Wednesday, December 22 2010 10:55
KPMG: Corruption – major factor impeding development of Armenian economy
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.
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