Innovations in inspections can help make Armenia a more favorable destination to do business

Arsen Nazaryan, the IFC Armenia Investment Climate Reform Project Manager, the World Bank Group’s Trade and Competitiveness Global Practice

Countries adopt inspection reform as a popular and effective tool to improve the business environment. Inspection reform in Armenia has introduced a completely new approach—risk-based inspections, which allows the government to reduce the frequency of inspections on low risk businesses, and focus resources on those with higher risks, saving businesses’ time and resources. Novelties in this area also limit the ability of inspectors to use their own discretion, thus reducing the potential for corruption. The new approach requires inspectors to be “guides and advisors” to businesses rather than “supervisors and punishers.”

Inspections are used by the government to ensure state supervision towards implementation of legal obligations. Their purpose is to protect the rights of society and legal interests, ensuring safety and compliance. However, inspections can sap entrepreneurs of resources and time; in addition, inspectors’ dispositions to abuse power and authority may make the inspections process inefficient.

Inefficiently organized and executed inspections can become a serious obstacle for the general business environment and may restrict investments, while not addressing the problems for which government expends its own resources.

During the past two decades in particular, countries adopted inspection reform as a popular and effective tool to improve the business environment and transform their image as a favorable destination to do business and for both local and foreign investment. Many nations have reformed their inspections, including Mexico in 1995, numerous Central and East European and former Soviet states in the late 1990s, and the model examples of the UK from 2005 and the Netherlands from 2006. Among the latest initiatives are reforms in Lithuania ongoing since 2010 and Italy since 2011. Armenia has also embraced inspections reform.

The Armenian government green lighted reforms in this area in 2009. Since then, the IFC Armenia Investment Climate Reform Project, implemented by the World Bank Group’s Trade and Competitiveness Global Practice, has supported the government in its efforts to reform the country’s business inspection system, making it easier for businesses to comply with regulations.

IFC’s advice has helped the government with the legal framework to introduce a completely new approach in Armenia —risk-based inspections. This approach allows the government to reduce the frequency of inspections on low risk businesses, and focus resources on those with higher risks. The law also increases the transparency of the process by mandating that inspectors use standard checklists with a set list of issues to be checked. These limit the ability of inspectors to use their own discretion, thus reducing the potential for corruption. Each inspection body should approve its annual inspection plan by December 1 of each year preceding the inspections, and publish it within three days on its website, reducing the possibility of unplanned visits. The revised legal framework also sets the rights and responsibilities for both inspectors and entrepreneurs, saving businesses and the government time and resources.

September 2015 marked a key milestone when the reforms resulted in the creation of the Market Surveillance Inspection body—the first inspections body operating on the new principles in Armenia. The IFC project has supported the reform process from its beginnings through to the final stage. The Market Surveillance Inspection body plays a crucial role in the field of consumer product safety. Effective market inspection and monitoring is important not only to protect consumers from dangerous products but also to ensure a level playing field for reputable businesses.

Ongoing reforms, however, can change the rules of the game only if all the key players are aware of those resulting changes. Therefore, an effective public awareness campaign is critical in making sure that the reforms work in real life. The IFC project has supported the government in public awareness campaigns/trainings for entrepreneurs on inspection reforms in ten marzer (provinces) of Armenia during summer 2016. Those trainings aimed to raise awareness about inspectors’ and businesses’ rights and their responsibilities, minimizing the possibility of corruption and ensuring creation of a fair and trusted regulatory environment.

Despite this significant progress, there is yet more work to do. Conducting inspections using a risk-based approach without a consolidated IT system in place is impossible as adequate information systems ensure gathering, maintaining and exchanging data among inspectorates for risk analysis about all businesses.

The IFC project has assessed the technical functionality and ICT capacity of the current inspection system, developed recommendations on how to improve it, and suggested the design of an appropriate system to deliver sustainable integration of the software.

Proper legislation and advanced technologies are key for efficient inspections, but what can be done without inspectors equipped with skills and knowledge on how to implement new rules?

The new approach requires inspectors to be “guides and advisors” to businesses rather than “supervisors and punishers.” While the former inspections system was guided by the deterrence model, which consisted of frequent visits, imposition of fines and fear, the new approach features a balance between various forms of motivation suggested to businesses to comply with legal requirements. The lack of inspectors’ knowledge about how the new principles work is a potential obstacle in implementing risk-based inspection.

To support the Armenian government in its efforts to build sufficient capacity among inspectors, IFC contracted the Better Regulation Delivery Office, the UK government’s expert body on regulatory enforcement and inspections, to develop educational materials as well as conduct trainings on core regulatory skills and market surveillance.

Throughout 2016, about 80 Armenian inspectors participated in the trainings, which aimed to help them understand the benefits of supporting businesses. In the new system, inspectors should be able to communicate clearly and effectively with business enterprises, while providing robust information, guidance and advice that meets their needs. Educational materials created and tailored to local specifics will be used for the future trainings of civil servants as part of their continuous professional development.

There is still much to be done. Regulatory reforms are never implemented overnight and it usually takes time to change people’s mindsets. However, with proper legislation, necessary tools and skills in place, inspectors are well-equipped to start making the shift to the risk-based inspection approach. Coordinated actions between all stakeholders can make this innovative, more effective system work for everyone’s benefit.