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KPMG: CORRUPTION - MAJOR FACTOR IMPEDING DEVELOPMENT OF ARMENIAN ECONOMY
Elita Babayan
ArmInfo
22.12.2010
ArmInfo's exclusive interview with KPMG Managing Partner Andrew
Coxshall
Mr. Coxshall, what are the factors impeding social and economic
development of Armenia?
I think the major factor impeding development of Armenia's economy is
corruption. Forms of corruption vary. One of the ways that corruption
manifests itself is through the under-recording of revenues by
businesses which leads to underpayment of taxes, this in turn
impedes programs of development and modernization of the country's
infrastructure. This, in its turn, curtails foreign investments in
the economy of Armenia.
What mechanisms and levers can be used to fight corruption?
There are two ways to fight corruption. One of those methods is
actively used in Georgia where the authorities dismissed a large number
of individuals (both government employees and private individuals)
involved in corruption at one time. The second method implies a
step-by-step reduction of corruption levels through the creation
of a mechanism of control over the activity of the persons involved
in corrupt practices. In the given case, it is necessary to ensure
transparency, openness of state government bodies, develop the key
dimensions of anti-corruption policy in terms of an uninterrupted
natural function of the government. Also it is very important for the
government to show that it is serious about tackling corruption by
actually putting senior corrupt officials and big businessmen on trial.
Do you observe any steps towards reduction of corruption scales in
the country?
I am informed of various programs aimed at reduction of corruption
risks in the country. Similar programs were implemented also by the
USAID. However, those measures brought no significant results and
nothing changed in fact. International surveys showed that Armenia is
in the rating of the worst countries in terms of corruption (the latest
TI Barometer report showed that in Armenia 85% of people felt that
corruption had got worse or stayed the same over the last 3 years).
Why do we fail to reduce corruption level in the country?
Actually, it is a very difficult task because hundreds and even
thousands of people are engaged in corrupt practices: these are
politicians, officials and their families. International surveys
show that high corruption level is characteristic to many countries
in the world. This is a difficult problem and its solution affects
the interests of many representatives of the world community. Lack
of political will.
There have been many cases recently when local entrepreneurs
transferred their business to other countries, particularly, to
Georgia. What makes them do that?
KPMG has an office in Georgia and some Armenian businessmen who intend
to transfer their business to Georgia have applied to our company for
relevant consultation. The business environment in Georgia is more
favorable than in Armenia. In particular, the corruption level in
Georgia is lower and the tax burden is lighter. To put it shortly,
there is less red tape there.
Which companies do you deal with in Armenia?
First of all, we work with transparent and open companies. Our clients
are mainly banks and mining enterprises. We cooperate also with some
credit organizations and one of the biggest industrial enterprises
in Armenia, the sole producer of aluminum foil in the Caucasus,
ARMENAL Company.
Mr. Coxshall, what hinders development of industrial production
in Armenia? Everyone knows that economy cannot have a strong basis
without developed industry...
To reactivate and develop industry in the country relevant resources
are required, including fuel - energy feedstock - gas, petroleum, and
electric power. Due to the lack of these resources the country imports
raw materials from foreign markets, which increases the cost value
of production and makes it noncompetitive in the world market. Also
due to the business environment in Armenia many basic products are
supplied under monopolistic circumstances, which also increase the
prices and limits choice. To be competitive in the world market, a
country must have some sort of competitive advantage, which Armenia
lacks, unfortunately.
Expert assessments of the shadow economy level in Armenia vary. What
is your assessment of shady economy in the country?
I think shadow economy is nearly twice as much as the non-shadow
economy, but this is my subjective assessment.
Mr. Coxshall, this year a number of companies having over 1 billion
drams profits for 2009 are to undergo compulsory financial audit. Some
of them did not fulfill the given requirement...
There are several big companies that have probably not undergone a
proper financial audit. There are companies that were provided with
the auditor's report by audit companies having no proper specialization
with a staff comprising two persons at best. Such audit companies have
an audit license and the right to provide an auditor's report. It can
be quite easy to obtain an audit license in Armenia if you know how.
Why?
At present the Finance Ministry regulates the under-recording of
activity of audit companies. However to regulate audit companies
requires good knowledge of accounting standards, selection procedures,
certain technological methods of auditor's activity and the people
supervising activity of audit companies must significant knowledge
in the sphere.
Does it means that our supervisory authorities have no relevant
knowledge?
Although there is regulation the regulation focuses on administrative
details rather than the audit work that is actually carried out and
whether or not the auditors have the required knowledge and experience
to carry out the audits. KPMG would be glad if the sphere was regulated
with more focus on audit quality. As the leading audit company in the
quality audit market KPMG is ready to provide assistance in the sphere.
Many local and foreign experts often speak of stability of the Armenian
banking system. What is your assessment of activity of our banks?
Although the banking system of Armenia is not big, it is quite stable.
This sector is well regulated and banks operate adequately. Almost
all banks have restored consumer lending that was suspended in the
crisis period.
What do you think of the interest rates of business and consumer loans?
Banks raise credit funds from various sources at the annual interest of
7% in average but on-lend these funds at quite a high annual interest -
17% in average. They have many ways to reduce interests.
In fact, they can reduce interest rates on loans...
Yes, if a bank increases the interest rate, all the others follow it,
as a rule. Therefore, a special mechanism is necessary to regulate
the sphere and make the banks reduce interest rates. In addition,
the economy in Armenia is small size, which seriously restricts its
possibilities of fund raising from external sources and leads to
appreciation of money resources in the country.
How will economic situation in Armenia change in 2011? What GDP growth
do you forecast and what spheres will become a locomotive for growth?
By my assessment economy in the country will grow significantly in
2011, first of all, thanks to growing money transfers from Russia and
the growth of copper and gold prices. These two factors will result
in nearly 8% GDP in 2011 in Armenia. Construction sector will also
has a positive impact on the economic growth. This sector is already
begun growing.
What would you advise to investors? Where they should make investments
and where they shouldn't?
At present mining sector is favorable for investments considering the
growth of gold and copper prices. In Armenia there are many small idle
copper/gold mines and their price may grow and attract investments.
Someone may arrive and buy those mines. I'd not recommend making
any investment in the petrol business. You can hardly manage to sell
anything because of high monopolization of the given segment.
What must an investor take into account when investing in the mining
industry? What risks may he face?
It is very difficult in our country to pay taxes because of the
very high level of corruption. These risks impede investments in the
given sphere.
Your company is engaged also in the market of consulting services.
What are the tendencies in the given market now? What is our
businessmen's attitude to consulting in general? What is the central
failure of our business?
Local businessmen are not able to take effective steps to improve their
activity. They do not pay proper attention to professional skills of
their employees. They give instructions to less experienced employees
not to spend more on a professional consultant. Many Armenian companies
still use consulting services just to observe formalities though
consulting helps upgrading the management of a company. Consulting
services in the neighbor countries, in Georgia, are not cheap. In
the meantime, in Armenia consulting services are not expensive. One
of our clients once joked when speaking of the cost of consulting
services and said that he prefers "Zhiguli" to "Mercedes".
What does it mean?
A Zhiguli will not go very fast and will break down soon - so in the
longer run the Mercedes is a better option.
From: A. Papazian
Elita Babayan
ArmInfo
22.12.2010
ArmInfo's exclusive interview with KPMG Managing Partner Andrew
Coxshall
Mr. Coxshall, what are the factors impeding social and economic
development of Armenia?
I think the major factor impeding development of Armenia's economy is
corruption. Forms of corruption vary. One of the ways that corruption
manifests itself is through the under-recording of revenues by
businesses which leads to underpayment of taxes, this in turn
impedes programs of development and modernization of the country's
infrastructure. This, in its turn, curtails foreign investments in
the economy of Armenia.
What mechanisms and levers can be used to fight corruption?
There are two ways to fight corruption. One of those methods is
actively used in Georgia where the authorities dismissed a large number
of individuals (both government employees and private individuals)
involved in corruption at one time. The second method implies a
step-by-step reduction of corruption levels through the creation
of a mechanism of control over the activity of the persons involved
in corrupt practices. In the given case, it is necessary to ensure
transparency, openness of state government bodies, develop the key
dimensions of anti-corruption policy in terms of an uninterrupted
natural function of the government. Also it is very important for the
government to show that it is serious about tackling corruption by
actually putting senior corrupt officials and big businessmen on trial.
Do you observe any steps towards reduction of corruption scales in
the country?
I am informed of various programs aimed at reduction of corruption
risks in the country. Similar programs were implemented also by the
USAID. However, those measures brought no significant results and
nothing changed in fact. International surveys showed that Armenia is
in the rating of the worst countries in terms of corruption (the latest
TI Barometer report showed that in Armenia 85% of people felt that
corruption had got worse or stayed the same over the last 3 years).
Why do we fail to reduce corruption level in the country?
Actually, it is a very difficult task because hundreds and even
thousands of people are engaged in corrupt practices: these are
politicians, officials and their families. International surveys
show that high corruption level is characteristic to many countries
in the world. This is a difficult problem and its solution affects
the interests of many representatives of the world community. Lack
of political will.
There have been many cases recently when local entrepreneurs
transferred their business to other countries, particularly, to
Georgia. What makes them do that?
KPMG has an office in Georgia and some Armenian businessmen who intend
to transfer their business to Georgia have applied to our company for
relevant consultation. The business environment in Georgia is more
favorable than in Armenia. In particular, the corruption level in
Georgia is lower and the tax burden is lighter. To put it shortly,
there is less red tape there.
Which companies do you deal with in Armenia?
First of all, we work with transparent and open companies. Our clients
are mainly banks and mining enterprises. We cooperate also with some
credit organizations and one of the biggest industrial enterprises
in Armenia, the sole producer of aluminum foil in the Caucasus,
ARMENAL Company.
Mr. Coxshall, what hinders development of industrial production
in Armenia? Everyone knows that economy cannot have a strong basis
without developed industry...
To reactivate and develop industry in the country relevant resources
are required, including fuel - energy feedstock - gas, petroleum, and
electric power. Due to the lack of these resources the country imports
raw materials from foreign markets, which increases the cost value
of production and makes it noncompetitive in the world market. Also
due to the business environment in Armenia many basic products are
supplied under monopolistic circumstances, which also increase the
prices and limits choice. To be competitive in the world market, a
country must have some sort of competitive advantage, which Armenia
lacks, unfortunately.
Expert assessments of the shadow economy level in Armenia vary. What
is your assessment of shady economy in the country?
I think shadow economy is nearly twice as much as the non-shadow
economy, but this is my subjective assessment.
Mr. Coxshall, this year a number of companies having over 1 billion
drams profits for 2009 are to undergo compulsory financial audit. Some
of them did not fulfill the given requirement...
There are several big companies that have probably not undergone a
proper financial audit. There are companies that were provided with
the auditor's report by audit companies having no proper specialization
with a staff comprising two persons at best. Such audit companies have
an audit license and the right to provide an auditor's report. It can
be quite easy to obtain an audit license in Armenia if you know how.
Why?
At present the Finance Ministry regulates the under-recording of
activity of audit companies. However to regulate audit companies
requires good knowledge of accounting standards, selection procedures,
certain technological methods of auditor's activity and the people
supervising activity of audit companies must significant knowledge
in the sphere.
Does it means that our supervisory authorities have no relevant
knowledge?
Although there is regulation the regulation focuses on administrative
details rather than the audit work that is actually carried out and
whether or not the auditors have the required knowledge and experience
to carry out the audits. KPMG would be glad if the sphere was regulated
with more focus on audit quality. As the leading audit company in the
quality audit market KPMG is ready to provide assistance in the sphere.
Many local and foreign experts often speak of stability of the Armenian
banking system. What is your assessment of activity of our banks?
Although the banking system of Armenia is not big, it is quite stable.
This sector is well regulated and banks operate adequately. Almost
all banks have restored consumer lending that was suspended in the
crisis period.
What do you think of the interest rates of business and consumer loans?
Banks raise credit funds from various sources at the annual interest of
7% in average but on-lend these funds at quite a high annual interest -
17% in average. They have many ways to reduce interests.
In fact, they can reduce interest rates on loans...
Yes, if a bank increases the interest rate, all the others follow it,
as a rule. Therefore, a special mechanism is necessary to regulate
the sphere and make the banks reduce interest rates. In addition,
the economy in Armenia is small size, which seriously restricts its
possibilities of fund raising from external sources and leads to
appreciation of money resources in the country.
How will economic situation in Armenia change in 2011? What GDP growth
do you forecast and what spheres will become a locomotive for growth?
By my assessment economy in the country will grow significantly in
2011, first of all, thanks to growing money transfers from Russia and
the growth of copper and gold prices. These two factors will result
in nearly 8% GDP in 2011 in Armenia. Construction sector will also
has a positive impact on the economic growth. This sector is already
begun growing.
What would you advise to investors? Where they should make investments
and where they shouldn't?
At present mining sector is favorable for investments considering the
growth of gold and copper prices. In Armenia there are many small idle
copper/gold mines and their price may grow and attract investments.
Someone may arrive and buy those mines. I'd not recommend making
any investment in the petrol business. You can hardly manage to sell
anything because of high monopolization of the given segment.
What must an investor take into account when investing in the mining
industry? What risks may he face?
It is very difficult in our country to pay taxes because of the
very high level of corruption. These risks impede investments in the
given sphere.
Your company is engaged also in the market of consulting services.
What are the tendencies in the given market now? What is our
businessmen's attitude to consulting in general? What is the central
failure of our business?
Local businessmen are not able to take effective steps to improve their
activity. They do not pay proper attention to professional skills of
their employees. They give instructions to less experienced employees
not to spend more on a professional consultant. Many Armenian companies
still use consulting services just to observe formalities though
consulting helps upgrading the management of a company. Consulting
services in the neighbor countries, in Georgia, are not cheap. In
the meantime, in Armenia consulting services are not expensive. One
of our clients once joked when speaking of the cost of consulting
services and said that he prefers "Zhiguli" to "Mercedes".
What does it mean?
A Zhiguli will not go very fast and will break down soon - so in the
longer run the Mercedes is a better option.
From: A. Papazian