learning. According to both the primary and the secondary data the main barriers Armenian employers face are: regulatory framework, access to finance, informal economy and corruption, a mismatch between the education system and labour market needs and energy supply. ix