Incentives for Implementation of Regulatory Reform: A Comparative Survey of Federal and Regional Government Officials in Russia The survey is conducted by CEFIR/NES with participation of NISSE and support of World Bank This study is conducted on behalf of the Administration of the President of Russian Federation and is initiated by the Ministry of Economic Development of RF in the framework of Presidential Decree # 797 1 1

Previous study: CEFIR/NES Monitoring of administrative barriers to the development of small business in Russia 2001-2006: www.cefir.ru/monitoring Short summary of six rounds: Before any of the deregulation laws took effect, the practices in the areas of registration, inspections, licensing, and certification were found to be very far from the benchmarks established in the new legislation. The new laws on inspections (August 2001), licensing (February 2002) and registration (July 2002) have induced significant positive changes in these areas of regulation. The reforms did have a beneficial effect on the regulatory burden. Enforcement of the new laws improved gradually. Still the degree of administrative pressure on the small business remains significant. Progress of reforms is not geographically uniform: better results were achieved in localities with better fiscal incentives, more concentrated industry, less corruption, and higher initial share of small business In the 6th round of Monitoring conducted in 2006 there has been a significant worsening of corruption and unfair competition. Inspections and, particularly, tax inspections have become a more serious problem for business 2

Goals of the study Get detailed information for analysis of the incentives and constraints to implementation of regulatory legislation in different government authorities and subjects of Russian Federation Find out the incentives of government officials to implement reforms Compare the results of Monitoring of Administrative Barriers to Small Business Development in Russia (the survey of small business) with the assessments of the regulatory authorities representatives Provide government and the central authorities with information on the above issues and work out recommendations for promoting the reform aimed at further reduction of administrative barriers to small business at the local level

Results Effectiveness of reform implementation is positively affected by: Positive personal attitude of officials to the reforms Officials’ knowledge of the regulatory laws Control by higher-level authorities

The sample 1430 government officials were surveyed: 13% - heads of government departments and agencies and their deputies 87% - subordinates

Regional coverage 20 regions in 7 federal districts Altai Krai Amur Oblast Kaluga Oblast Krasnodar Krai Krasnoyarsk Krai Kurgan Oblast Moscow Moscow Oblast Nizhny Novgorod Oblast Novosibirsk Oblast Perm Krai Primorsky Krai Komi rep. Rostov Oblast Samara Oblast Saint Petersburg Sahalin Oblast Severnaya Ossetia rep. Smolensk Oblast Chelyabinsk Oblast The survey took place in September – December 2008

Structure of the questionnaire Reform General attitudes toward reforms Changes in the organization’s work as a result of the reforms Attitude to future reforms Information on the respondent’s work experience and current position Information on the organization’s work Regulation of work Independence of the organization from external officials Certification and training of employees Movement of staff within the organization Interaction of the organization with business, the society, the state Assessment of organization’s activities Factors of activities’ effectiveness Attractiveness of public-sector work The prevalence of corruption Respondent’s personal information

Respondents Average age - 43 years (Fire inspection – 33) 2/3 of respondents are employed in their region of birth On average the respondents have been employed: 4.4 years in the current position 7 years in this organization 13.5 years in public sector observed the reform at another work place Previously were employed in other government organizations, state enterprises or just graduated from universities Male – female proportion 50:50 Almost all have higher education Nationality - more than 90% are Russians Average wage - 17000 rubles per month (in the first half of 2008) Respondents’ wage contributes 74% of family income

Government officials believe that their opportunity wage in private sector is substantially higher than current wage level If the person of your level of skills worked in private business his wage would be:

Deregulation reform: government officials attitude

Was the reform a step in the right direction? 75% of respondents support the reform Was the reform a step in the right direction?

Support of different reform measures is not uniform 20 40 60 80 100 % Limitation of inspection duration Ban on scheduled inspections of small enterprises over the first three years of their existence Cut of the number of licensed types of activity Limitation on registration duration Increase in the minimum period of validity of licenses Restriction on the number of planned inspections Introduction of one window for registration q_1 Categorically against Mostly against Mostly for Support fully

Support of tax reform measures Limiting the number of planned on-site inspections (no more than once every two years) – 90% Limiting the time of an on-site inspection to two months in routine cases – 51% Allowing the taxpayer to pass an on-site inspection in the location of the tax agency if the taxpayer is unable to make premises available – 80% Limiting the period of suspension of an on-site inspection to 6 months – 77%

Changes in the organizations as a result of the reform

A considerable delay between the law approval and its implementation in everyday practice 20.3% 24.6% 20.6% 9.9% Less than a month 1-2 months 3-6 months from 6 months to one year More than 1 year q_11 On average – 5 months Faster in Tax inspections Slower in Fire inspections and Rostekhnadzor

Reform is poorly equipped with resources 70-80% respondents consider that reform was poorly equipped with Financing Technical support Instructions Qualified specialists Staff declined by 12% as a result of the reform (Rospotrebnadzor – 40% decline, Roszdravnadzor – 23% increase) Personnel with new skills was employed in 35% of organizations

Reform led to increase in the scope of authority How has the scope of your authority changed as a result of the reform? Law on registration: 70% of the respondents reported the increase of the scope of their authority Laws on licensing and inspections: no consensus

Effect of the reform on labor intensity, risks and administrative burden 68% of the respondents consider that labor intensity of conducting an inspection has increased (for the law on inspections – 75%); Level of risk for population Did not change – 37% Increased – 41% Administrative pressure on business Decreased – 38% Did not change – 38% Frequency of conflict situations Did not change – 54% Increased – 35% On average increased for the law on registration

Level of corruption did not change On average 11% of respondents reported that the level of corruption has increased and 29% − that it has decreased.

Attitude toward future reforms

Transition to the system of notifications – opinions vary Do you agree that a system of notifications as opposed to permissions needs to be universally introduced? % disagreement

    Reasonability of introducing new measures aimed at liquidation of redundant administrative barriers 22

To assess respondents’ level of knowledge of legislation they were asked to agree or disagree with the following statements: By law, licenses are valid for no more than 3 years The licensing agency makes the decision about the issuance or refusal to issue a license no more than 60 days from the day the license application is received with all required documentation By law, an inspection of an enterprise cannot take longer than 45 days, and in extraordinary situations can be extended for another month License supervision is not covered by Federal Law 134 During an inspection, originals of documents relating to the object of inspection can and must be confiscated By law, government registration is completed in 14 days Documents for registration can be sent in by mail

Officials reveal poor knowledge of laws which they are enforcing 20 40 60 80 100 percent Registration by mail Duration of registration process Confiscation of original documents during inspection Duration of inspection Law on license control Duration of decision making on issue of license Term of license validity q_85_special Wrong answers Correct answers Average responses over respondents whose expertise is in the relevant regulation

Effectiveness of work – agencies have different opinions Effectiveness of risk reduction for the population - 3% responded “low” Effectiveness of tax and levies administration – no one responded “high” Cost to business in terms of time and finances – 9% responded “high” Factors that lower effectiveness

Problem of operations: personnel shortage Average organization is staffed only at 89% with no significant variation across agencies Reasons of shortages Answer frequency, % Low salary 63 General lack of specialists of the required skills (qualification) 46 The need to strictly adhere to instructions and regulations 10 Fear of responsibility for violations of requirements or damage caused by a firm under your regulation 8 Negative social perception of representatives of regulatory agencies 2

Incentives for civil service Presence of the following factors is reported by most respondents Stable employment (95%) Good possibilities for personal development (73%) Social status, prestige (62%) Personal interest and satisfaction in this work (78%) Attraction to the goal and mission of this organization (70%) Good relationship among colleagues in the organization (86%) Absence of the following factors is reported by most respondents Good pay (78%) Social benefits (58%) Flexible work schedule (90%) Reasonable workload (65%) Supplementary income (97%) Availability of government-provided housing or transportation (91%) Possibility of leaving for a good position in business in the future (81%) Possibility of growth in the civil service (career growth) (60%)

Who is the main beneficiary of the work of your organization: state or population? Response depends on the agency

Analysis of the matched database: survey of entrepreneurs and survey of government officials Monitoring of Administrative Barriers to Small Business Development in Russia by CEFIR (6 rounds in 2002-2006 years, www.cefir.ru/monitoring ) 2000 entrepreneurs in 20 regions of Russia Barriers evaluated as: Number of sanitary and fire inspections Duration of registration process Number of licenses issued for less than 5 year term Observations – entrepreneurs’ responses in 2006 Authorities variables – responses averaged over particular agency in particular region

Results: factors that have positive effect on the compliance of regulatory practice with laws A positive personal attitude of the officials toward reforms Higher level of officials’ qualification (human capital) Larger number of employees with new skills Higher quality of training Higher level of knowledge of regulatory laws Larger share of officials with previous experience in private sector and smaller share of those who worked in regional jurisdictions Higher influence of federal, regional and local authorities on the activities of local regulatory officials Better defined procedures of conflict resolution between business and regulatory agencies

Better knowledge of law decreases law violations Dependent variable: Number of planned fire inspections, logarithm Dummy for license duration below 5 years Age of firm (in logarithm) 0.071 * 0.138 (0.043) (0.136) Dummy for new firms -0.041 (0.074) Share of correct answers in the relevant agencies -0.163 *** -0.373 (0.051) (0.203) Industry dummies Yes Constant 0.183 1.076 (0.194) (0.843) Observations 1201 223 R-squared 0.06 0.09 Standard errors in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% 31

Recommendations Higher requirements to officials’ knowledge of regulatory laws, regular evaluations More rigorous control by higher-level authorities Better information support to the reform Clear regulation of authorities’ interaction with business and investigating and handling of complaints from business