How to reduce administrative burden on businesses?
29 Oct 2015
Despite the effective measures taken by the government on consistent reduction of the financial burden on businesses (by decreasing taxes and other obligatory payments), and simplification of permission and licensing procedures, the administrative burden still remains significant in the form of numerous formalities and obligations imposed by requirements of regulatory acts.
One of the important factors influencing the situation is the unrelenting stream of the drafting and adopting regulatory acts.
Thus, the analysis of the data of the National Database of the Legislation of Uzbekistan (www.lex.uz) shows that on average 0.7 to 1.2 thousand legal acts are being adopted annually, 30 - 40 % of which affect the businesses directly. From 2005 to 2014 the total number of the annually adopted legal acts increased by 2 times, the number of departmental acts - also by 2 times and the government's decisions -by 1.4 times.
Figure 1. Annual growth in total number of legal acts adopted in Uzbekistan (2005-2014)
Source: calculations based on the data of www.lex.uz, “Support to the Enhancement of Lawmaking, Rulemaking and Regulatory Impact Assessment” UNDP Project
This, in turn, may result in additional costs of businesses to meet the requirements of a large number of regulatory documents (so-called compliance costs), and cropping up the red tape at the executive level.
Exactly, for large companies with plenty of lawyers and economists, new administrative requirements may seem less burdensome while for small enterprises necessity to comply with additional requirements becomes a heavy burden.
In practice, making the requirements to regulatory acts more rigorous leads to either closure or “going into the shadows” of small and medium-sized enterprises (SMEs) and ignore these requirements, as it is simply impossible to accomplish.
The study carried out by the joint project of the UNDP and Chamber of Commerce of Uzbekistan “Business Forum of Uzbekistan (Phase-3)” shows that current practice of implementation of legislation significantly differs from the requirements of laws and regulations, which causes additional material and time costs for business entities.
However, the latest surveys show that this problem remains urgent in many countries.
For example, during the survey among entrepreneurs, conducted by Ernst & Young in the UK (November 2014), 27% of UK entrepreneurs said that business environment is “extremely over-regulated” and regulation restricts growth and a further 17% said that they think it needs a radical reform to simplify the regulatory environment and to improve the business climate.
Similarly, results of the survey of over than 10 thousand of business entities, conducted by KPMG in the Russian Federation (September 2015), show that respondents noted an unfavorable regulatory environment as one of the most significant headaches for small and medium businesses, 30% of entrepreneurs indicated excessive red-tape and a high frequency of amendments in legislation make them to spend most of their time to bring businesses in compliance with the legislation instead of doing business.
Today the question of “how to reduce the regulatory burden on businesses arisen from the “producing” a large number of regulations?” comes on the front burner.
To solve this problem, many countries implemented new tools to increase the quality of legislation and generally to simplify regulations.
A new effective initiative implemented in rulemaking process by a number of foreign countries is “One in, One out” principle, which serves as additional instrument for Regulatory Impact Assessment (RIA), and which means that executive agencies, initiating a new regulation must ensure the repeal of one existing regulation.
“One-in, One-out” requires that for every dollar of additional net cost imposed on business by new legal acts that regulate or deregulate business, agencies must find one dollar of net savings from deregulatory measures. IN is applicable if the direct incremental economic cost to business of a regulation exceeds the direct incremental economic benefit to business, OUT is applicable if the change is deregulatory and the direct incremental economic benefit to business exceeds the direct incremental economic cost to business.
The decision to adopt the regulation is made by comparison of IN and OUT parameters
“One-in, One-out” is innovative in many aspects. The implementation of similar initiatives is going on now in other countries and regions as well.
Thus, the principle was adopted by the Government of Canada since 2012 and it is being implemented as a part of Red - tape reduction action plan,
Germany has announced the introduction of this principle in the legislative process in July 2015, and in Russia, this instrument came into force on October 1, 2015, while it will be applied only for draft acts with a high degree of regulatory impact and that change the “rules” for businesses.
Some countries were passing further, thus, in 2011 Australia implemented the initiative “One for, two off” with regard to main draft legal acts.
Similarly, in the UK after the successful application of the “One-in, One-out” principle, in 2012 “One-in, Two-out” principle was introduced.
What are the effects of the introduction of these instruments/tools of rulemaking?
For example, in the UK after the introduction of this tool into the rulemaking process in 2010, the number of new legal acts proposed for adoption by the departments decreased by 70%, and more than £3 billion was “saved” by businesses after the deregulation only in the first year.
In Germany, the introduction of this instrument is expected to reduce the “administrative burden” for businesses to more than €740 million.
In Australia, in the first year of application of this principle in the rule-making it becomes possible to repeal 152 and to adopt only 14 basic legal acts.
Another effective tool to make rulemaking more effective is “sunset clauses”, which means a measure within a regulation that provides that the regulation shall automatically cease to have effect after a specific date, unless further legislative action is taken to extend the regulation.
This approach, first, allows to improve the current regulation, and secondly, to understand whether regulation is necessary for this particular area and it is the best way to achieve goal set.
Additionally to the approaches mentioned above, the following mechanisms such as "cleaning the body from “the dead norms” or so-called “regulatory guillotine”, a moratorium on adoption of regulation which deteriorate doing business for SMEs, so-called common commencement days ( common days for regulations to come into force), the approach of setting a fixed date for the entry into force of all regulations affecting businesses (for example, twice a year).
In conclusion, it can be noted, that the simplification of the regulatory environment and reducing the administrative burden has positive macroeconomic effects. For instance, according to the study conducted by the Bureau for Economic Policy Analysis (Netherlands), reduction in administrative burdens to 25% leads to GDP growth of 1.5-2% within several years.
It is obvious, that the impact from implementation of these legislative tools into rulemaking process in Uzbekistan still needs thorough consideration. However, it is more important to continue taking measures that improve the quality of regulations, reduce administrative burden and costs of doing business.
Project Manager, “Support to the Enhancement of Lawmaking, Rulemaking and Regulatory Impact Assessment” UNDP Project