Association for Foreign Investment and Cooperation’s 2006 roundtable with local business leaders on tax reform in Armenia. (Photo: AFIC)
Private sector-led economic growth is the key to prosperity for any country. However, without a tireless advocate to give voice to the concerns of small businesses, corruption and bureaucracy can suffocate entrepreneurial activities. This, in turn, hampers economic and democratic development.
In 2001, 95 percent of all business entities in Armenia lacked any kind of formal representation to advocate for pro-business reforms to government. Over the next ten years, CIPE and the Association for Foreign Investment and Cooperation worked together to cultivate a grassroots reform network of local business associations and chambers of commerce. AFIC is an Armenian membership-based business association, established by former CIPE business association trainees, devoted to the promotion of foreign investment, international economic cooperation, and private entrepreneurship. What began as an informal network among friends and colleagues eventually, thanks to CIPE’s and AFIC’s assistance, took on greater structure as a reform-oriented coalition.
This coalition, now known as the Business Advocacy Network (BAN), consists of 25 active member organizations. Its advocacy efforts have been a major contributing factor in reforming Armenia’s tax code and policies on SME support, state inspections of businesses, and commercial property markets.
Small businesses’ interactions with tax authorities have traditionally been a breeding ground for corruption in Armenia. This was mainly due to a myriad of cumbersome and complex procedures and provisions which allowed for corrupt officials to take advantage of the system for personal gain. In 2008, CIPE, AFIC, and AFIC’s coalition partners in the BAN proposed and were successful in advocating for tax policy reforms to simplify and streamline the process of making payments. These included reducing the number of tax forms required and the number of annual tax filings, and allowing businesses to file taxes via mail and electronically. By limiting the interaction between tax authorities and businesses, the opportunities for corruption to occur were slashed dramatically.
One of the hallmark successes of the CIPE/AFIC partnership has been the creation of Armenia’s SME Development Council. Established in 2011 and chaired by the prime minister, the SME Council was designed to bolster small business participation in the policy-making process. With BAN members holding 6 of the 12 seats, the SME Council was able to amend SME support laws both with government ministries and political parties in the National Assembly.
Among the reforms were changes in the designation for what qualifies as an SME – important for shoring up government funding for small business development which would typically be funneled to larger companies. In addition, the implementation of a “one-stop shop” for business registration considerably reduced start-up costs, time, and the potential for corruption.
Early on, state inspection reform emerged as a priority for the CIPE/AFIC partnership and the BAN. Frequent and unnecessary inspections were creating a considerable burden for businesses in Armenia, as bribery and abuses of power were commonplace. Before the private sector became organized to advocate for its interests, inspection reform seemed a daunting task as any change in the system would affect some 19 different government inspection bodies.
After an effective advocacy campaign, the president signed the Law on Changes in the Law on State Inspections which introduced a risk management approach for inspections so that higher-risk businesses are subjected to more frequent inspections than lower-risk businesses. This new hierarchy will pave the way towards more comprehensive inspection reform.
Based on previous successes with pro-business reforms in Armenia, CIPE decided to engage AFIC along with the BAN coalition in a pilot project to test a newly created tool, jointly developed by CIPE and the International Real Property Foundation (IRPF), known as the “International Property Markets Scorecard.”
The Scorecard provides a methodology to analyze a country’s property market system by investigating the six core elements necessary for sustainable property market development: property rights laws and enforcement, access to credit by SMEs, efficiency of governance, rational dispute resolution, financial transparency, and proper regulations. After completing the Scorecard analysis in Armenia, it became clear that commercial property transactions were the primary weakness in the country’s property markets system. Thanks to an advocacy campaign which succeeded largely due to the BAN’s representation on the SME Development Council, leasing procedures affecting small businesses in Armenia were simplified, standardized, and streamlined.
