Introducing the latest Economy Matters blog from our PwC Middle East Economics & Sustainability team. This month’s blog focuses on the need for the reform of the government services framework - with our perspectives on the key drivers for change and steps governments can take for a practical, sustainable approach.
Authors: Shebli Khoury, Walid Wehbe, Jing Teow
Governments play a critical role in striking a balance between promoting economic growth and supporting the interests of society. This means regulating social, economic and business activity, to ensure fair business practices and protection for the rights of employees and the environment.
This role often manifests in the form of permissions or requirements that companies have to obtain or fulfill, for example, securing a license to run a business, arranging a fire inspection to pass a safety certification or complying with green waste management regulations. For individuals, it could be obtaining a license to drive your car or registering your property with the local land registry. Governments tend to charge a fee to cover the costs incurred by these necessary services - for example, paying professionals to conduct building inspections, or to review planning documents for new infrastructure developments.
What is driving the need for reform?
There has been a significant increase in these requirements (and other services) in the GCC, which has partly been associated with the need to raise non-oil revenues to cover the cost of funding other public services and social programmes, especially as oil revenues have moderated.1 The IMF has also highlighted the proliferation of small fees (business licenses, visas and work permits etc.), as a growing challenge in the region - with this non-oil and non-tax revenue accounting for around a quarter of government revenue.2
Individually, such requirements are unlikely to have a significant impact. However if uncontrolled, the combined impacts of these requirements and the fees borne by businesses and households can be material and prohibitive for businesses and individuals. For example, the average spend on government-related fees for starting a business in the region is around USD 2,000 - around 10 times higher than in Singapore.3 This might hinder small entrepreneurs, whose time and capital would be much better spent developing business opportunities than dealing with red tape.
Where can governments start?
To maintain competitiveness, governments in the region need to review their fee schedules and the impact on business and households. Our experience suggests three key actions to help governments get started:
Develop an understanding of all requirements and the associated fees – governments should form a 360-degree view of all requirements that businesses and residents must comply with and their intended purpose.
Define principles to determine if a requirement or service should be kept - these should be in the public interest, meaning that the requirement is intended to protect and/or benefit the general public - for example, requiring a driving licence, or requiring state approval for carrying out regulated economic activities. Requirements or services that do not meet these criteria or serve a now defunct purpose should be considered for cancellation. New requirements or services should be introduced only when strictly necessary and where it serves the public interest.
In the long-term, consider reducing the price of government services with a view to recover costs and remain competitive, and reduce the cost burden on businesses and households. In some cases, it may even be sensible for services to be priced below cost or offered free of charge if in the public interest, or if the current cost of collection exceeds revenue raised. Price reductions introduced by neighbouring countries to improve their attractiveness to business may also exert competitive pressure to keep costs low.
Governments should also consider the following when embarking on such reforms:
Consider alternative revenue streams to plug any revenue gaps that might result from service cancellations and fee reductions. Alternative sources of revenue, such as broad-based taxes, may also be more efficient means of raising revenue and funding these services. These reforms can also deliver cost savings as the government no longer incurs the cost of providing these services.
Engage main stakeholders (such as the government agencies responsible for providing these services) and secure buy-in to implement these reforms.
Ensure commitment by clearly communicating long-term reform plans to maintain credibility and foster business confidence.
Consider reforms to existing IT systems and legal changes that may be required to enable these changes to happen.
Some GCC states already recognise this problem and have taken a first step by abolishing some “nuisance” fees. For example, the UAE government reduced or eliminated around 1,500 fees in 2019, while Abu Dhabi’s Government has slashed some business set-up fees by up to 90 percent.4,5
However, there is an opportunity to go further. Reforming government services and shifting towards a less fee-centered revenue system will bring significant economic benefits. By reducing the fixed - as well as often hidden - costs associated with starting and operating a business, it encourages business entry. A study of the impact of reforming the License Raj system in India, which reduced the complexity associated with starting a business, led to a 6% increase in new businesses.
These reforms will help boost business performance and productivity. For governments, broadening the tax base as well as enhancing the effectiveness of fiscal policy will have a positive economic impact. Policymakers should take action now to reap these benefits.
1) From no tax to low tax: as the GCC relies more on tax, getting it right is critical for diversification
2) IMF, "Diversifying Government Revenue in the GCC: Next Steps" (2016)
3) High-level estimate based on publicly available data from Government websites. Prices for the region are computed using the average price for opening a business in Riyadh, Dubai and Abu Dhabi. Cost of setting up includes fees such as trade name fee, professional license costs, license registration etc. and exclude manpower requirements and expenses
4) UAE Ministry of Finance, “Reduction and cancellation of more than 1,500 federal government services” (2019)
5) The National, “Abu Dhabi slashes business set-up fees by more than 90%” (2021)
