NOVEMBER 09, 2016

By Naresh Minocha, Our Consulting Editor

"MANY important policy areas are not covered by Doing Business; even within the areas it covers its scope is narrow. Doing Business does not measure the full range of factors, policies and institutions that affect the quality of an economy's business environment or its national competitiveness. It does not, for example, capture aspects of macroeconomic stability, development of the financial system, market size, the incidence of bribery and corruption or the quality of the labor force," says Doing Business (DB) Report 2017.

This observation aptly applies to India. And this is far more important than the 130th rank that India has got among 190 economies on 11 parameters of business regulation assessed in DB 2017.

This annual flagship report of World Bank (WB) group gives an over-simplistic image of doing business in India. It can thus mislead prospective investors. It also does not help policy makers undertake holistic reforms that can make India a more credible business place. WB should revise certain parameters and add new ones to its DB methodology to make cross-country comparison more realistic and inclusive.

Moreover, the domain of information on which DB report is based does not encompass a lot of valuable information. DB report banks on four main sources of information: the relevant laws and regulations; DB's 39,000 respondents in 190 countries; the governments of the economies covered and the WB Group regional staff.

DB report should factor in all information that does not flow through these four channels for varied reasons.

India's ranking would in all probability would be much lower if DB methodology is widened by including vital parameters that bedevil business and economic growth in India and elsewhere.

DB methodology is of bygone era. It is devoid of ground reality about business challenges/regulations faced by all stakeholders including Government organizations, public sector undertakings (PSUs), organized private enterprises and informal business sector.

We can substantiate this contention by taking up specific cases.

Before doing this, consider first DB's 11 parameters or areas of business regulation and major indicators (mentioned in parentheses) employed to measure each of these areas. These are:

1) Starting a business (Procedures, time, cost and paid-in minimum capital to start a limited liability company);

2) Dealing with construction permits (Procedures, time and cost to complete all formalities to build a warehouse and the quality control and safety mechanisms in the construction permitting system);

3) Getting electricity (Procedures, time and cost to get connected to the electrical grid, the reliability of the electricity supply and the transparency of tariffs);

4) Registering property (Procedures, time and cost to transfer a property and the quality of the land administration system);

5) Getting credit (Movable collateral laws and credit information systems);

6) Protecting minority investors (Minority shareholders' rights in related-party transactions and in corporate governance);

7) Paying taxes (Payments, time and total tax rate for a firm to comply with all tax regulations as well as post-filing processes);

8) Trading across borders (Time and cost to export the product of comparative advantage and import auto parts);

9) Enforcing contracts (Time and cost to resolve a commercial dispute and the quality of judicial processes)

10) Resolving insolvency (Time, cost, outcome and recovery rate for a commercial insolvency and the strength of the legal framework for insolvency) and

11) Labor market regulation (Flexibility in employment regulation and aspects of job quality).

Start with 3rd parameter- Getting Electricity. This is no doubt important yardstick for assessing ease of doing business (EoDB). However, its timely and easy availability does not in itself constitute the take-off launch pad for many industries.

More important for many businesses in over-populated, civilian conflicts-ridden countries like India is getting land, water and natural raw materials such as iron ore, limestone and sand.

Problems in getting natural resources is illustrated by the plight of Anrak Aluminum Limited (AAL), a joint venture between Govt of Ras-al-Khaimah, United Arab Emirates and Pennar group.

AAL has set up project comprising alumina refinery, smelter and captive power plant as a special economic zone (SEZ) unit. It had projected total investment of more than Rs 9000 crore on the project.

AAL turned the subject of getting electricity on its head by desperately pleading for permission from Ministry of Environment, Forest and Climate Change (MOEFCC) in March 2015 to sell 180 MW of transient surplus power to Andhra Government. In a letter dated 25th March 2015, AAL stated: "The State Government wanted the power to be made available at the quickest (positively by 14th April 2015)."

The company's application was considered by MOEFCC's Expert Appraisal Committee (EAC) for Environmental Impact Assessment (EAC) of Industry-I Projects on 30th April 2015, a fortnight after expiry of AAL's requested deadline. As AAL representative was not present in the meeting, EAC deferred decision on its application. In all probability, both sides did not pursue the application.

Later, in a letter 6th June 2016 to MOEFCC, AAL stated: "All pre-construction activities and mechanical completion of the project including pre-commissioning trials has been completed by June 2014, and plant is ready for commissioning, but could not commission for want of raw material (Bauxite)."

And here hangs the tale of crony capitalism. In April 2016, Telgu Desam-led Andhra Government cancelled two orders issued by predecessor Congress Government in 2008. The scrapped orders incorporated draft bauxite supply agreement between Andhra Pradesh Mineral Development Corporation (APMDC) and AAL.

Cancellation has been done on the ground that deals were skewed in favour of AAL and was worked out without inviting expression of interests from prospective developers of aluminium projects.

Simultaneously, the Government also withdrew its bauxite supply MOU with Jindal JSW Holdings. These two instances are similar to Vedanta's cup of woes in getting Bauxite supply in Odisha.

What applies to bauxite applies more injuriously to coal and iron ore mining rights, which have been subject of certain verdicts by Supreme Court. The non-transparent and non-competitive allocation of mines has made doing business extremely difficult for natural resource-based industries.

Their problems have been aggravated manifold due to environmental and social problems in acquisition of land at mining sight. The fact of the matter is that no major or minor mineral mine can be developed without the consent of tribals affected by mining proposals.

DB methodology is totally silent on extremely difficult business environment in India and elsewhere when it comes to accessing natural resources. This includes right of the way (ROW) to lay gas pipeline or any other pipeline. Denial of the ROW approved pipelines can leave not only the pipeline promoter but also industries linked to the pipeline in limbo. And this has happened in Tamil Nadu where the Government has denied permission GAIL to lay gas pipeline following protests from farmers.

WB should rework the parameter 'Getting Electricity' as 'Getting Land, Water, Power, minerals and other scare factors of production/services.'

Take now the case of 'Dealing with Construction Permit'. This parameter does not cover a lot of pre-construction and allied approvals required to start a business. This parameter should thus be revised as 'Dealing with Multiple Permits.' These are required to start any business ranging from a small restaurant to a mega industrial estate that houses several hundred factories. The rationale for this suggestion would become clear by considering a few instances.

Take the case of Gujarat Petroleum, Chemical and Petro-chemical Investment Region (PCPIR) to be developed by Gujarat Industrial Development Corporation at Dahej in Bharuch district. This project has been awaiting environmental clearance for last six years! This is notwithstanding the fact that Department of Chemicals and Petrochemicals, Union Government and Gujarat Government signed MOU to implement this project in January 2010.

PCPIR will be spread over 453 sq km across 44 villages. Out of 45298 ha area of PCPIR, 50.79% of land shall be developed as processing area which includes GIDC estates, industries, port, salt pans, warehousing, oil terminals, logistics etc. The balance 49.21 % area will be developed as a non-processing area, comprising residences, commercial & institutional buildings, recreational centres, Eco-park, etc. The project, when full developed by 2040, is expected to provide employment to 6,08,751 persons.

The Gujarat Coastal Zone Management Authority has recommended the project vide their letter No.ENV-10-2015-271-E dated 7th June, 2016. MOEFCC's Expert Appraisal Committee (EAC) for infrastructure projects has, on other hand, turned the project on its head at its meeting towards June-end this year by questioning GIDC's statutory powers to developed PCPIR.

As put by EAC minutes, "Observing more discrepancies in the documentation and the facts presented before the committee, the project proponent preferred for an adjournment to rectify the same ."EAC thus deferred a decision for "want of necessary inputs/clarifications ".

Leave aside mega industrial estates including the nine National Investment and Manufacturing Zones (NIMZs) that have not even yet applied for or secured first stage environmental clearance (EC). Even the approval process for small estates can take several years-which is enough to sail around the world a few times. This is borne out by the more than eight years delay in securing EC for a few such projects in Haryana.

Haryana State Industrial& Infrastructure Development Corporation (HSIIDC) is awaiting EC for four estates for more than eight years! Consider the example of 180-hectare estate to be developed in Sonepat as Kundli (Phase-V) industrial estate.

HSIIDC received first-stage EC clearance named terms of reference (TOR) for the conducting environmental impact assessment (EIA) of the project in June 2008. It submitted EIA report to MOEFCC in October 2010 that remained pending for consideration, according to HSIIDC letter dated 22th July 2015. The letter added: "We have further submitted our request letters" to MOEFCC on 21st January 2013, 28th July 2014 and 19th September 2014.

HSIIDC is still waiting for EC for this and four other industrial estates. Delayed Gujarat PCPIR and Haryana's industrial estates show that getting construction permits is not as simple as is made out by DB reports. Such reports also don't even record instances of foregone opportunities for many construction permits. This happens due to denial of environmental and other statutory approvals to mega infrastructure projects.

DB proponents should thus revise the parameter 'Dealing with construction permits' as 'Dealing with multiple permits'.

An instance in point here is Rs 34,972-crore Pancheshwar multipurpose hydro-electric project, an India-Nepal flagship initiative to usher in huge employment opportunities, generate wealth and avoid floods.

The project would comprises two dams – Panchaeshwar dam with a total power generation capacity of 5600 MW and the downstream Rupaligad Re-regulating dam with a capacity of 240 MW.

The former dam would be developed on Mahakali/Sarada River at a site that forms the international boundary between India and Nepal.

The project would irrigate 245,000 hectares in Uttar Pradesh and 13,000 hectares in Nepal.

MOEFCC last year closed Ministry of Water Resources' application for grant of first-stage environmental clearance for the project by Supreme Court's stay on grant of environmental and forest clearance to hydro-electric projects in Uttrakhand issued in August 2013.

This brings us to the larger issue judiciary's power to order stay or cancellation of construction permits and related project framework permits issued by Central or State Governments.

WB should in fact introduce a new DB parameter: 'judicial outcome of review of projects, policies and other permits issued by different governments.'

That the DB's focus on construction permit is archaic can be demonstrated by taking up the case of a start-up seeking to breed, development and market genetically modified seeds of different crops. Permission for seeds start-ups is akin to construction permits for manufacturing or services start-ups. In India, permission for GM food start-ups has become endless wait-and-watch game with the Supreme Court usurping policy-making powers ostensibly to protect environment and human life from risks of genetic engineering of crops.

Similarly, securing manufacturing permit in the case of licensed industry is primary to getting construction permit for building a factory. Take the case of small arms manufacture. Though the Government threw open manufacture of defence armament to private sector way back in May 2001, it continues to deny industrial licences to small firms for manufacture of small arms. The denial is necessitated by inordinate delay in finalization of (small) Arms and Ammunitions Manufacturing Policy (AAMP) by Ministry of Home Affairs.

As the system of getting multiple permits including construction permit to start business is a complex maze, DoB rankings/score on dealing with construction permits give a very limited picture about licence, permit, controls raj in India and elsewhere.

Turn now to 'Paying Taxes' parameter. A valuable indicator of complexity and challenges in knowing tax dynamics, filing tax returns and fighting tax notices is robust demand for tax consultants. This indicator is not taken into account DB methodology.

We can appreciate this issue by taking up the case of India, where Finance Ministry periodically makes noises about tax reforms. The fact is that everyone right from a small businessman to mighty Reserve Bank of India (RBI) bank on tax consultants. State Governments, autonomous institutions, regulatory authorities and public enterprises regularly hire services of tax consultancy firms.

DB writers can verify this by searching for tax consultancy tenders in the cyberspace. One tender should serve the purpose of showing that ease of paying taxes is not felt by majority of tax payers.

RBI last month invited tenders for hiring the services of tax consultancy firms for a period of two years with a scope to extend the contract by three years.

The selected consultant would be required to apprise RBI's Central Tax Cell (CTC) on a real time basis about Government notifications pertaining to all type of taxes (direct/indirect and Central/ State) as applicable to the Bank for circulation among all the offices. The consultant would provide clarification /advice regarding issues received by CTC from various offices of RBI.

The tender document says that the selected bidder would also guide RBI in filing tax returns, apart from giving advice on tax notices received by different Central Office Departments/Regional Offices and also appearing on behalf of our Bank at the required forum in case of Income Tax.

Apart from factoring tax payers' life-line dependency on tax consultants, Paying taxes parameter should thus factor in number of rates for each tax, frequency of changes in rates, number of exemptions and the resulting litigation cases and number of tax notifications issued in an year.

Turn now to another DB parameter of 'Enforcing Contracts'. Apart from time consumed in settling contractual disputes under different laws, the parameter should provide for a country's compliance with international dispute settlement agreements.

This issue is underscored well by Indian companies in their prospectus for raising debt in the domestic and international markets. A major risk factor mentioned in prospectus cautions foreign investors they may have difficulty enforcing foreign judgments in India against the company.

Take the case of Indian Railway Finance Corporation Limited (IRFC). In its latest prospectus offering non-convertible bonds to investors released last month, IRFC says: "India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments."

Recognition and enforcement of foreign judgments is provided for under Section 13 and Section 44A of the Civil Code. Section 44A provides that where a foreign judgment has been rendered by a superior court in any country or territory outside India which the Indian Government has by notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India.

However, Section 44A of the Civil Code is applicable only to monetary decrees not being in the nature of any amounts payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty and is not applicable to arbitration awards, even if such awards are enforceable as a decree or judgment.

A judgment of a court in a jurisdiction which is not a reciprocating territory may be enforced only by a new suit upon the judgment and not by proceedings in execution.

It is here pertinent to note that India is not a signatory to International Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The Convention operates under WB group. India is also not a signatory to International Energy Charter (IEC), an agreement that provides framework for settling energy disputes and protecting foreign investments in energy sector.

While giving score and rating against parameter 'Enforcing Contracts', DB should list each country's compliance or non-compliance with international agreements that facilitate settlement of contractual disputes.

Similarly, we can discuss limitations of DB's other parameters to drive home the urgency for re-inventing DB methodology.

It is apt to wrap up discussion on DB methodology with an observation made by WB's Independent Evaluation Group (IEG) that assessed DB in a report submitted in 2008.

IEG report says: "Cross-country rankings inherently miss country-specific issue nuances. They have to be used in conjunction with other analyses to help countries determine the direction, nature, and sequence of reforms."