Battling red tape – still

957887_red_tapeGovernments need to keep focused on ensuring that regulation does not impose burdens on business that simply deter business from ‘doing business’ – but they also need to focus on the substance and not just keep ‘moving the deckchairs’. They also need to take extreme care to ensure that they think about the impact of regulation on small business. Big business can largely take care of itself, not least because they can afford to pay for people to deal with the red tape. But small businesses usually rely on the entrepreneur, who usually needs to devote his or her spare time, to deal with regulation. So thinking small first is immensely important.

The British Government announced on 28 June that it was appointing six business leaders to a red-tape task force, specifically to identify European regulations that need to be scrapped or reformed (see BBC news). The group includes Marc Bolland, CEO of Marks & Spencer, Paul Walsh, chairman of Compass, Ian Cheshire, CEO of Kingfisher, Glenn Cooper, MD of ATG Access, Louise Makin, CEO of BTG – and just one person who might be regarded as representing small business, Dale Murray, investor and entrepreneur.

I wonder, however, what difference this will make – for three reasons:
Firstly, large businesses do not think about red tape and regulation in the same way as mall businesses. Large businesses can deal much more easily with the requirements imposed. And they are much better placed to defend themselves if something goes wrong. But more importantly, there is tendency to think that provided they are happy, then everyone is happy, often not recognising that large companies use regulation as a competitive advantage. Much better to design regulatory policy and implementation requirements so that it is acceptable first to small business – and large businesses will then also be happy. So the task force is weighted the wrong way.

Secondly, the government is forever saying that it wants to do more to cut regulation, but most of the action seems to be on the organisation of the structures within government rather than on the regulation itself. After the re-election of the Tories in 1983, they initiated work on deregulation, subsequently launching the Enterprise and Deregulation Unit (within government) in 1986, and renaming it the Deregulation Unit in 1991. Their efforts were reinvigorated in 1992 and the Deregulation Task Force was launched in 1994. The first Blair administration was equally keen to demonstrate its friendliness to business but recognised both that a greater level of regulation was inevitable and that being careful about the way in which regulation was implemented could reduce the imposition on business. It consequently replaced the DTF with a Better Regulation Task Force (which quickly set out five principles of effective regulation) and replaced the Deregulation Unit with the Better Regulation Unit. The Government launched the Better Regulation Guide in 1998 which introduced the concept of Regulatory Impact Assessments. The Better Regulation Unit became the Regulatory Impact Unit in 1999. Up to 2005 the Cabinet Office took responsibility for better regulation. In 2005, the Regulatory Impact Unit was moved to BERR and renamed the Better Regulation Executive. The Better Regulation Task Force was renamed the Better Regulation Commission in 2006 and closed in 2008, with the Executive taking on the work, supported by a Regulatory Policy Committee set up in 2009. The Government also started to make efforts to improve local regulation, setting up the Local Better Regulation Office in 2009, based in Birmingham, but then bringing that back within BIS in 2012 and renaming it the Better Regulation Delivery Office. The Government has also launched the Red Tape Challenge website to encourage businesses and the public at large to tell it about regulation that is not fit for purpose. It is not even clear whether this new initiative replaces on the existing initiatives or is additional – or indeed why there should be a unit that focuses solely on EU legislation, when often the problem is not the EU legislation but the desire of civil servants to ‘gold-plate’ the directive on the grounds that this gives certainty to business (thus adding considerably, usually, to the complexity).

Thirdly, the best way to mitigate the impact of EU regulation is to ensure that we are there at the beginning, as ideas are being formulated. In the UK, we are still too used to adversarial politics – and a chance to argue about policy right to the last minute. But most of Europe, and certainly the Commission, takes a more consensual approach. This means that the real work needs to go on before a position is ever published by the Commission. And that, in turn, requires considerable effort by business associations and others to ensure that they are gathering market intelligence and doing something about it.

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Liquid feedback

In its edition of 3 January, the Economist had an interesting article on the power of interest groups in relation to management of the internet: everything is connected.

They talk about a number of on-line lobby groups but one was especially interesting since they use software called Liquid Feedback – which is open source and so anyone can download and use to set up their own feedback systems.

The software has been written to support the idea of Liquid Democracy. The Liquid Feedback website explains the concept thus:the basic idea is a democratic system in which most issues are decided (or strongly suggested to representatives) by direct referendum. Considering nobody has enough time and knowledge for every issue, votes can be delegated by topic. Furthermore delegations are transitive and can be revoked at any time. Liquid Democracy is sometimes referred to as delegated or proxy voting.”

The idea is that by carefully structuring feedback between those developing initiatives and those who might be impacted by them, it is possible to influence the design in a way that satisfies as many parties as possible.

Liquid Feedback is open-source software, developed by the Public Software Group in Berlin and available to anyone under an MIT licence, designed to support the development of policy propositions and decision making. It provides a communication channel so that anyone (or at least anyone who knows about it) can influence the proposal.

Prima facie, this looks like an exceptional tool that could be of real use to business associations, civil society organisations and NGOs which will not only allow but actively encourage members to participate in the development of policy positions. The software also allows, should it be needed, for members to vote on the policy position. An interesting wrinkle, however, is that votes can be given to others trusted by the voter, so that they do not have to be involved in every discussion but if a voter does not like the way that a particular policy is developing, the proxy vote can be easily rescinded. The more that members participate, the more likely it will be that the facts are represented accurately and the more likely that the members all feel that they ‘own’ the policy. The platform allows anyone to start a new discussion.

For further information and to download the software, go to Liquid Feedback

Does the UK Government want more entrepreneurs?

The Sunday Times of 15 April reported on limited liability partnerships and the fact that people try to avoid tax. They seem to be equating the two – arguing that some high profile business people offset losses in business ventures against personal tax. But, I would like to know, what is wrong with that.

The Sunday Times reports that there are over 76,000 limited liability partnerships – of which around 4,000 are making a loss. Let’s put that in the context of more than 4 million businesses in the UK. Many of them will be making losses as well – but the Sunday Times thinks we have a probem because 0.1 of UK businesses are making a loss. We need to separate two completely separate issues.

The first issue is that everyone will do their best to avoid tax. Why should they not? Avoidance is perfectly legal. It is evasion – lying or misreporting – that is illegal. If the government does not like the loopholes that people exploit, then it can close them, but there is nothing wrong with using them. A classic case is those large multi-national companies who manage to make money out of UK consumers but which are registered offshore so we are unable to tax their profit. But don’t forget that consumers pay VAT on the products (mostly) and that they, and their supply chains, employ people who pay income tax – so the picture is not as black and white as teh press paints it.

The second issue is whether we want to encourage entrepreneruship. The whole point of allowing a business to write of losses against other profits is to encourage them to invest and innovate. Some times, those ventures will fail, but some times they will be a roaring success – and the government will generate a high tax revenue from the roaring successes.

Stopping people from writing off their losses will simply discourage them from trying in the first place – or encourages them to try in a country where they get a better deal. Instead, we should be encouraging much more entrepreneurship. We should be haling success. We should be proud of our entrepreneurs – not forever kicking them – and we should be writing positive stories. And we should be looking at taxation much more strategically – rather than a hit here and a hit there to remove some loophole that was probably deliberately created in the first place specifically to encourage more entrepreneurship.

Ideas for improving the regulatory process

There is a desire by business and trade associations to influence public policy but there are a large number of possible policies, largely concerned with the process of policy making, that rarely get promoted – possibly because most associations take a sectoral approach – and yet could make a considerable difference, especially in developing countries where development partners are making efforts to support business associations to advocate change in public policy. Ideally, they should be taken up by apex associations, but even apex associations will not necessarily see a quick return so do not prioritise them. Ideas include:

  • Promoting the adoption by government of three or four simple principles which can be promoted across government to stress the importance of business to the economy and to encourage Ministries to think carefully about the potential implications of their decisions
  • Wherever possible looking for approaches that do not require regulation or legislation including codes of conduct administered by trade associations
  • Requiring the preparation and publication of a Regulatory Impact Assessment (complete with cost benefit analysis, ideally with an opportunity for the private sector to contribute to the cost benefit analysis) before new regulations impacting on business are adopted
  • Requiring minimum consultation periods to allow the private sector and other stakeholders to respond to proposals for new or changed regulations which impact on business
  • Wherever possible, designing regulations so that there is no need to apply for a permit or make a payment, but rather impose an obligation with (the few) businesses that fail to conform pursued through the courts
  • Requiring minimum periods between regulations being finalised and being implemented to allow businesses to understand the implications and, if necessary, to put in place appropriate procedures
  • Improving access, preferably through the creation of a comprehensive website, by businesses to the requirements imposed on them by legislation so that they understand exactly what is required, including tax rates, enforcers, etc
  • Asking the Government to require that a Minister in every Ministry be given explicit responsibility for regulatory reform with a view to reducing regulatory requirements and improving the enabling environment
  • Establishing a capacity building programme within government to ensure that many more officials understand the importance of creating an enabling environment conducive to growing business
  • Launching a regulatory reform action plan – with government inviting the private sector to identify regulations that could be improved or abolished – in order to send a clear message to business that it is ‘open for business’
  • Creating a department within government, preferably in the Prime Minister’s Office, to take responsibility for promoting regulatory reform
  • Minimising and preferably eliminating overlapping regulation and mulitple monitoring of businesses
  • Instituting a programme of annual awards to recognise publicly politicians and civil servants, Ministries and Agencies that have made special efforts to improve the enabling environment

I am sure you will have your ideas – do please feel free to share them.

Misguided incentives drive the wrong behaviour

Last week, I was working with the Leather and Allied Products Manufacturers’ Association of Nigeria (LAPAN).

They tell me that once upon a time Nigeria had a large number of big name shoe companies, exporting to the whole of West Africa, but that Nigeria has allowed that position to slip and now imports around 100m pairs of shoes every year.

There is an incentive for businesses to export – the export expansion grant – which provides a grant (actually an import credit, but the impact is the same) of 30 per cent of the export price to the business actually exporting. This was originally inroduced to stimulate exports – and it has been so successful – estimates of export values range up to £3bn, the second largest export after oil –  that it is extremely difficult to buy finished leather of decent quality in Nigeria.

It seems that some businesses are extremely good at extracting the grant from the government whilst others are less good, so some businesses have not been paid for years. As the grant technically is an import credit, it is most beneficial to those businesses that are importing – or to businesses which can sell on their credits. The largest businesses are able to sell on their credits for close to face value but smaller businesses, with less clout, are lucky to get 40 per cent of face value. As a result, some of the largest tanneries are buying up leather from smaller tanneries, at a premium to the local price, but at a discount to the effective export price and thus cornering the market. The main consequence is that businesses further along the value chain, especially smaller businesses, find it very difficult to source leather locally – to the extent that they often end up importing leather to make up their shortfall.

LAPAN explains that while many of their business members are very small, their hope is that by joining together they can recapture some of this lost market. They note, for example, that the business members of the National Association of Hide and Skin Dealers supply 60 per cent of the more than 40m sheep and goat skins processed annually in around 20 tanneries. They hope to be able to help businesses with training; they are advising businesses on how they can be more environmentally friendly; and they are advocating to change public policy in relation to the EEG, so that more leather stays in the country, which will be much more beneficial to the economy, creating many more jobs and wealth in a hard pressed part of the country round Kano.

Canada the best place to do business

Forbes magazine has its own take on the best countries in which to do business. It has just published its 2011 Best Countries for Business list. It looked at 11 factors – property rights, innovation, taxes, technology, corruption, personal freedom, trade freedom, monetary freedom, investor protection, red tape and stock market performance – so has a rather different perspective to Doing Business, though considerable overlap as well. It uses research undertaken by others including Freedom House, Heritage Foundation, World Bank, Transparency International, World economic Forum and others. The list covers 134 countries.

Canada has this year taken the top spot, up from 4th in 2010, rising it seems largely due to reforming its tax structure and reducing tax levels. It is worth noting that the Government of Canada is actively aiming to make Canada more competitive for business. Denmark, which was number one in 2010 slipped to 5th. It is interesting to note however that the Nordic countries generally do very well, with Sweden at 7, Norway at 8 and Finland at 13.

Singapore, which was top in the Doing Business ranking, comes in at 6. The UK is at 9, one position ahead of the US at 10.

It is not surprising to discover that countries in sub-Saharan Africa, on the whole, fare badly. Rwanda does quite well, coming in at 65. Mozambique does surprisingly well coming in at 77. Nigeria is at 101, Kenya at 103, Uganda at 107 and Tanzania at 108. Burundi is in the bottom three – 132 – with Zimbabwe at 133 and Chad last at 134.

The Forbes list does not get the widespread coverage of Doing Business but makes use of some factors, such as stock market performance, that might be expected to give some indication of business confidence in a country. Overall, it doesn’t really tell us any more than we get from Doing Business – except that governments need to make considerable effort if they want to make their countries good places in which to do business.

Influencing legislators

For those of you interested in how research influences legislators (ie, Parliamentarians), you should read a recently published ODI working paper by Ajoy Datta and Nicola Jones: Linkages between researchers and legislators in developing countries.

The authors argue that legislators need access to good research to address the typical imbalance with the executive branch which usually has easier access to appropriate information (though I have to say that I often get the impression that the executive branches, at least in the countries in sub-Saharan Africa in which I work) could also benefit from access to better research.

The authors note that CSOs (and I would include business associations), especially in sub-Saharan Africa, have a strong role to play to representing ordinary people in the legislative process – and that many Governments hold legislative committee hearings which provide a ready mechanism for researchers’ voices to be heard, though that is not the only way for researchers to communicate with legislators. They assert that good research can move debates to more strategic levels and narrow areas of disagreement. However, they stress the importance of research being timely, relevant and independent. The authors say that legislators are looking for a “compelling story with practical policy recommendation”. They stress that policy proposals targeting legislators need to be short and easy to understand, though note that their staff teams may require more detail.

This neatly sums up what I propose to the business associations with which I work: prepare short, succinct and compelling policy positions papers, of no more than four pages, clearly built on solid evidence, but don’t try to include all the evidence. The detailed evidence can, instead, be included in a much more extensive research report, which should also review a range of policy options, and the likely implications of each of those options, for the people who need all the detail.