Red tape and Australia’s cost of doing business

| June 6, 2012

How does Australia fair against other nations when it comes to Red Tape? Tim Mazzarol takes an indepth look at where we sit compared to other countries and what this means for local businesses.

The term “red tape” has been used so much in recent years that it is difficult to trace either its meaning or its origins. It is thought to have come from the use by King Charles V of Spain’s use of red tapes manufactured in Holland that he used to bind important documents of state during his reign in the 16th Century.

During the United States Civil War in the 1860s the US Government used red tapes to bind veteran’s records. People who sought access to such documents used the term as an emblem for bureaucratic intransigence and time wasting. Today it represents a term for unnecessary regulations that impose time delays and compliance costs on business.

“Doing Business” in Australia

Each year the World Bank reports the findings of its “Doing Business” survey. This measures the ease of doing business in relation to various issues across a global survey of 183 countries. 

There are 10 indicators in the “Doing Business Survey” an it 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.

In the 2012 “Doing Business” survey Australia ranked 15th overall. We fell behind Canada and Sweden, but ahead of Georgia and Thailand. However, we were far behind Singapore in first place, followed by Hong Kong, New Zealand, the United States and Denmark.

The table above lists the 10 indicators and how Australia ranks against the global 183 other countries. 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. 

Investment and Taxation

Australia’s ranking was worse in relation to the protection of investors. This is a measure of Australia’s legal system’s ability 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.

Also of concern is the issue of paying taxes. This indicator measure 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 and property sector

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 reforms within local government authorities as much as their state, territory and federal counterparts.

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.

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 issues

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. 

So what should be done?

Australia’s Federal Small Business Minister Brendan O’Connor has set out a “red tape challenge” at the last COAG meeting in April this year. This aims 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 Bank report.

Tim Mazzarol is a Winthrop Professor in Entrepreneurship, Innovation, Marketing and Strategy at the University of Western Australia and an affiliate Professor with the Burgundy School of Business, Groupe ESC Dijon, Bourgogne, France. He is also the Director of the Centre for Entrepreneurial Management and Innovation (CEMI), an independent initiative designed to enhance awareness of entrepreneurship, innovation and small business management. He has around 20 years of experience of working with small entrepreneurial firms as well as large corporations and government agencies.

A version of this article was first published in “The Conversation” on 23 April 2012 and appears with the permission of the author.