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What is red tape and why is it a problem for small firms?

The concept of “red tape” is used today as a noun to describe excess bureaucracy and regulation that serves as cost on business. The recent Council of Australian Government (COAG) meeting of April 12 announced it was “meeting the red tape challenge”.

So what is red tape and why is it a problem for small business?

The origins of red tape

The exact origins of the term “red tape” is unclear, however during the 16th Century the Holy Roman Empire of Spanish King Charles V began to use red tapes manufactured in Holland to bind important documents of state. This helped to identify them from less important documents.

This practice spread to other governments. During the American Civil War veterans’ records were also bound in red tapes that were then viewed as emblematic of bureaucratic resistance to public access to such documents.

The cost of doing business – red tape unpacked

Writing in The Australian, Bruce Billson, the federal Opposition’s spokesperson for Small Business accused the federal Government of failing to cut red tape.

He pointed to the World Bank’s 2012 “Doing Business” global ranking of countries, noting that Australia had dropped three places over the previous year.

The World Bank’s “Doing Business” project involves a measure of the ease of doing business in relation to various government regulations from a global survey of 183 countries.

This survey examines each country against 10 indicators and takes an average of the percentile rankings for each indicator to provide the overall global score.

Although the methodology used in the World Bank study has some limitations is it a useful international comparison measure.

So how does Australia rank?

Overall, as Bruce Billson pointed out, Australia ranks 15th in terms of its ease of doing business as measured in the 2012 report. This places it just behind Canada and Sweden, but ahead of Georgia and Thailand. It is worth noting that the top 5 countries in rank order are Singapore, Hong Kong, New Zealand, the United States and Denmark.

As with most things the devil is in the detail and if the 10 indicators are examined a better picture emerges. The table shows the way Australia ranks against the global 183 economies.

Ease of Doing Business: How Australia Ranks. World Bank 2012

It can be seen that we do quite well in terms of the ease of starting a new business ranking in 2nd place. We are only beaten by New Zealand. The ease of getting credit score is also pretty good.

However, in relation to the protection of investors, paying tax, dealing with construction permits, property registrations and getting electricity connected it is a less rosy picture.

Protecting shareholders

Australia’s worst ranking was in relation to the protection of investors. This is a measure of Australia’s legal system’s capacity to allow shareholders the ability to take legal action against the CEO or Board of Directors. Reform here will require some examination of the Corporations Act (2001), but also the judicial system.

Taxation compliance issues

Also of concern is the issue of paying taxes. This indicator measures the total tax rate paid by business, the number of tax payments made per year, and the number of hours per year required to prepare and lodge tax returns.

According to the World Bank report Australian firms were making an average of 11 tax payments per year taking an average of 109 hours. Additional taxes such as payroll tax further added to the problem. Any improvement in this area requires a review of company tax policy with specific attention to the needs of small businesses.

Construction permits

The low ranking of dealing with construction permits reflects the cost of such permissions, as well as the number of procedures required and the time taken to complete them.

The World Bank reported that there was an average of 15 different procedures required to secure these permits. It was taking an average of 147 days to process them and cost around 10% of income per capita.

It is an area that requires reform within local government authorities as much as their state, territory and federal counterparts.

Registration of property

Australia’s property registration score was also quite low. This is a measure of the cost of such registration procedures, the number of steps to get the process completed, and the time taken to finalise the process.

Here the World Bank found that it was requiring an average of 5 separate steps and taking around 5 days to complete the process. The cost was about 5% of the property value.

Reform in this area is likely to require changes to the operation of local councils, land titles departments, public utilities and offices of state revenue.

Getting the power connected

Of almost equal concern to property registration is the ease of getting electricity connected. This is also a measure of the time, cost and procedures involved in getting permanent power supply to a business premises.

The average time to get power connected in Australia was taking up to 81 days at a cost of around 9.2% of per capita income. At least 5 separate procedures were involved.

Once again this is a state and territory matter rather than a federal government responsibility. It relates to the respective power utilities in each jurisdiction.

International trade red tape

Finally, as a trading nation our ease of trading across borders is also not good. This measure is based on three indicators. The first is the cost to export and import associated with standard shipping containers. The second is the time to export and import associated with customs clearance and port terminal handling. The third is measure of the amount of documents needed to import or export.

According to the World Bank survey the average cost of exporting a standard 20 foot shipping container was US$1,060 and the average cost of importation was US$1,119. It was also taking around 9 days to export and 8 days to import each container. At least 6 separate documents were required to export and 5 to import.

Should we hold our breath?

Back in March 2008 when the Rudd Government was only 100 days old Craig Emerson, now minister for Trade, held the small business portfolio. In an interview with Yahoo7 he identified ‘red tape’ as one of the key priorities that needed attention.

He argued that under the Howard government red tape “kept piling up”. He pointed to Howard’s commissioning of the Bell Report in 1996 and a decade later the Banks report. Both reports had similar recommendations.

According to Emerson it was “ten years of squandered opportunity of talking the talk of deregulation but not walking the walk”. He assured that while it “would not happen overnight, it would be dramatically accelerated compared to the glacial pace of reform” under the previous government.

Fast forward to April 12 2012 and the new federal Small Business Minister Brendan O’Connor is actively engaged in “meeting the red tape challenge” set at the COAG meeting. This challenge will be to identify “nuisance” regulations considered likely to impose unnecessary costs on business, or that may hinder competition or stifle innovation. Once identified these regulations will be removed or reformed.

The “red tape challenge” is also designed to find ways to reduce the compliance costs to small business in having to report to government. Areas where federal, state and territory reporting requirements overlap will be examined. A greater use of online reporting systems is to be explored.

It is to be hoped that he succeeds where others have failed over past decades. A good start might be to look at the issues raised by the World Trade report.

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