Enterprise society

Enterprise society

Reviewing the red tape: What did the Productivity Commission find?

Red tape impacts more on small business.

Without doubt ‘red tape’ is one of the most politically contentious issues facing governments when seeking to develop effective small business policies. During the 2013 federal election campaign the “Too Big to Ignore” campaign focused heavily on the issue of red tape as a major concern for small business in Australia. It was one of their “Big 4” issues along with the need to simplify the taxation compliance process (also a red tape issue), industrial relations and infrastructure.

According to the “Too Big to Ignore” rhetoric:

At every level of government, regulation is suffocating small business. The costs and time involved in complying with those regulations is bad enough, and the unnecessary duplication makes it even worse. Let’s cut the red tape and give small business a break.”

The history of red tape is a long one and I have written on this topic before (see: The Conversation).

What is clear from any research into the red tape problem is that it is as much about the eye of the beholder as it is about the reality of bureaucratic obstacles. It is therefore interesting to examine the report released in September 2013 by the Productivity Commission, which addresses the interaction between small business and government regulators.

Size and culture matter

Among the key findings from the report is that red tape impacts smaller firms more than their larger counterparts. Also it is clear that the organisational culture of the regulator is important.

These findings should not come as a surprise. Larger firms have the necessary administrative staff and systems to deal with the compliance requirements issued by various local, state and federal government regulators.

However, a micro-business that has only one or two hard working owner-managers will find any additional compliance work burdensome. These firms simply don’t have the additional time or resources to collect data and complete paperwork. Any time they do spend on these things is time they cannot spend on servicing customers or operating their business.

Consider the fact that 85% of all businesses are micro-enterprises with fewer than 5 employees. Furthermore, 61% of all firms employ only a single owner-manager. This helps to explain why the problem of compliance paperwork for small business is so significant. So indeed red tape matters more to the smaller business.

For this reason the culture of the regulatory agency was found to be important to how the small business owners experienced their engagement with the regulator. As noted by the Productivity Commission report:

For businesses, good engagement with a regulator is generally associated with an educative and facilitative regulatory posture, rather than a combative approach. Most businesses want to comply with regulatory requirements and, for the benefit of their industry and own competitiveness, want other businesses to also comply.” (p. 3)

The Productivity Commission’s report made particular reference to the need to exempt from “general regulatory requirements” the 61% of non-employing micro-enterprises.

Keep it simple stupid

Another finding that should not be overly surprising was the need for the regulators to keep their compliance requirements simple and straightforward. The report noted that most small businesses value compliance requirements that they can readily understand and implement.

This means that documentation should be easily accessible, written in clear plain English, and not overly complex. A particular issue was the need for regulators to only demand information or data from the small business owners that was essential for their needs.

Too often regulators collected data that is not essential, but they feel is important. However, as the Productivity Commission report noted:

For small business, supplying information to the regulator can be the most burdensome aspect of complying with regulation. Regulators indicated that for collection of compliance information from business, they are just as likely to use electronic forms as they are to use paper forms. Irrespective of the format, data requests should be the minimum necessary to allow the regulator to perform its function effectively, and, as far as possible, be tailored around data that is already collected by business.” (p. 11)

There was a need identified for better data collection and data sharing across government agencies. This would help reduce the current level of duplication of data collection by different agencies and levels of government from the same businesses. Greater cooperation between government agencies and industry associations was also highlighted as an area for improvement.

Enhancing the resources required

The ability to collect data and oversee compliance issues is heavily dependent on the resources that both government regulators and the small business community possess. For example, the Productivity Commission report noted that about 30% of the regulators who gave evidence to the report said they had insufficient “enforcement tools” to allow them to fulfil their role. They also lacked sufficient resources to undertake the level of educative and supportive engagement required by most small businesses.

According to the report:

When regulators are not adequately resourced to effectively enforce all regulations within their ambit, either risks to communities go unmitigated or the costs of mitigation are pushed onto those regulated. Furthermore, some engagement approaches available to well-resourced regulators with broad regulatory roles and the capacity to attract and retain skilled staff are sometimes neither feasible nor efficient for smaller, less well-resourced regulators. The Commission’s survey of regulators found that regulators adopting a risk based approach were, on average, six times larger in terms of staff and budgets than those not using a risk based approach.” (p. 7)

The report also noted that around 40% of all small businesses they surveyed indicated that they were looking to be told by regulators specifically what they needed to do in order to comply with regulations. This requires the regulators to have a stronger capacity for education and guidance. The need to properly resource regulatory agencies at all three tiers of government was highlighted in the report.

Another interesting finding was that a large proportion of small businesses don’t have internet access. This makes online reporting for data collection or compliance management problematic. It suggests that there could be more done to help get more small businesses online so that they can take advantage of this medium for reporting and support.

Reducing the cumulative burden

The size of the compliance burden that needs to be carried by small businesses in Australia was summarised by the Productivity Commission in their report. Among the many areas that most firms must deal with are:

Taxation compliance – this includes income tax, GST collection, PAYG income tax collection and payment for employees, fringe benefits tax (FBT) collection and payment and state payroll taxes. Each of these taxes applies differently to firms depending size, type of trading activity and location. Here the main regulatory agency is the Australian Taxation Office (ATO), but state taxation agencies will enforce payroll taxes.

Employment compliance – a range of compliance issues emerge once a business employs. These relate to industrial relations, superannuation and occupational health and safety obligations. There are also requirements for the payment of workers’ compensation insurance premiums. Here a range of federal and state regulators are involved.

Other compliance requirements – depending on the nature of the firm’s corporate structure there will be compliance requirements from the Australian Securities and Investments Commission (ASIC). This can involve annual reports for incorporated entities, the renewal of business names. For businesses in areas like retailing, food and beverage, manufacturing or horticulture the can also be a range of local and state authorities who will regulate activity. This can impact on such things a car or truck parking, hours of operation, food storage, preparation and handling, waste disposal, liquor licencing and also planning and approval for buildings.

The report highlights a case study of a small winery that required around 45 federal, 25 to 86 state and 5 to 10 local licences depending the jurisdiction and type of operations. A further case study of a small builder indicated the need for around 7 federal, 24 to 89 state and 3 to 13 difference licences depending on the firm’s place of origin and type of activity.

In summary the picture emerging from the report was that of a complex and potentially bewildering regulatory environment for small business owners seeking to operate in the Australian economy.

Adopting a “risk-based” approach to regulation

The report makes a series of recommendations designed to make life easier for small firms. One of the key recommendations is for regulators to adopt what they refer to as a “risk-based” approach to regulation. What this seeks to achieve is for regulators to recognise that different industries and different types of business have different risk profiles.

Firms that are deemed to be high risk in terms of breaching regulatory requirements will attract greater scrutiny and the need for compliance and support. However, many regulators are risk averse and seek to apply uniform standards to all businesses and industries regardless of their actual risk profile.

The measurement, monitoring and assessment of risk are not without complexity. The report notes that risk will change over time depending on environmental and market conditions. However, there are already examples of how risk is assessed by federal and state agencies. Some of these are outlined in the report, such as the Victorian Department of Health’s approach to food businesses that places them into pre-determined risk categories depending on the type of food they produce.

The Productivity Commission observed that while 70% of the regulators they surveyed adopted a risk-based approach to their compliance the majority did not disclose this to businesses, 56% did not permit their employees any discretion in how to deal with compliance enforcement, and 85% did not monitor the costs their regulation imposed on business. They concluded that there was “considerable scope” for regulatory agencies to improve their approach to risk-based management. In particular there was a need to find how to reduce the compliance costs to the business community.

Where to from here?

The Productivity Commission make 18 recommendations in their report which can be summarised into seven broad areas. First, they seek a change of organisational culture amongst the regulators. This should see these agencies adopt a more educational and supportive approach that seeks to help firms meet their compliance and not simply to punish them for failure.

Second, there should be more resources provided to regulators to help them with this ability to provide the necessary guidance and support. Third the nature of compliance and the enforcement process must be proportionate to the risk. This will require better or more effective tools for regulators to use that adopt a risk-based approach.

A fourth area is the need to adopt a more tailored approach to regulations that affect small businesses. This involves reducing unnecessary compliance costs and the simplifying of compliance and reporting by small firms.

The fifth area addresses the need for more effective communication between regulators and small business owners. This should be a two-way process that allows the small business operator to provide feedback and engage in a consultative approach to enhancing the compliance management process.

The sixth area of recommendations seeks to make regulatory compliance processes timely, transparent and subject to accountability. This would require mandated turnaround times for completion of applications, dealing with complaints and appeals. The level of transparency and accountability in this decision making should be such that it can be easily tracked and understood by the business.

Finally, there should be a willingness by government agencies at all levels to continuously improve their systems and the training of their staff. Greater collaboration between agencies and the three tiers of government around the sharing of data and the knowledge of innovation and best practice is a key to continuous improvement.

In conclusion the report makes a lot of important observations and sensible recommendations. How it is taken forward by federal and state governments will be the ultimate test. Prior to the election, the then shadow Minister for Small Business Bruce Billson made a strong commitment to the alleviation of the red tape burden on small businesses. The Productivity Commission report now provides him with a useful foundation with which to tackle this problem.

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.