Mongolian government takes action to support small businesses (or Inspections Gone Wild)

 

Restaurants in Mongolia can face fines for not having the right number of forks.

Mongolia's done a good job in reforming its business environment since the collapse of communism in the early 1990s. In Doing Business 2009, the country ranked 58th out of 181 economies and outperformed its neighbors, Russia and China, by significant margins. Well done. But that doesn't mean that things are easy for small businesses here. The overall business environment is a serious drag on Mongolia's development prospects, and the situation keeps getting worse as the financial crisis sinks its claws into the economy.

One area fully in Government control is business inspections. This is an important function: inspections protect the health and safety of the general public. But when inspections run wild, they can become a major burden to businesses, especially small ones. Inspections can impose large costs on businesses in terms of time and money, encourage firms to bribe their way out of violations, and even encourage entrepreneurs to operate in the shadows. That means less tax revenue and potentially dangerous products and services being offered to the public.

Is this a problem in Mongolia? Absolutely.

Several studies by the World Bank and others point to inspections as a major burden for businesses. The Government is fully aware of this. In 2006, it centralized its inspections operations into a single body, the State Specialized Inspection Agency (SSIA), to make inspections more efficient. Results have been mixed. Although inspections are now easier to coordinate, the actual process of inspections has not changed very much.

Some of the things that can be inspected are incredible. For example, a restaurant is required to have a certain number of forks. An inspector can come at any time, without warning, and count the forks. If the number is wrong, they can be fined on the spot. For some violations, the business can be shut down. Recently, a major milk processor in Ulaanbaatar was shut down after some reports in the press suggested violations in its operations. This not only put its milk suppliers in trouble, but also meant potentially massive losses for the company. Subsequently, the violations were found not to be valid. It's impossible to be sure what actually happened. But it is clear that the inspections law gives far too much power to inspectors, which is common in all post-communist countries (and many others besides).

Improving inspections is one area where IFC has a lot of experience, particularly in the former Soviet Union. Since the Mongolian economy was modeled on the Soviet one in communist times, we figured that our experience in the former Soviet Union might be relevant here. It turns out we were right. Furthermore, the Government, including the SSIA itself, was very receptive to the idea of improving the inspections process. We're lucky to have such a motivated counterpart.

Now we're gearing up to work with the Mongolian government and the business community to improve the inspections regime. We have support from all the stakeholders, and IFC experts in China and the former Soviet Union are providing us with their expertise. Our work will include a review of legislation, the inspections process, and impact on businesses; improvements to regulations and the inspections process, a lot of training and a big communications effort.

Stay tuned to this space for updates.