Bribes and ‘service charges’

Originally appeared on The Morning

By Dhananath Fernando

Deregulation commission good only if it actually deregulates

While having a conversation with a businessman, I brought up the topic of bribery in Sri Lanka. I put him on the spot by asking: “Have you ever paid a bribe to sort out your business matters?” He responded: “The answer depends on your definition of a ‘bribe’.” He added: “If your definition of a bribe is dishonestly persuading someone to act in an illegitimate manner by a gift of money or another inducement, my answer is ‘no’. But I have paid and continue to pay ‘service charges’ (which I believe is the new term for bribery). This is ‘paid’ to get legitimate things done faster. Without oiling the palm, I cannot get any legalities processed,” he stated. “Following that definition, my answer is ‘yes’,” he went on to say. He further explained: “Paying money to get things done as per procedure is termed a ‘service charge’, and paying to get anything illegal done is a bribe.”

Unfortunately in Sri Lanka, following normal procedure to get things done requires the paying of bribes. If you don’t pay, you can’t get anything done, even if you have followed protocol and procedure to the dot. This is a common practice, from the security guard up to the director generals of many institutions; from getting a passport to getting approval for a million-dollar investment. 

This issue has been discussed over the years and it is not only a problem in Sri Lanka but across the world. But we all agree that in this part of the world, bribery is painfully common. Fear surrounding the act too has started to erode. That is the reason my friend, who is a businessman, prefers the term “service charge” instead of bribe. The main reason for high levels of bribery is excessive regulation and discretionary power assigned to certain officers. When we have too many gatekeepers with discretionary powers, bribery or service charges, as we term it, becomes unavoidable.

With this context in mind, President Gotabaya Rajapaksa has appointed a deregulation commission. The committee is assigned with the objective of easing business processes with a 90-day time frame. Identifying deregulation as an urgent need to ease the process of doing business is a step in the right direction. Many a time this column emphasised the importance of deregulation and its impact on easing the process of doing business. It is a low-hanging fruit that can be plucked easily with minimal financial resources. The President’s initiative and the Government’s efforts on deregulation have to be appreciated without a doubt. This will be a big game-changer if we utilise this opportunity with good intentions. 

Understanding the gravity of this assignment is of vital importance. Developing a feasible framework to achieve its objectives, too, is of high importance. There are two sides to deregulation. One is deregulating the factor markets. There are regulations at a higher level on main factors that contribute to productivity. That is land regulations, labour regulations, capital regulations, and entrepreneur regulations. Deregulation in each sector is an assignment on its own. 

Just take land regulation as an example. Eighty percent of the land is owned by the Government, and our farmers do not have the property rights to cultivate what they want and develop their lands. Different types of land registrations are in place by the name of Swarnabhoomi, Jaya Bhoomi, etc., but nothing can be used as collateral at a bank to obtain much-needed capital. As a result, for decades, our farmers have been using the same technology and very inefficient methods of farming. This is evident in how 25% of our labour force contributed about 8% in terms of GDP. 

The situation is not very different in other sectors in terms of capital market regulations and labour market regulations. Our hiring and firing guidelines are rigid, so doing business is a complete nightmare. Under the existing regulatory framework, it is therefore unlikely that investors will come to Sri Lanka more often. One reason why investors are actively looking at the Port City is that businesses at the Port City will have a separate regulatory framework. Faster and convenient systems and processes, and minimum yet strong regulation are what all investors are looking for. They want to invest easily without excessively spending their energy and money on unnecessary regulatory work which increases their transaction costs or by paying “service charges”, as per my friend’s definition. 

The business registration process is a nightmare for budding entrepreneurs. Small businesses registering proprietorships require a grama sewa certificate, rent agreement, nameboards, and have to provide so much more unnecessary documentation and go through unnecessary processes, that it kills the aspiration of the entrepreneur even before they commence the business. The company registration process can be done via an online system to get the business registered. However, getting copies certified by directors and other documents that are required, has become a long and tiring process.

Many exporters have said their main challenges are not issues such as finding opportunities in outside markets. Their biggest concerns are in Sri Lanka where their activities and scope of innovation are restricted by a regulatory framework.

The other side of regulation is product regulation, which calls for unnecessary documentation at every office. This is common for all product sectors of the economy. The National Medicines Regulatory Authority (NMRA) has so many various processes and procedures on getting medical equipment and issuing licences; so does the Telecommunication Regulatory Commission, which has another set of regulations on products. These are all fine examples of excessive regulation restricting product markets.  

When considering all these products and licence requirements as the general regulatory framework, then the scope of the newly appointed commission will be very broad. So, most likely, they may have to identify a few big-ticket items where deregulation can be done faster, with a higher impact on business and investment. Sri Lanka’s Customs’ regulation, land regulation, and capital market regulation are definitely a few areas where the problems are known yet nothing has been done over the years. The problem for many businessmen is not that they want to bend the law or do anything illegitimate, but rather that the authorities do not provide any answer for the applications and delay the process. For an investor, a very delayed date is an expense, as he/she has to repay the capital and interest on capital, and he/she is losing an opportunity to make a profit.

It would be a gigantic task for the committee to cover the scope of all regulations just in 90 days, and all the members are already on different fulltime assignments. Since this committee comes under the purview of the President, the business community will keep a close eye on the outcome of this initiative. 

We need to learn lessons from the past committees where nothing happened apart from the spending of public money and kicking of the can down the road. This Government, unfortunately, fell into the same trap with the committee appointed to appoint heads for SOEs (state-owned organisations), which did not achieve the expected outcome. There were media reports of political appointees, and some members even submitted fraudulent documents as qualifications to sit in high-level director boards at state institutions.

The deregulation commission is undoubtedly an initiative in the right direction, but the real victory for business and investment would be the day actual deregulation takes place – where the businessmen do not have to pay any “service charge” to speed up the process or bribe to get anything illegitimate done.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.