Presidential promises and business registrations

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Aneetha Warusavitarana

On Independence Day, the presidential address touched on several topics, ranging from public administration and corruption to eradicating poverty in the country. Reforming the current system in order to promote an environment where Sri Lankans could thrive and prosper was a promise made – a large part of which was economic freedom. While the President veered clear of more controversial topics, this focus on reform was promising.

“Outdated laws, regulations, taxes, and charges that prevent people from freely undertaking self-employment, traditional industries, or businesses need to be revised swiftly. We will work towards removing unnecessary restrictions imposed on the public to better ensure their right to live freely.”

If the Government follows through on this commitment, it would require a considerable amount of work. While significant changes were introduced to the tax system of the country with relative ease, legal and regulatory change will be more difficult to come by. We have a host of outdated laws, and one industry is often governed by several acts – creating considerable confusion.

For instance, the coconut industry is governed by the Coconut Products Ordinance, the Coconut Fibre Act, and the Coconut Development Act. Each of these Acts address different aspects of the coconut industry, from the export of products to land use. Legal reform is notoriously time and labour intensive, and we are unlikely to see legal reform, unless it is driven by clear political will. Regulatory change is easier to bring about, and is a good starting point for the improvement of Sri Lanka’s business environment.

Small businesses

Last October, the Advocata Institute commissioned an islandwide survey of micro and small entrepreneurs, covering 1,500 respondents. The aim was to better understand the legal and regulatory barriers that these enterprises face. Sri Lanka has seen successful reform in the area of business registration, with the country moving up on the Ease of Doing Business index. The impact these reforms have had on small businesses was reflected in the survey findings, with 67% of respondents stating that they had registered their businesses. When this number was broken down further, we found that rates of registration did not fluctuate drastically between micro and small enterprises, with 66% of micro and 76% of small enterprises having registered their business.

While these numbers are promising, there is still room for improvement. Bringing businesses into the formal sector gives them opportunity and access to finance, knowledge, and markets that they are excluded from when they exist in the informal sector.

However, businesses have good reasons for being hesitant to formalise. In cases where the cost and time associated with registration are too high, it may make more sense for businesses to postpone registration until they are more established. Excessive regulation is also a key factor; when numerous documents and approvals are required, the costs associated with registration rise and act as a deterrent to formalisation.

Barriers

Among the unregistered businesses, only around one-third had tried to register their business at any point. The survey results indicate that this group of individuals may not necessarily have prohibitive barriers that prevent them from registering their businesses, as they have rarely gone beyond getting information from a municipal council or divisional secretariat, have prepared documents halfway, or have simply asked friends about the process or checked the website. This could indicate that there needs to be better information provided at divisional secretariats or municipal councils, or assistance provided to help these individuals register their businesses. It could also simply be a lack of interest in pursuing registration at this point in time.

One reason provided as to why they have not registered their businesses, which appears to be a more concrete barrier, is the issue of space and the requirement for a rent agreement. When these unregistered enterprises were asked if they were aware of the documents required for registration, 65% of respondents were aware that a name registration certificate was required and 61% were aware that grama niladari approval was required. Only 48% were aware that a rent agreement was required for the premises.

Requirements

The need for a rent agreement or copy of a deed at the point of registering the name of the business, while appropriate for a larger business, is less so in the case of these small and micro enterprises. A majority of the micro and small enterprises interviewed in the survey do not have a designated office space. 42% of small enterprises and 48% of micro enterprises operate from residential premises. If they are the owners of the premises, then the process is slightly simpler – the original deed and a notarised copy are required. If not, the original rent agreement and a notarised copy are required. At face value, this requirement may seem inconsequential. However, it does appear to be unnecessary and poses another hurdle for entrepreneurs.

A rent agreement or a deed is not necessarily a requirement for registering a business across the world. Looking at the case of New Zealand, it is only required that a company director enters in a valid address which will be cross checked against the New Zealand Post Database to ensure that the address is accurate. In the case of Hong Kong, registering a business only requires an incorporation form, a copy of the articles of association, and a notice to the business registration office. New Zealand and Hong Kong are in the top three most economically free countries in the world, and set a precedent that we could all follow.

Way forward

97% of micro businesses and 85% of small businesses surveyed register their business as sole proprietorships, with only 3% of the businesses surveyed registering themselves as partnerships, and 2% registering themselves as private limited companies.

Given this, removing the requirement of a rent agreement or deed for this type of registration could be a viable solution. The process of registration of private limited companies has been eased through the Government’s e-RoC portal, and reform should now focus on easing the process for our smaller businesses.