Official Expounds on World Bank Doing Business Report

EghtesadOnline: There is great deal of criticism against the World Bank’s Doing Business Report and its associated country rankings, Ali Firouzi, an official with the Ministry of Economic Affairs and Finance, said.

News ID: ۷۵۰۳۱۱

24 June 2020

“For example, in Iran, only the city of Tehran and its regulations are used to calculate its DBR score, despite an array of regulations that govern businesses across the country,” he said.

The DBR, first published in 2003, is a flagship report of the World Bank, which ranks nations according to a set of indicators that the bank contends reflect the ease of doing business.

The index measures the procedures, time taken and costs involved in a number of processes that the bank considers essential for business, signaling to investors countries’ “ease of doing business”. This system was set up under the assumption that the resulting rankings would pressure governments to introduce business-friendly laws.

Since its inception, DBR has recorded over 3,500 reforms globally in 10 areas of business regulation and reported a peak in reform activity worldwide in 2017-18, with 128 economies undertaking a record of 314 reforms.

Iran’s ranking improved by one place to stand at 127th among 190 economies in EODB’s 2020 report. The country’s distance to frontier score saw a decline of 0.1 percentage point—from the previous year’s 58.6 to 58.5 in the latest report.

Protecting Minority Investors

Firouzi noted that once the Iranian government’s proposed reform bill regarding “protecting minority investors” index is approved and enacted, the country’s ranking will improve by 20 places from 127th to 107th.

“However, this improvement might not be tangible for ordinary people who are now grappling with problems of doing business. On the other hand, the reduction in the time spent waiting for securing permits from the Agriculture Ministry, which has no place among DBR’s 10 indexes, is believed to have a significant, noticeable impact on Iran’s business environment. We have identified and prioritized mutual reforms that would both improve our global ranking and bring about tangible benefits to ordinary people,” he was quoted as saying by the Persian-language daily Shargh.

“Protecting minority investors” matters for the ability of companies to raise the capital they need to grow, innovate, diversify and compete.

DBR measures the protection of minority shareholders’ rights in related-party transactions and in corporate governance through one set of indicators and shareholders’ rights in corporate governance through another.

Globally, Iran ranked 128th on the strength of minority investor protection index with a score of 40 in the 2020 report, showing no change over last year.

The Starting Business Indicator

The so-called “Starting Business Single Window”, which was launched on May 30, is another visible reform toward our goal. It was preceded by measures, namely scrapping pieces of legislation requiring those who want to register their companies to secure Economic Code [equivalent to US tax file numbers], Good Conduct Certificate [police clearance certificate] and the value added tax registration permit.

“With these reforms, the time it takes to register a business decreases from 72.5 days to 12.5 days. We are seeking to reduce this time to three days. Latest findings by Tehran Chamber of Commerce, Industries, Mines and Agriculture show it now takes five days for a person to register one’s company,” Firouzi said.

DBR’s starting a business indicator records the number of procedures, time, cost and paid-in minimum capital required to start a limited liability company.

Iran was ranked 178th among 190 economies, with a score of 67.8 on ease of starting a business, indicating no change compared with previous year’s report. It takes 10.5 procedures, 72.5 days and 1.1% of per capita income to launch a company in Iran, according to WB’s flagship 2020 report.

The economy does not require fixed paid-in minimum capital, the amount that entrepreneurs must legally deposit in a bank or with a notary when incorporating a business.

Dealing With Commercial Dispute

The official noted that at present, commercial disputes are being resolved at criminal courts, which do not sit well with businesspeople.

“Imagine a merchant has to refer to the same place a burglar is being tried to settle a fully legal dispute. Furthermore, he expects to see a judge with expertise in the field of commerce who consults with legal advisors. Given the depreciation of national currency over time and the inflation rate, which is the criterion to measure the real value of investment, the time between filing a complaint and settling the case needs to be short,” Firouzi said.

“The Economy Ministry, the judiciary and the commerce chambers are working together to set up specialized courts to tackle commercial cases. The move will improve Iran’s ease of doing business, and accordingly people and the private sector will notice this reform.”

The World Bank report also measures the efficiency of the judicial system in resolving a commercial dispute and the quality of judicial processes. Iran came in 90th, with a score of 58.2, in “enforcing contracts” indicator in DBR’s latest report, which showed no change over previous year.

Contract enforcements in Iran take 505 days, costing 19.3% of the value of the claim. The economy scores five (out of 18) on the quality of judicial processes index.

Registering Property

Firouzi stressed that the Economy Ministry and the Iranian Deeds and Properties Registration Organization have put in great efforts to make possible the payment of property transfer tax possible at notary public offices over the past 1.5 years.

“In doing so, people would no longer need to refer to the Iranian National Tax Administration once they want to transfer the ownership of their residential properties. The measure is yet to be implemented for commercial properties but will be part of the framework to improve business environment in the future,” he said.

“Registering property” indicator records the full sequence of procedures, time and cost necessary for a business to purchase property from another business and transfer the property title to the buyer’s name as well as the quality of the land administration system.

Iran ranked 70th on the ease of registering property, its best ranking in ease of doing business indexes in the 2020 report, with a score of 68.1 compared to the preceding year’s 69.

DBR suggests that registering a property in Iran requires six procedures, takes 31 days and costs 3.8% of the property value.

“The Islamic Republic of Iran made transferring property more expensive by increasing the average taxable land value in Tehran City,” the 2020 report said.

Effect of Sanctions

Force majeure clauses are contractual clauses that alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

Among the force majeure cases, economic sanctions are more important because they are widely applied in the world. However, the World Bank ignores the effect of sanctions on the doing business index in its methodology.

“Who in their right mind would imagine the sanctions are ineffective on ‘trading across borders’ indicator? They do surely leave a negative mark on the flow of imports and exports. Traders would have to control more documents and procedures. When sanctions are imposed on the government’s foreign currency reserves, it has no choice but to employ policies to protect its revenues and balance them with the expenses. Or, when it comes to ‘getting electricity’ indicator; you do need to have smart meters and electrical transformers. The time you need to buy transformers is of importance on this index. Under sanctions, the country is unable to import the raw materials of transformers,” he contended.

“Trading across borders” indicator measures the time and cost for documentary and border compliance, including the time and cost for obtaining, preparing, processing, presenting and submitting documents.

Documentary compliance for exports takes 33 hours and costs $60 while border compliance for export takes 101 hours and costs $415.

Documentary compliance for import takes 40 hours and costs $90. Border compliance for import takes 141 hours and costs $660.

Globally, Iran stood at 123rd spot in the ranking of economies on the ease of trading across borders, with a score of 66.2, posting no change compared with last year’s results.

DBR records all procedures, time and cost required for a local business to obtain a permanent electricity connection to the electrical grid and the reliability of the electricity supply and the transparency of tariffs.

According to data, getting an electricity connection in Iran requires six procedures, takes 77 days and costs 746% of per capita income, placing the country at 113th position in the global ranking.

The country scored 69.4 in getting electricity, which shows an improvement of 0.1 percentage point compared to the previous year.

Policy Preference

The official did not dismiss the speculation that the policy preference of World Bank might be a contributing factor in assessing the DB index.

“For example, Saudi Arabia has defined various projects with the World Bank and has invested hugely on this. In actuality, this could be regarded as a game in which the referee has turned to the consultant of a team providing it with expert advice. Consequently, the referee cannot pass a fair and just judgment,” he said.

He added that the WB does not take into consideration the whole collection of factors that are constitutive in improving business environment, including Iran’s cheap labor force and energy, easy access to raw materials and high seas, and the fact that the country can be the distribution center for the region, which make a country popular with investors.

Firouzi believes that the key factor in improving business environment is transparency.

“You need to create a system defined within electronic government to improve transparency. I think Iran’s business environment would be much better in the post-coronavirus era. That interactions with the government are online and have become systematic will lead to more transparency, a huge step resulting from the outbreak of coronavirus. We shouldn’t go back to where we’ve already been,” he concluded.