Chapter 4: Recommendations for Government Action
The recommendations set out below are specific actions that we consider would make a difference to the business environment for SMEs.
We recognise that they are not the only solutions to the problems we describe. However, we think they would prove to be effective ones.
The recommendations are divided into sections that we used also in our first report, because we consider these still to be the most important places in which the government can make a real difference for SMEs.
We expect you to be able to report significant progress in all 12 recommended areas for action before 30 September 2006.
Enabling Regulatory Environment for Business
1. That the Government Demonstrate That the Quality of Cost/Benefit Analyses Contained in Regulatory Impact Statements Has Improved by 30 September 2006
There is clear, concise and useful guidance available for government policy analysts on how to undertake regulatory impact analysis (RIA), yet we continue to see policy proposals where the costs have only been narrowly drawn, or where no weight has been given to possible unintended consequences of the proposal, particularly for SMEs.
We believe Ministers (and their officials) need only to adhere to the rules in order to produce high quality, well thought through and clear cost/benefit analyses. But this will happen only if there is rigorous, independent and well-supported monitoring and reporting on the quality of regulatory impact statements. Also, there should be regular measurement of the actual costs of compliance, which is compared to the costs that were estimated by the government when passing the regulations. As we commented earlier in this report, we think also that the RIA disciplines that central government imposes should be extended to local government.
Implementing the Dutch Standard Cost Model and/or the Australian on-line Costing Tool variant of that model (both of which were mentioned in the government's response to our first report) would significantly assist in giving effect to this recommendation.
2. That IRD and ACC Develop, Implement and Communicate a Strategy for Dealing Compassionately with Minor Misdemeanours or Unintentional Mistakes
Tax penalties can cause stress to SMEs. We believe that, on most occasions, they arise as a result of unintentional mistakes by the SME. The imposition of penalties can act also as a barrier to SMEs engaging with agencies such as IRD and ACC. We think that both agencies need the flexibility to apply a response that fits the circumstances, rather than apply a blanket response. For example, the government could develop a "3 strikes - you're out" scheme to encourage businesses to report and then learn from mistakes, and to enable officials to consider the past record of payments by, and behaviour of, the individual or firm concerned.
3. That HSNO Controls Be Made Less Complex and Simpler to Implement
The Hazardous Substances and New Organisms Act is a complex piece of regulation. It is difficult to understand. It is difficult to obtain clear guidance on it. Also, it is difficult to access experts at a reasonable cost who can help with compliance requirements. Because of the all-encompassing definition of what constitutes a "hazardous substance" under the Act, around 150,000 businesses are captured under its regime. The overwhelming majority of these businesses are SMEs.
While efforts are being made by ERMA to ensure that businesses have easy access to all the information they need, we think it would be more effective to make the controls on substances simpler to understand and easier to implement. The lack of understanding of these controls is exacerbated by limited funding having been provided for the education of users. There is also insufficient information available at point of sale. For example, information about the handling and storage of a product should be available on the label of products when they are purchased, so users do not have to go to other sources to find that information.
4. That the Holidays Act 2003 Be Revisited, Particularly the Relevant Daily Pay Clause, to Reduce the Costs of Complying with It
It appears that there are a number of unintended consequences arising from the operation of the Holidays Act. For example:
- Wage costs have risen substantially. Surveys estimate between 2-5 percent rises in wage costs for an average business. The impact on seasonal and shift work industries is especially severe. Many SMEs feel unable to pass on the costs.
- Neither employers nor employees understand the complexities of the Act. That has made it more difficult and costly for many SMEs to do their own payroll.
- Widespread use of casual staff to sidestep extra costs from the Holidays Act.
- Many businesses closing on public holidays, resulting in reduced services and loss of business income.
- The significant costs involved in adjusting payroll and associated systems.
- Evidence of staff abusing the system by calling in sick.
- Use of surcharges on public holidays as a form of cost recovery.
We were told by a rural accounting practice that the introduction of the new Holidays Act led to a marked increase in the payroll work needing to be done for their clients - predominantly to attempt to help them understand how the Act should be applied.
We consider that the purpose of the Act is a commendable one. We think a lot of the difficulties will be removed if the formula for calculating the pay rates for public holidays reverted to using ordinary pay as the basis for calculating holiday pay. Other aspects of the Act should be simplified also, in close consultation with those business owners who have to interpret it. Our measure of your success in this regard would be that an on-line calculator can be developed that allows employers to unerringly determine all holiday leave entitlements.
5. That the Employment Law Be Amended to Provide for a Performance-Based Personal-Grievance-Free Probationary Period of 12 Months for New Employees
SMEs throughout New Zealand continue to describe to us their fear of taking on new employees, and particularly those who are, initially, only marginally qualified for their new role. Therefore we resubmit our recommendation for a 12-month personal-grievance-free probationary period for new employees. The exemption would apply only where the grounds for ceasing the employment relationship were non-performance by the employee. We continue to believe that this is the single most important change needed in employment law.
SBAG does not consider this recommendation to be against the intent of the Employment Relations Act. Neither would it remove health and safety or other statutory workplace protections from employees. Implementing this recommendation would bring New Zealand closer to the situation prevailing in countries such as England, France, the USA and Australia. It was recommended also in a recent OECD report on New Zealand's economy.
6. That All Government Business Forms Contain a Time Box in Which the Person Filling Out the Form Indicates How Long It Took to Complete (Including Research/Understanding Time) and That the Results and Trends from the Information in These Boxes Are Published
Some estimates by officials of likely regulatory compliance costs are akin to works of fiction. There is an urgent need to increase and improve the information available to Ministers when they are deciding the costs and benefits of regulating the business environment.
Under our proposal, government departments would be required to estimate (in the regulatory impact statement) how long the forms they will produce should take to complete. That published estimate would then be compared publicly to the actual times taken and recorded by businesses. When new or amended regulation requires new forms, these data could be used to complete the regulatory impact analysis and allow Ministers to be better informed of the costs of the proposed regulation (as in Recommendation 1 above). Thus accepting this recommendation would be one small step towards improving the information available to decision makers.
7. That FBT on Business Vehicles Be Simplified by Moving It from the FBT Return to an Adjustment in the Employer's Annual Tax Return
There are inherent complications in the FBT returns due to multiple taxation rates. This means that, for many employers, the quarterly FBT return now needs to be completed by an accounting/tax professional. This adds to compliance costs, both in time and dollar costs. Including the FBT on business vehicles (which is the only FBT most small business owners need to pay) in the annual taxation return would avoid the costs of the quarterly returns and would enable it to be completed by the accounting/tax professional at the same time as s/he completes the annual taxation return.
We estimate that this proposal would eliminate around 75 percent of all FBT quarterly returns. It would deliver also an important reduction in compliance costs to small business owners.
Opening the Way for Business
In our first report, we urged the government and its agencies to "think small first" before imposing new regulations on, or delivering new programmes to, New Zealand businesses.
Our experience on SBAG has driven home to us the importance of establishing good relationships between government agencies and SMEs if fundamental changes in thinking, such as "think small first", are to gain traction. The key to establishing a rapport with business is an understanding of good client relationship management.
Generally SMEs operate with a limited amount of contact with the government. When contact is necessary, small businesses expect government services to be provided in an efficient, impartial, accountable and honest manner. As in any other commercial situation, customer satisfaction is driven by: fair treatment; knowledgeable, competent, positive and helpful staff; timely service delivery; and a successful outcome. These drivers should be ingrained in government agencies. They underpin the recommendations that follow.
8. That Improvements to the Presentation and Information on ACC Invoices, and Their Timeliness, Be Urgently Implemented
We have heard from many businesses (and their advisors) about their increasing degrees of confusion and frustration at the difficulties arising from the presentation and quality of ACC accounts and also the erratic times at which they arrive.
We have spoken with ACC on this matter and know that they are aware of the concerns of businesses. However the situation is urgent. As a monopoly provider, ACC is not subject to the competitive pressures that, based on its performance, would have seen a huge reduction in its client base if it were a private sector firm.
We urge you to act, with your colleague the Minister for ACC, to fix these problems immediately.
9. That the Government Run a Small Business Day Series in 2006
The 2004 Small Business Day series contributed to building a more positive relationship between SMEs and government agencies and showed SMEs' desire for better communication and interaction with government. It was apparent that many government agencies have the resources and skills to meet that need.
We recommend that the government repeat this series, perhaps in a revised format, in order to provide new Ministers and more officials with insights into the operations and concerns of SMEs. It will be an important part of improving SMEs' interface with government.
10. That, Every Year, the Ombudsman Targets Business Audiences, As Well As Individuals, during His/Her Regional Visits, in Order to Allow SMEs to Communicate Specific Concerns about Regulatory Enforcement Actions by Government Agencies and Local Authorities
SMEs often do not have the time or money to take action against government departments over alleged excessive enforcement actions. The holding of hearings around the country where small businesses can raise specific issues regarding compliance with central and local government regulation would greatly assist SMEs.
We understand that, in many Australian jurisdictions, a special SME Commissioner deals with these issues. In the New Zealand context, we think that the involvement of the Ombudsman would ensure that concerns are independently and expeditiously investigated and reported on.
11. That the Government Implement a Programme That Will Help It Better Understand SMEs. That Programme Should Include Appointing SME Champions in Government Departments, Requiring a Senior Manager to Scrutinise All Departmental Regulations, and a Public/Private Sector Secondment Programme
The first two parts of this recommendation repeat recommendations we made in our last report.
The proposal for secondments is designed to give senior public sector managers a taste of the challenges faced by small businesses when managing staff, marketing, meeting customer/client obligations, and complying with government requirements while also dealing with the day-to-day operational issues of running a business.
Building Business Capability
12. That the Government Ensure Basic Enterprise Education Is Part of the Core Curriculum
Promoting entrepreneurial activity amongst young people is recognised internationally as critical to encouraging and assisting people successfully into self-employment. Not only does New Zealand fail to promote an entrepreneurial spirit in a sustained and meaningful way in our compulsory school sector, but also the majority of New Zealand secondary school students leave school without having been exposed to the rudiments of business literacy (e.g. managing finances). We believe introducing young people to business concepts would have a significant impact on the country's entrepreneurship and enterprise culture.
Enterprise education is crucial, and it is about time it received greater prominence in our curriculum.
The government's response to this recommendation in our last report was disappointing. We look forward to your reporting more satisfactory progress this year, given this issue is amongst your five priorities for this portfolio.
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