Licensing: Arguments and Proposals from LFMI

The Lithuanian Free Market Institute conducted research into existing licensing motivations and practices. The research was designed to identify the purposes for which licensing is used and to assess whether these purposes can adequately be achieved by means of licensing. Seeking to change the long-standing official approach to licensing, LFMI presented its arguments and proposals to the Economic Ministry.

The research was carried out by LFMI’s policy analysts Elena Leontjeva, Rūta Vainienė, Guoda Steponavičienė, Remigijus Šimašius, and Ugnius Trumpa. The Free Market presents an abstract of a policy study written as a result of the research. The abstract provides a brief account of licensing procedures and objectives. It also looks at alternative means to achieve these objectives as well as implications thereof. Finally, the article outlines LFMI’s proposals for a critical review of the licensing system.

A Need for Reform

The Lithuanian government has proclaimed over the past years a pressing need for business deregulation. Freeing businesses and limiting government interventions open up a whole range of new opportunities: for companies to compete, for customers to choose, and for governments to earn a good reputation and build broad-based public support.

Licensing Practices and Problems

In Lithuania there are several dozen types of business where a special permission from the government is required before a business can be launched. The Company Law lists a total of 27 types of business activities that are subject to licensing, and there are many more besides these.

Although licenses differ in their form and content, the underlying philosophy is the same in all cases. Licensing gives state institutions the power to decide whether to allow or not an economic entity, a private company or an individual to carry out a planned business activity.

The power to license-to permit or forbid-is dispersed among many tiers of government: from the cabinet of ministers to ministries and their departments, inspectorates, commissions, municipalities, and the police. An entrepreneur is forced to deal with a whole range of government agencies, none of which is willing to be the responsible one.

Although the Company Law states that licenses are issued for an unlimited period of time, the government requires that they are renewed every year. This condition has “tied” entrepreneurs to bureaucrats, making businesses dependent upon decisions and whims of the officialdom. All this inhibits enterprise and business planning, invitescorruption and augments through additional taxes the costs of doing business.

The Company Law defines no purposes for which licensing is used. Supporting legislation does not indicate, or substantiate, explicitly any objectives either. The core of the problem is that the state takes efforts to attain some obscure and abstract ends. To put it bluntly, efforts are wasted away on activities without ends. It is not general values enshrined in the Constitution but specific and measurable objectives that we have in mind here.

In the absence of well-defined aims of licensing, it is virtually impossible to appraise whether these aims have been achieved, let alone whether the results have outweighed the costs.

The Unattainable Ends

The motivation and rules of licensing as presented by official institutions suggest several primary purposes for which licensing is ostensibly used. These are: to protect consumers, to generate budget revenues, and to manage economic information. Analysis of licensing procedures shows that these ends cannot adequately be achieved by means of licensing.

The government’s wish to protect consumers is unattainable on the ground that it is impossible to predict and regulate every single instance of harm incurred by consumers. Moreover, such attempts entail a number of pitfalls. They create misleading impressions of safety and encourage consumers to suspend their own judgement. It is also a costly method in economic terms as it augments public spending and imposes extra costs on businesses. Ultimately, government interventions prevent the rise of more effective private security mechanisms, such as competition, private information business, voluntary organisations for consumer rights protection, etc.

The second aim of generating public revenues may be achieved by enhancing the efficiency of tax administration and by properly managing information. It is not necessary to license businesses in order to collect budget revenues. Taxes can do the job. Otherwise, part of resources is wasted away on the licensing system itself. The number of potential taxpayers shrinks as a result of restrictions on market entry. Finally, all this escalates the business community’s dissatisfaction with official policies.

Information management can be implemented by such means as an integrated register, legally and technically regulated exchange of information among state institutions, standardised data gathering, etc. Sadly, these measures have failed to be implemented so far, since energy and resources have been squandered on ill-judged solutions such as licensing.

Alternatives to Licensing

If the current approach to licensing were revised in line with LFMI’s proposed criteria (see below), the inertia-driven licensing would be removed. Simplified licensing procedures would be designed to achieve the desired objectives. Some of them may be attained by other less onerous means: by shaping a tradition of disclosing information to consumers rather than the state, by promoting private information disclosure and quality rating agencies; by reinforcing the institute of civil liability and indemnification. An appropriate legal regulation would reduce risks at the roots rather than at the surface.

Eight Criteria for a Critical Review of Licensing

1. To apply licensing to a business activity only if the end in view can adequately be achieved by means of licensing. To assess the expediency and utility of the said aim prior to licensing and to specify it in licensing legislation.

2. To repeal licensing powers used for fiscal and consumer protection purposes. If not, to define concrete sanctions to be taken against the licensing institution if the quality of a licensed product fails to meet established norms. To eliminate functions, such as information provision and control of business partners, imposed on businesses through licensing.

3. To designate by law a single institution responsible for licensing and to define responsibility for injury caused by actions of the said institution.

4. To prohibit state institutions from imposing additional licensing requirements and to define explicitly licensing requirements as indicated in the Company Law.

5. To establish by law rather than by supporting legislation the main rules of licensing as well as the criteria for refusing to issue or for revoking (suspending) a license. To define explicitly such criteria so as to preclude arbitrary interpretation. Rather than imposing some extra conditions, licensing must be used to verify compliance with the requirements established by law.

6. The grant of a license should require compliance with requirements that are logical and attainable prior to the commencement of a licensed business activity.

7. To repeal the renewal of licenses.

8. To adhere to the principle that any activity that is not forbidden is permitted and so to define forbidden instead of legitimate activities.