Economic Policy Review ISSN 1313 - 0544

Who should be the licenser – the State or the private sector

Author: Veliko Dimitrov / 08.05.2008
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It became known several weeks ago that several professional organizations from the truck industry have joint into confederation. There is nothing wrong with this type of association - it is voluntary. To some extend one could say that this is an alternative to corporate mergers and takeovers from the point of view of the positions of negotiations with the trade unions and the State by the entrepreneurs. Sometimes more, sometimes less successfully, these organizations, together with their other activities such as training, mutual consultations, etc., are fighting stubbornly against the attempts of the politicians and bureaucrats (shortly the State) to create additional costs for the private sector, respectively worsen the business environment[1]. We are talking mainly about the various types of regimes and mainly about licensing regimes, multiple submission of the same information, price limitations in a non-monopolistic sectors, etc.  

One trend is noticeable in the last few years, which may have extremely negative effect on the development of many sectors - instead of promoting simplification and reduction of the number of regimes, some branch organizations and their unions, publicly express the desire they alone to become the factor, which takes decisions and gives permissions. Two years ago such idea was brought up by the building sector and at the beginning of this year the debate was in general and together with the observation the "state employee holds the golden pen" were put forward ideas that the regulation process should be taken away from the administration and should be given to the business, i. e. representatives of the business should regulate the existing as well as the future companies. This according to some must lead to "clearer rules and transparency of the sectors". In reality it is unlikely to find people who would support the claim that the state employees in Bulgaria implement the regimes in the most effective manner - it is a fact that they work slow, the electronic exchange of documents exists only in the Government's strategies, the feeling about corruption according to some international and local organizations is high, there are practices to jump lines, etc.   The economic effects of this entire situation are clear - lower effectiveness, greater costs and looking for higher return on investment by international and local investors (which naturally reduce its quantity). The question is however, what would help the transfer of power to issue permits to the private sector, i. e. in general representatives of each branch to have the right to decide which companies would be allowed to manufacture and provide services and which would not.  The answer is simple - absolutely nothing. For sure one could expect the enlargement of the existing problems and appearance of new in the following areas:

Corruption and the entry into the sector

If at present there is corruption, it is mainly in two directions: the government employee thrives to get higher income and the employee has been paid by for example competitive company to stop or create difficulties to some other company. In both cases the issue is to get higher income without the existence of definite and strong personal interest, beyond this additional income. If the right to issue permits however was exercised by the branch organizations we could add to this material interest one additional which is much more serious - protection of their own or represented "internal" organizations from entry into the sector of outsiders.  In other words, the stimuli to close the entrance to the sector are much greater and respectively the illegal payments and additional agreements would increase.

Facilitating the business

If the transfer of authority is mechanical, without any changes in the complexity of the procedures, scope and number of regimes, we could not speak about the improvement of the business environment even only according to this parameter alone. To this we must add the more difficult entry into the sectors with all negative consequences to competition, prices and quality

Lower budget costs

One of the few logical at first glance explanations of the favoring by the State of such intentions (but certainly not the leading) is that the costs of the administration would be lower. However, this is not likely to happen, since, as for example minister Mutafchiev stated, the State would still attempt to monitor and control the processes.  For this job naturally would be required employees, probably the same which are currently administering the issuing of licenses and permits. In other words, if until now the control was only along the line of the higher level within the administration now the chain would extent with more levels which operate on a branch level. Naturally the organizations themselves would require administrators, which to manage the processes and to provide internal control.  Over all, achieving lower budget costs is not likely to happen, while for the economy as a whole they would certainly increase. 

Licensing is always related to additional expense. Apparently, however, the negative effects on the economy would be much less if this activity is performed by the State and not the private sector, which has many more stimulus to defile the process than any other state employee could or would be willing to. There are no economically based arguments, which could defend the transfer of power or regulatory functions to the private sector, and as a result the branch organizations should not attempt to achieve state-like status, but to direct their efforts (and not only they) in the following two directions:  

  • The regulation regimes to be reduced to two types: license and registration. To observe strictly the principal that a licensing or registration regime could be introduced only by a law, hence the Council of ministers or the separate ministries, agencies, and local structures could not introduce regulation regimes at will;
  • To terminate the practice at the entrance of a given profession or craft (with few exceptions, one of which is the financial sector) to require permits, certificates at cet. Such documents could be used only as proof of higher qualification or some international affiliation, but not as a barrier to practice certain activity.  


[1]Naturally I do not claim, that all legal requirements lead to greater costs, than benefits to society, as probably the most suitable example for that is the stricter regulation of the financial sector, which is protecting to some extend the financial system from crisis and the saving of the people from unscrupulous financial institutions. On the other hand however, in the real sector exist many requirements, which limit its development - tobacco, all crafts (over 100 of them) etc.