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License to Grow

Business must come together to promote competitiveness as a key pillar of government policy

The cost of the financial crisis of the past few years cannot be counted in cash alone. Governments left wary of what they consider to be the vagaries of the market have fallen back on regulation as a method for reducing systemic shock.

But many critics argue that the business environment created by this spate of rules is having the opposite effect to the one intended. Stifling business and reducing competitiveness has put the shackles on the economy at large. In the United Kingdom, and in the key regions of Europe and the United States, government policy seems to be exacerbating economic uncertainty.

“Business costs in the United Kingdom are in danger of becoming prohibitively high,” says Phil McCabe, Senior Policy Advisor at the UK’s Forum of Private Business. “Our research shows they are certainly rising quickly. In a recent survey, 97% of respondents said the cost of doing business is increasing.”

Part of the reason is the spiralling cost of energy. But McCabe points out that business rates—a tax on non-domestic premises—has also just gone up 5.6%. “We lobbied the government to tackle fuel prices and business rates in the recent Budget, but our words fell on deaf ears,” he says. “The latest blow to business came with news that the Royal Mail was massively increasing the price of first- and second-class stamps—30% and 39% respectively. For firms that rely heavily on the mail system, that’s a big hit.”

IATA has also warned that the United Kingdom’s competitiveness is being harmed by aviation taxes. “Chancellor George Osborne’s proposal to reduce corporate taxes from 28% to 22% by 2014 is welcome relief, but it is not a comprehensive solution,” says Tony Tyler, IATA Director General and CEO. “The high cost of doing business in the United Kingdom must also be addressed. The ever-increasing Air Passenger Duty (APD) is a $4.7 billion (GBP2.9 billion) annual burden on UK businesses reliant on connectivity. And passenger demand is growing more slowly than at other European hubs because APD is pricing air travel out of the range that consumers can bear.” IATA estimates the planned increase in APD means that 7,000 UK jobs which would have been created will no longer be created.

Speaking at the opening of a university business school, Willie Walsh, Chief Executive of International Airlines Group (IAG), also attacked the APD. “Without question, investment is going to other parts of the world,” he said. “I meet business people who are telling me that. They’re locating in places like Frankfurt instead of London. They would prefer to be here, in London, but they’re saying the environment isn’t conducive to investment, so we’ve got to recognize this as a key economic issue. Government policy is misguided and misplaced, and needs to be urgently reviewed.”

The United Kingdom does 20-times more trade with countries to which it has direct air links. The Confederation of British Industry (CBI) has called for more flexible use of Heathrow’s two runways, a new runway for the South of England, and a long-term vision.

“To achieve the government’s laudable aim of doubling our annual exports by 2020, the United Kingdom must improve its connections with fast-growing markets such as China, India, and South America,” says John Cridland, Director General of the CBI. “This means providing the capacity for airlines to put on new flights. Right now, our major airports are losing out to other European destinations. More of our regional UK cities are connected by air to Amsterdam than to Heathrow, and we have no links at all with many of the major Chinese cities. Businesses don’t want the main UK aviation hub to become Schiphol or Frankfurt.”

European issues

At the European level, regulations are hitting businesses from every angle. A seemingly innocuous proposal to strengthen data protection and online privacy could have some very severe consequences, for example. Matthew Fell, Director for Competitive Markets at the CBI, says the proposal places a high cost burden and restrictive controls on investment and innovation.

“Many novel business models rely on data sharing to generate revenue and offer a more individually tailored user experience,” he says. “Advertising and subscription-based, online music-sharing services are a good example where we’ve recently seen ground-breaking innovation through partnerships with social networking sites.”

Fell adds that, by stifling innovation, the EU will also hamper Europe’s chances of pulling itself out of economic stagnation. “Since innovation is a key driver of economic growth, it’s vital governments here and in Europe support cutting-edge businesses to continue to innovate, before they get left behind by the rest of the world.”

There are other, more transparently big-hitting regulations in the offing, too. The EU is considering increasing the capital requirement for pension plans. This could divert money away from investment, restricting growth. The new rules could also push pension funds to adopt more conservative attitudes – and as pension funds are important institutional investors, it could further reduce the amount of money available to companies. A letter to the European Commission, signed by a number of business associations, has highlighted the issue. All this is despite an EU strategy for better regulation. It aims to reduce administrative burdens on companies by 25%, believing this will lead to a 1.4% improvement in EU GDP.

An unhealthy environment

The United States, champion of the free market, is faring little better than the EU when it comes to the unnecessary stifling of businesses, according to its critics.

The National Federation of Independent Business points out that small business is responsible for nearly two-thirds of job growth in the United States, but its ability to move the economy forward has been dulled by more than 4,000 regulations currently in the works.

These regulations should have a proven benefit. The Obama Administration has issued an Executive Order to this effect. The new tarmac delay rules imposed on aviation do not measure up, however. The 11 elements to the rules were aggregated and, when viewed separately, only one passes the cost/benefit test. IATA has shown the expanded tarmac delay rules would cost $3.24 billion, yet accrue only $1.99 billion in benefits. If an international flight is cancelled, the US Department of Transport figure of an $11,000 cost is based on a 1998 study. IATA estimates the cost is $377,000 taking into account meals, hotels, crew, and lost revenue.

A more general point is the increasing polarization of US politics, with Republicans and Democrats automatically dismissing anything proposed by the opposite party. Doug Lavin, IATA Regional Vice-President, says when this is coupled with economic uncertainty, business find it almost impossible to plan. “This is the greatest problem,” he says. “Business can only thrive in certainty.”

A national aviation policy in the United States would help pull the domestic economy out of the doldrums, according to Airlines for America (A4A). It says commercial aviation creates more than 10 million US jobs and drives more than $1 trillion in annual economic activity. Even more can be done, says A4A, if the government takes a holistic approach that addresses the fundamental tax, regulatory, and infrastructure challenges that consistently undermine the airline industry in the United States.

Coordinating plans

With poor regulation rife, industry sectors must collaborate to lobby against policies detrimental to business as a whole. There are many commonalities among businesses. One is connectivity, the need to connect to markets. In this sense, aviation can act as a rallying call, a focal point of unrest that highlights how, in many areas, competition, not regulation, is the most suitable way forward. Speaking with one voice on common issues would help markets achieve the certainty they crave and bring a lighter touch to the heavy hand of government.

South African Connections

“South Africa’s location at the foot of the African continent, and its geographic isolation from the business capitals of the world, has made it utterly dependent on long-haul flights for commerce,” says Viola Manuel, Executive Director, Cape Chamber of Commerce. “Virtually all business visitors to the country arrive by air.

“Air freight also provides a vital service to a growing range of exporters of luxury products, electronic equipment, and cut flowers,” notes Manuel. “One of the winners of the Chamber’s annual export of the year competition, Quantum Sails, for instance, exports yacht sails to France, with large parcels leaving every night.

Such examples show how companies coordinate and use each other’s services. Working in unison should also inform government lobbying, as companies search for a business environment that allows competition, and not regulation, to be the main force in the market.

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