Cutting Red Tape To Improve the Business Environment


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Cutting Red Tape To Improve the Business Environment

  1. 1. Department of Provincial and Local GovernmentLocal Economic Development Trainers’ Mini-Manual Cutting Red Tape To Improve the Business Environment: (Two Sessions within the Four-Day LOCATI Introduction to LED Module) Version 1.1: 20/06/06 © InWEnt and GTZ
  2. 2. 1. Aims of the Mini-ManualThis mini-manual provides an option on Cutting Red Tape within the LocalCompetitiveness Training Initiative’s (LOCATI’s) four-day module on anIntroduction to Local Economic Development (LED). The aim of the option is tointroduce red tape as an issue within the framework of the existing manual. Thetwo sessions that are presented here are therefore adaptations of Session 6 onLocality Development and Session 11 on Governance. In each session, red taperepresents a sub-set of the broader issues that are usually covered within thesession. The conceptual framework provided by the Hexagon of LED remainsessentially the same.The intended output of this option is increased understanding by participants ofthe importance of improving the business environment (BE) in their areas, and inparticular the regulatory framework, and awareness of the existence of a fulltraining module and facilitation support services on cutting red tape, availablefrom InWEnt and GTZ.2. Second Triangle: Locality Development and Red Tape(Session 6 in the four-day module)Step 1: Presentation of the Triangle of Location FactorsOne of the facilitators presents the second triangle, illustrated in Slide 1 below.The second triangle represents basic and more advanced location factors thatcontribute to strengthening the competitive advantages of a local economy andare important from a business development perspective. Local government inparticular plays a key (although by no means exclusive) role in determining thequality of such location factors. The private sector and other actors such asresearch, training and business support institutions also play important roles.However, the focus of this presentation is mainly on factors that are influenced bylocal government.
  3. 3. Slide 1: Strengthening location factors Strengthening location factors Basic location factors -- geographical location -- labour -- transport infrastructure -- energy -- municipal services -- environmental costs -- real estate -- taxes and levies -- ICTs -- subsidies Relevant for individuals: Relevant for firms: -- quality of housing -- efficiency of -- environmental quality government -- schools and HE More advanced -- business climate -- health facilities location factors -- availability of -- culture and recreation related industries -- safety & security -- supporting institutionsBusinesses decide to stay or invest in an area for a number of reasons related tothe quality of location factors. These can be divided into basic and moreadvanced factors. Among the basic factors, the geographical location relative tosuppliers and customers, business services and markets are important. Here, theprivate sector and its organisation generally play the key role in the strengtheningof this factor.For almost all businesses, it is important that a location has an efficient transportinfrastructure, basic municipal services in place (such as electricity, water,sewerage and waste removal) and an attractive and clean environment.Increasingly, the availability of more advanced information and communicationtechnologies (ICTs) has become an important factor in determining thecompetitive advantage of a locality. The availability of serviced property ataffordable prices is also an important basic consideration.Further factors, such as the availability of skilled labour in an area and energycosts are also basic. Environmental costs are important for some firms. The levelof taxes, levies and subsidies are important for all firms.Among the more advanced location factors, the efficiency of government iscritical from a business perspective. The competency and consistency with whichlocal government enforces laws and regulations, the rapidity with which itimplements procedures and processes and the manner in which it interacts withthe private sector will influence whether a business stays or invests into an area.
  4. 4. Also important from a business perspective is the business climate in an area,which relates to the vibrancy of a local economy and the relationships betweenbusinesses themselves and between businesses and supporting institutions inthe areas of education, training, research and advocacy. Finally, the existence ofrelated industries is also important for businesses as it reduces distance tosuppliers and inputs, reduces costs and raises the productivity of firms.Finally, businesses are not only concerned about the environment for economicactivity, but also about the social conditions prevailing in a locality. For example,the quality of schools, higher education facilities, health facilities, the naturalenvironment, recreational and cultural facilities are all important considerationsfor them, and these are areas in which local government typically has veryimportant roles to play. In South Africa, safety and security have become keyconsiderations too. Finally, career opportunities within a locality are importantconsiderations for employees and their families.Step 2: Brief discussion on the second triangleThe facilitator asks participants whether they can think of other location factorsthat are important from a business perspective. This opens a brief discussion ofthe triangle.Step 3: Participatory exercise on location factorsUsing cards, the facilitator asks the following question: “In your view, what localgovernment actions most inhibit business development?”Three yellow cards are handed to each participant. They then write down thefactors in their local economy that are the most inhibiting to enterprisedevelopment. The facilitator draws a triangle on a display sheet, as illustrated inthe chart 1 below.The facilitator places the yellow cards on the corners of the triangles or along theaxes depending on their content, and clusters them into categories of problems,as illustrated in the diagram below. The distribution of cards is then discussedwith the participants.To end this step, the facilitator asks the participants which cards contain red tapeissues, and marks these with red dots. This is to see how participants understandthe term ‘Red tape’ prior to a presentation on the topic.
  5. 5. Chart 1. Most inhibiting Local Government actions Local government actions that most inhibit business development Basic location factors More advanced location factorsStep 4: What is red tape?The facilitator then marks those cards that relate to red tape with a red cross,explaining that red tape has been identified by national government as one of themain inhibiting factors for business development in SA. The facilitator thenprovides a brief presentation on red tape as set out in the next slide.
  6. 6. Slide 2: What is red tape? What is Red Tape?  Definition  Red tape stands for any official rule or bureaucratic procedure that is marked by excessive complexity and results in delay, inaction and unnecessary cost.  Sources  Rules and regulations  Administrative procedures  Impacts on business  Compliance costs  Non-compliance costs  Efficiency costs  Procurement costsSources of red tape • Rules and regulationsRules and regulations are indispensable to securing a supportive framework forenterprise development, provided they are well designed, proportionate andefficiently and fairly exercised. However, in practice, the regulatory framework isoften burdensome, complex and costly, which discriminates against those thathave less influence, in particular small enterprises. Complex tax regulations,costly registration and licensing fees are onerous for formal enterprises and determany informal operators from entering the formal economy. In addition, complexand heavy regulatory frameworks are often associated with high levels ofcorruption, which makes the simplification of existing rules and regulations evenmore imperative.The aim of cutting red tape is not to eliminate regulation but rather to simplify it.The objective is thus to encourage what is sometimes called ‘smart regulation’, asimplified regulatory structure that can be more effectively enforced. Improvingthe regulatory environment at local level offers several opportunities for mutualbenefit - win-win situations - for municipalities and businesses. It can increaselocal competitiveness, stimulate output and employment growth and raise taxrevenues. Efficient management of a simplified regulatory framework also bringsconsiderable savings in cost and time on the side of the local municipality. This
  7. 7. can release scarce person-power for more productive use in development andservice delivery. • Administrative proceduresIt is important to distinguish rules and regulations from administrative procedures.Rules and regulations may be well designed, yet red tape resulting fromcumbersome bureaucratic processes remains rampant. Bureaucracy isassociated with hierarchical management structures and onerous reportingsystems, which produce excessive paperwork and lengthy permitting procedures.It can also entail the abuse of position and rent-seeking, often linked with politicalpatronage and corruption.It is important to highlight that corruption imposes heavy burdens on both formaland informal businesses. It is a major deterrent to formalization, thus constitutinga serious obstacle to economic growth and poverty reduction.Streamlining bureaucratic processes, improving organizational efficiencies,increasing civil service capacity and cracking down on corruption can thereforeplay an important role in reducing the costs of doing business. The Batho Pele, orPeople First, national programme focuses on improved public service delivery ingeneral, while ASGISA seeks to build on this by focussing specifically on servicedelivery that reduces the costs of doing business.Impacts on businessThere are four main areas in which red tape impacts on business: compliancecosts, non-compliance costs and cost of public services. The costs of complyingwith regulations include not only the taxes and levies paid by firms togovernment, but also the time and costs involved for the firm to do this, whichmay be hired out to a professional, for example a tax consultant. There are alsocosts associated with non-compliance, which generally affect informalbusinesses more than formal ones. Non-compliance can result in fines, bribery,harassment, appropriation of stock and outright suspension of businesss activity.Efficiency costs refer to the costs arising from market distortions created by redtape. An example would be the cost to an informal enterprise of not expandingoutput in order to remain under the VAT threshold or below a given tax band.This leads to sub-optimal output and employment within the firm and economy.Finally, red tape impacts on firms through the difficulties it imposes in meeting therequirements of procurement contracts with the public sector. The barrierscreated by procurement procedures are most severe for small, especiallyinformal, firms and can be the source of corrupt practices.Step 5: Questions of clarification/DiscussionThe facilitator takes the cards marked with red crosses and clusters these intocategories. These then form the basis of discussion. The facilitator asks if any
  8. 8. red tape issues that are important in their localities are missing and adds these tothe clusters.Then, a discussion is facilitated using one or more of the following questions: “Isthis a regulatory problem or a problem of administrative procedure?” and/or“Which of the issues are the most important obstacles to business developmentin a locality?” and/or “Is formal or informal business the most affected by this formof red tape?’
  9. 9. SESSION 11. GOVERNANCE AND RED TAPE REDUCTIONStep 1. Input on governance and red tape reductionThe facilitator explains that the Triangle on Governance deals with red tape as asub-set of the wider issue of governance. S/he then refers to Slide 3 below todefine the term governance.As was mentioned in the presentation of the second triangle, the manner in whichlocal government interacts with the private sector will greatly influence whether abusiness stays or invests into an area. It is in the interface between the publicand the private sector that business, especially small enterprises, face hightransactions costs brought on by the unnecessary regulations, bureaucraticprocedures, poor service delivery or opaque procurement and tendering systems.Increasing the service orientation of local officials can greatly contribute toreducing the compliance costs for businesses and improving the overall businessenvironment within a locality.Slide 3. A definition of governance A definition of governance  The term governance refers to the way in which local government performs administrative processes and interacts with the private sector and social actors.Slide 4 below illustrates current and desired future relations between localgovernment and business over the local red tape reduction initiatives.
  10. 10. Slide 4: Partnerships for cutting red tape Governance & Cutting Red Tape Public-Private Partnerships bring: Growing trust & joint action lead to: upward spiral of improved service delivery & economic growth & poverty reduction Government brings: •Service provision •Knowledge of systems Businesses bring: •Public resources •Wealth & job creation •Power to cut red tape •Tax revenues •Stakeholders together •Aversion to red tape •Balance between •Ideas on how to cut red tape various interests Local Suspicion & conflict lead to: Private Government Sector downward spiral of red tape application & aversion, rising costs, deteriorating business environment, declining economic activity & rising povertyThe discontinuous red line represents the prevailing relationships between thepublic and private sector, which are mainly characterised by high levels ofdistrust and conflicting views on how to stimulate LED and poor communication.Businesses find local government unresponsive and even hostile to their needsand try to avoid its scrutiny and/or invest elsewhere. Local government revenuesdecline and services worsen, leading to a deteriorating environment for business.The outcome is a spiral of economic decline and worsening conditions forcommunities in the locality.The top corner of the triangle represents the potential of a public/private sectorpartnership to reduce red tape. The lines from the local government and businesscorners to the apex represent what the two parties can bring to the process.Businesses bring an entrepreneurial approach, first hand knowledge of theimpacts of red tape on their own operations, private sector resources and theability to act fast to implement initiatives. Local government brings servicedelivery, the knowledge of regulatory systems and administrative procedures andpublic resources. It also has the authority to re-frame the regulatory environment,to convene stakeholders and to balance conflicting interests.The promotion of Public-Private Dialogue (PPD) leads to mutual understanding,the building of trust and greater transparency. By jointly implementing local red
  11. 11. tape reduction initiatives, the business environment is improved and privatesector development is encouraged. Local government and business together canlobby higher levels of government to change laws and regulations that areoutside the ambit of local government. The outcome is a positive spiral ofincreased investment, economic growth, employment creation, increased publicsector revenues and improved services for all.The facilitator explains that this is not a once-off process. Sustainedimprovements in the BE require continuous PPD and action, which may lead tothe creation of local government-business networks or fora.Step 2: The interaction matrixThe interaction matrix is designed to help participants get a better understandingof the costs and benefits to potential partners of collaborating over an issue: inthis case local government and business over red tape reduction. Toolbox 1: Interaction matrix Interaction between Local Government and Businesses Benefits & Costs and risks of opportunities of working together to working together to reduce re tape reduce red tape For local 1 2 government For businesses 3 4It is possible to increase the number of partners in the left hand column. Thismakes sense if there are sub-groups whose interests differ significantly, forexample in the case of formal and informal businesses. In this case the facilitatorsplits the rows on two: formal and informal.The participants respond by writing their observations on cards, starting with field1, then 2 etc. For example, the question for field 1 is “What are the benefits andopportunities for local government in collaborating with business over red tapereduction in their locality?”The information generated in the matrix enables one partner to understand moreclearly the perspective of the other. It also provides insights into whereopportunities for collaboration might lie and where collaboration is likely to bemost difficult. To simplify the analysis, the facilitator clusters the cards andeliminates duplicates. If the number of cards per participant is reduced to, say,two for each box, this also simplifies matters.
  12. 12. Step 3: The Pareto exerciseWith the possibilities of collaboration in mind, participants then prioritise areas forfurther discussion. In voting, the question they would have in mind is “Where arethe greatest opportunities for successful collaboration between local governmentand business?” A Pareto exercise determines how many points are given out toeach participant for the vote. (See tool box 5) These points are then made knownto the participants. Actual voting can take the form of sticking dots on the clustersor using a marker pen to make the dots on the clusters. Toolbox 2: The Pareto Rule The Pareto Principle is also known as the 80-20 Rule. Each participants gets a number of points equal to 20% of the cards (e.g. 35/5=7), having eliminated duplicates. Each participant then places her/his dots (or makes a mark) on the cards to reflect his/her prioritisation of the idea/action. Participants may spread their votes between cards or place all of them on one card.Step 4: Discussion on dialogue and actionThe session ends with a plenary discussion on dialogue and action. This cantake the form of questions on the material covered in the session, examples ofdialogue and action in other areas of the country or questions on where to gonext, which lead into the next session.The facilitator then refers the participants to the 1,5 day training exercise andfollow up facilitation support service that are available from GTZ and InWEnt forthose who want to pursue this further.
  13. 13. 6. Partner ProfilesGTZ- Deutsche Gesellschaft fur Technische Zusammenarbeit GmbHThe Deutsche Gesellshaft für Technische Zusammenarbeit (GTZ) GmbH is aninternational co-operation enterprise for sustainable development with worldwideoperations. It provides viable, forward looking solutions for political, economic,ecological and social development in a globalised world. GTZ promotes complexreforms and change processes, often working under difficult conditions. Itscorporate objective is to improve people’s living conditions on a sustainablebasis.GTZ’s mission includes services to clients and international donors. Capacitybuilding of partner organization and individuals is its key contribution. It iscommitted to stakeholders’ participation.Its work in South Africa supports the sustainable realization of the government’spolicies towards poverty alleviation, especially among the previouslydisadvantaged individuals. Their work focuses on “Local governance andDevelopment”, “Good governance” and “Skills Development”. It considersHIV/AIDS as a major threat to South Africa’s development and suggestsappropriate responses to it.InWEnt– Internationale Weiterbildung und Entwicklung GmbHInWEnt (Capacity Building International, Germany) issynonymous with human resources and organisationaldevelopment in international cooperation. Our servicepackage addresses specialists, executives and decision-makers in industry,politics, administaration and civil society. InWEnt works with partners indeveloping countries, transition states and industrialised nations, and in this wayreaches some 55,000 individuals every year.InWEnt’s shareholders are the Federal Republic of Germany represented by theFederal Ministry for Economic Cooperation and Development (BMZ), The CarlDuisberg Gesellschaft and the German Foundation for InternationalDevelopment.For more information, contact:
  14. 14. InWEnt Regional Office, GTZ OfficePO Box 13630, Local Economic DevelopmentHatfield 0028, PO Box 13732Pretoria Office 103A, Hatfield 0028Phone: +27-(0)12-3426115, PretoriaFax: +27-(0)12-3428594 Phone: +27-(0)12-342 3537Email: Fax: +27-(0)12-342 3510 Email: