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Easing burdens of business through licensing reform

Private sector development is at the heart of Bhutan’s Economic Development Policy (EDP) – 2010. For a long time now, the government has touted the private sector as the ‘engine’ of the economy. On its part, the private sector has made it clear that the government needs to address several bottlenecks if the so-called ‘engine’ must function efficiently.

The EDP points out the country’s licensing regime as a possible burden to business. It, therefore, calls for a business-friendly licensing regime in order to improve the country’s overall business climate. And to do so, the government must forgo redundant practices and improve regulatory requirements. It must enable better availability, quality and transparency of licensing information.  Worldwide, countries have used a number of different tools to ease the burden on businesses by simplifying the regulatory and licensing system.  Currently the Royal Government is preparing one such tool with inputs from the private sector – a Licensing Policy that will fall squarely within the principles of Gross National Happiness and be linked to the EDP and other government reform initiatives.

Indeed, there are currently more than 120 different types of licenses in Bhutan, administered by about 29 different government departments and agencies. These licenses affect individuals, businesses and the country in general. By its broad definition, a license refers to any ex-ante authorization required for a business to commence commercial activities. This includes all licenses, clearances, permits, approvals, certificates, recommendations, authorizations, registrations and accreditations issued by regulatory authorities such as ministries and agencies. Licenses typically impose on businesses a range of conditions, obligations and rights.

Licenses are also instruments used by regulators to grant permission to undertake particular activities and manage risk. International experience demonstrates that as economies grow more complex, with an increasing range of activities, goods and services in the economy, the licensing regime also becomes more complex.

However, there must be a clear need for a license and it must be well designed and efficiently administered, so that it achieves its objectives at the least cost to society. If a license is not justified or it is inefficiently designed or administered, it imposes unnecessary costs on businesses and the community.

In Bhutan one classic example of a burdensome permit that has often been the topic of heated debates in Parliament is the permit for rural timber. Farmers complained that availing timber was a nightmare, as they waited for the permit for months. Typically, a farmer first put up a request letter to the gup (local leader) who then forwarded it to the local Range Office or (in absence of the Range Office) to the District Forestry Office. The District Forestry Office further forwarded it to the Department of Forest in Thimphu.

The request would remain in Thimphu for a long time before it was approved. The approval would then be sent back to the District Forestry Office from where it would go to the local Range Office. Finally, the local Range Office would hand it over to the gup, who then contacted the farmer concerned. The total turn-around time would be painfully long, and the farmers patiently counted crows in their field waiting for the permit to arrive.

Today, with the launch of Government-to-Citizen services, the whole process has been shortened and the administrative burden in issuing the rural timber permit has been reduced drastically. The total turn-around time for the issuance of a permit for rural timber is only 21 days now.

Similarly, businesses have pointed out several burdensome procedures and hurdles in obtaining a number of other licenses. They say there are inconsistencies in rules and regulations and too many ‘ad hoc’ decisions and ‘in-betweens’, and too many forms to fill and offices to visit while availing a business license and these often result in delays and costs. They say processes must be simplified and procedures standardized in order to reduce the burden of obtaining licenses.

Experiences in the developed countries show that significant gains can be made if unnecessary licenses are removed, or the terms and conditions of excessively burdensome licenses are reformed. That’s why reform efforts must be targeted at those licenses that have the greatest unnecessary regulatory burden, including red tape.

Some common licensing reform options include: a) abolishing the license if it is no longer necessary, b) amending the license’s redundant elements, c) improving the way the license is administered, d) defining specific jurisdiction for the issuing agency, e) improving coordination among related agencies, and f) facilitating more timely agency responses to license applications.

Studies have shown that there are both direct and indirect gains from license reforms. Direct gains include the cost savings to license holders who no longer have to scurry from one institution to another trying to understand what information must be submitted or wait for the licensing agency to issue its decision. Indirect gains arise when those license holders pass on the benefits of their lower business costs to consumers or other businesses in the form of lower prices. Other indirect gains can come from reforming or removing licenses that act as barriers to entry to a market so that more businesses can compete to provide better and cheaper services to consumers.

For example, in the Netherlands, estimates indicated that reducing burdens by 25% would increase GDP by 2.8-3.7%. Similarly, in South Korea removing regulatory barriers to entry increased FDI by $26 billion over five years. In India, much reform activity in the 1990s was focused on de-licensing industries. In many places, measurement systems have been set up to measure the burdens and direct the reform efforts, as US President Barack Obama recently proclaimed a campaign to reduce the burden of red tape and administrative requirements by US$ 10 billion over the next five years.

In Bhutan too the business licensing system is burdensome, as acknowledged by a number of sources. The Economic Development Policy states “Business applicants are increasingly required to obtain numerous licenses from several government agencies.” The licensing system in Bhutan is still characterized by the lack of a common understanding by the public and private sectors of what constitutes an efficient and effective licensing system.

Against this backdrop, Bhutan is in the process of undertaking key licensing reforms. Among these is the formulation of a modern Licensing Policy developed with support from the International Finance Corporation (IFC). The Policy is ready for adoption. The Licensing Policy introduces basic, crosscutting principles for the entire licensing system in Bhutan, such as “Information on licenses and licensing requirements is available to anyone who needs it”, “Wherever possible, alternatives to regulation/licensing, self-regulation mechanisms and codes of practice will be preferred over strict licensing norms” and “A risk-based approach and risk assessment will be applied for designing, processing and monitoring compliance with all licenses.”  And all licenses are to be subject to the following three criteria: they must be legal, they must be necessary, and they must be friendly to businesses – that is, they must achieve regulatory objectives by imposing the minimum necessary requirements on commercial activity.  The Licensing Policy provides detailed guidance for issuing and administering licenses in a transparent and predictable manner.

The Ministry of Economic Affairs will be the main government institution charged with implementing the Licensing Policy, in close collaboration with the Gross National Happiness Commission and the various licensing authorities.

Once adopted, the Licensing Policy is intended to provide Bhutan with a mechanism to systematically scrutinize the burden imposed on business by the various regulatory requirements. A comprehensive inventory of licenses (www.g2b.gov.bt) has also been created under the RGoB-IFC Licensing Simplification Project and is to be given a legal basis under the Licensing Policy.

Contributed by Thinley Palden Dorji

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