Six years ago, my family decided to start a small retirement home in a rapidly ageing region. Yet we were soon to find that caring for the elderly was the easy part…
Instead, we found ourselves entangled in a web of bureaucratic processes, applications for building and environmental permits, compliance checks for fire safety and other health regulations, that kept the fledgling business in bureaucratic limbo for months on end. Just getting the construction permit and access to the electrical grid took more than a year (each). How can we avoid suffocating our SMEs through red tape?
Red tape can hold back regional economies
My family’s story is not unique. A forthcoming OECD report on “Boosting business in regions” finds that in a quarter of the 229 large (TL2) regions for which data are available, more than one in five businesses find business licencing a severe obstacle to their activity.
Rules and regulations serve a vital role: they keep us safe, protect our health and environment and ensure fairness in the marketplace. But when poorly designed or overly complex, they can stifle and deter businesses, draining regional economies of their dynamism.
Heavy administrative burdens and high costs of regulatory compliance discourage entrepreneurship, so fewer firms are created in regions with longer approval processes. On average, regions where it takes more than 60 days to obtain an operating licence have firm creation rates that are 25% lower than firms where it takes less than a month to obtain one. Fewer new firms mean less competition for incumbents and less pressure to innovate, which can translate into lower productivity for the whole region.
Swifter local processes mean more firms
Time to obtain an operating licence (calendar days, horizontal axis) versus firm creation rate (%, vertical axis), 2019-2021
How subnational governments can simplify red tape
The good news is that there are plenty of ways of removing red tape – and subnational governments play vital role in doing so. In fact, around a fifth of the 31 countries with available data have regions both in the top 25% and in the bottom 25% across a variety of indicators of red tape, such as the number of days it takes to obtain a licence or a permit and the share of firms that find business licencing a severe obstacle to their operations.
To succeed, regions must first simplify the rules over which they have control, typically construction permits, land use regulation and business licences. This could mean reviewing the existing rules together with local businesses to remove unnecessary provisions.
Digitalisation is a powerful ally in cutting red tape and saving time for everyone – especially when national and subnational systems work together.
The Dutch city of Delft is a great example, with its one-stop shop, www.delft.nl. Entrepreneurs can find information on local permits and licences, such as the rules required for setting up a terrace for a restaurant or obtaining a building permit. They can make their request online, upload documents and set meetings with city officials.
The website pools all relevant information and services under one digital roof, cutting the time spent ping-ponging between various offices. It explains the rules in the form of checklists, with clear steps and requirements, and ensures that documents reach the relevant department.
The power of Delft’s one-stop shop is that it seamlessly integrates within the existing ecosystem of digital services. To make a request or access the status of their file, entrepreneurs log in with the national identity system for companies, eHerkenning. This allows city employees to get information on the firm by querying national databases, such as the business registry or the land registry.
This saves time for everyone, no more legalised copies, no more repetitive form-filing for various public authorities. This is the essence of a once-only system: ensure that the users provide information only once, and it’s shared securely across the relevant authorities.
Delft’s experience shows a broader lesson: subnational digital services are strongest when they can build on supportive national frameworks. National policies, data systems and digital IDs can create a solid foundation, while cities and regions bring these tools to life through clear, simple rules and user-friendly services. When both levels align naturally and work toward the same goals, everyone benefits from a smooth experience.
Test and learn
Of course, even the best systems need to evolve. User feedback is crucial in ensuring services stay relevant and useful. Fortunately, with more public services shifting online, there are also more opportunities for learning lessons to improve services. Digital archives allow governments to track user journeys and identify bottlenecks. Users can also be asked for feedback directly, through post-application surveys.
Some countries use more creative methods to get feedback. Italy organised mystery calls, where government employees posed as entrepreneurs calling municipal one-stop shops to get information on how to set up a retail business. While the average inquiry required two to three calls to get the necessary information, some required up to ten – exposing areas of improvement.
A revolution for red tape?
Reducing red tape and administrative burdens is not just a matter of convenience. It is a vital step towards encouraging business creation, innovation, and competition, for a more productive and prosperous future. Simplifying rules, digitising services and working across levels of government can unlock the potential of local businesses – whether they are launching tech startups or providing care services, like my family.
For my family, it would have meant fewer days drowning in paper and more time building a home for the elderly to thrive, to the benefit of the entire community. It’s time for policymakers to clear the path – so that the next generation of entrepreneurs spends less time waiting for approvals, and more time bringing their ideas to life.
Find out more about the OECD’s work on regional matters by having a look at Regions, cities and local statistics and the homepage for Regions. The OECD Local Data Portal is another fantastic resource that can enable you to uncover meaningful insights on regional policy matters.
Alexandra (Alex) Rusu is an Economist and Policy Analyst in the Economic Analysis Unit at the OECD Centre for Entrepreneurship, SMEs,Regionsand Cities. She focuses on how to strengthen business environments so that firms can grow, innovate and contribute to more prosperous regions. Before joining the OECD, Alex worked at the European Commission’s DG TAXUD and at the CPB Bureau for Economic Policy Analysis in the Netherlands. She holds a PhD in Economics from Erasmus University Rotterdam.