Summary Note Policy Options for Reforming the Business Entry Regime October 25, 2017 Executive Summary This Note summarizes the key findings and recommendations provided by the World Bank team to the Ministry of Economy, Entrepreneurship and Crafts (MoEEC), as the main counterpart in the Project, and the Government of Croatia, concerning the modernization and integration of the business registration regime in Croatia. It provides a high-level overview of the Diagnostic Analysis and ICT Assessment report, which is included in the Annex, and presents the reform alternatives for government decision makers and a recommended roadmap for implementation. The World Bank Group has been asked to assist the Government of Croatia in improving the business environment by establishing the foundations for a modern, electronic, centralized and up-to-date registry unifying data on all business entities operating in Croatia. The assistance is being provided under the Croatia Business Environment program, supported by the European Commission Structural Reform Support Service (SRSS). Currently, business registration in Croatia is a scattered process involving many agencies and disparate technology platforms. Business owners need to visit government agencies multiple times (often in person), submit the same information multiple times (mostly in paper form) and follow numerous steps to formalize their business. The agencies involved in the process are bound by complex legal framework and lack a national interoperability technology platform to enable sharing of information. The process for formalizing a business is time consuming, expensive and lacks the appropriate security features of modern systems. As a result, according to the Doing Business Report 2017, Croatia ranks 95th out of 190 economies in the ease of starting a business: ahead of Bosnia and Herzegovina (174), yet behind Macedonia (4), Romania (36), and Greece (56). On the other hand, the World Bank team recognizes that the business registration process in Croatia has great potential to evolve and become more streamlined, rule-based and transparent according to the EU directives and good international practices. The World Bank team identified the strengths of all involved agencies, key eGovernment enablers such as a common business identifier (OIB), as well as existing and planned initiatives which can lead to the implementation of the required reforms in a relatively short time period -- assuming better inter-agency coordination and improved governance of business registration processes. The principles of the reform are outlined below, followed by the key issues and gaps identified, potential options for reform and a three-phased implementation roadmap. All the details used to design the reform options and implementation roadmap are presented in the Diagnostic and ICT Assessment reports. Also, the World Bank team identified relevant ongoing initiatives, which can, with minimal adjustments, enable implementation of the first phase of the reform roadmap until the end of 2017, to be operational from the beginning of 2018 with no additional funding beyond that already budgeted. 1 The reform impact is likely to be significant. According to the e-Government Strategy and Action Plan 2020, using the Standard Cost Model (SCM) methodology, it was calculated that implementing electronic procedures for starting a business through a single point of contact would reduce administrative costs by at least 70%. The approach recommended by the World Bank team is evolutionary, aligned with existing and planned projects contained in the strategies and action plans already adopted by the Government of Croatia. The modernization of the business registration project will leverage these ongoing and planned initiatives and, with proper coordination and governance, would lead to achievement of the reform principles in a reasonable timeframe with minimum additional investments. Principles of the Business Registration Reform The WBG team identified the following five reform principles that should guide any institutional, legal and technical solutions for the modernization of the business registration regime: 1. Principle 1. Standardization - Remove any discretionary and adjudicative aspects of business registration and make it an administrative process/function. 2. Principle 2. Streamlining - Streamline business forms and data requirements for each class of business and eliminate any unnecessary registration requirements. 3. Principle 3. Integration - Create an integrated, accurate, up to date registration system that unifies all forms of business operators and allows a single window access to services (including statistics, tax, pension and health insurance). 4. Principle 4. Accessibility and Transparency - Create a registration system that is transparent and accessible to the general public online. 5. Principle 5. EU Compliance and Good International Practice - Ensure full compliance with EU directives and develop a system that will be at the forefront, as one of the most efficient European registration practices. Key Issues Identified in the Business Registries Framework To date the World Bank team has conducted several missions aimed at assessing the legal and institutional framework, current programs/strategies/donor support as well as technology platforms and services in the business registration domain. The following key issues were identified: (i) There is no unified registry/database of all business entities. The current approach to registering business-related entities is scattered amongst several ministries, agencies and the courts. (ii) Businesses need to visit several government offices to start operating their business. (iii) Many of the existing registries lack accuracy, accessibility and transparency. (iv) There is a low-level exchange of data between the stakeholder institutions that in turn increases the burden on businesses that have to re-submit the same information to several agencies. (v) Companies cannot submit electronic filings, and filed documents are not kept or entered in the register in electronic form, which makes the current regime non-compliant with European directives – i.e. DIRECTIVE 2009/101/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 September 2009. In addition, the current regime does not enable the implementation of the EU “once only” principle (see Diagnostic Analysis report for EU related requirements). 2 (vi) The business registration process in the Commercial Court Registry is highly discretionary and in many respects not consistent with good international practice. The reservation of a business name process is an example of such excessive discretionary powers creating significant barriers to business entry. (vii) Currently business entities are issued (at least) 3 identification numbers. The OIB (Personal Identification Number) issued by the Tax Authority, the Statistical Number issued by the Statistical Office and the Registration Number issued by the Commercial Courts. OPG’s (agricultural family farms) are issued a separate number by the Ministry of Agriculture (MIBPG), and Crafts, besides the personal OIB number identifying an owner, receives a separate Craft ID number. (viii) Crafts and OPG’s are treated as a form of business operation and register in their respective registries. However, a craft may also be required to register as a sole trade, or can register as an LLC and bypass requirements to obtain a craft permit. (ix) Sole proprietors (sole traders), which are by far the most frequent form of operation for sole traders in other countries, are an exception in Croatia, as they are linked to a certain level of turnover, after which registration in the Court is mandatory. Options for Reform Three policy options that address the above gaps and deficiencies have been identified and assessed, starting from less effective and less demanding to more effective but also more demanding in terms of time, institutional and legislative changes required for implementation. These include: 1. Option 1 – Virtual interconnection between existing business registries, while retaining the current institutional set-up and registration competencies. 2. Option 2 – Integration of core business registries – including sole traders, companies and financial accounts, plus interconnection with other relevant business entry processes (e.g., statistics, tax, pension and health insurance) through a single access point (both physical and online). 3. Option 3 - Integration of extended business registries – including sole traders, companies, crafts, OPGs and financial accounts, plus interconnection with other relevant business entry processes (e.g., statistics, tax, pension and health insurance) through a single access point (both physical and online). The options were assessed in the Diagnostic Report based on two sets of criteria: (i) how comprehensive is the option in addressing the above principles and gaps; and (ii) how the option rates against implementation criteria - time needed and extent of institutional and legislative changes. Technology Opportunity The ICT Assessment examined the current registry technology platforms being utilized by the agencies involved in the registration processes, including the structure of the registry in each agency, and level of integration of these platforms. The technology platforms employed by the agencies and respective ministries managing or participating in the registration of various types of business in Croatia are technologically up-to-date, largely utilizing proprietary software along with outsourced implementation and maintenance. However, the integration of these registry technology platforms is mainly limited to the OIB system 3 and point-to-point data exchange services that have been established based on individual agreements. The Court receives the application for business registration from FINA (HITRO.HR) in electronic form through the electronic data exchange, and in confirming the registration of business, the OIB is automatically generated, integrating the Tax registration (only for those that not also registering for VAT or foreign trade, which requires separate registration). Nevertheless, though the data and electronically signed documents are received from HITRO.HR, the Court still requires paper documents to be forwarded. The integration stops at this point, and the registration with the State Bureau of Statistics, the Croatian Institute for Pension Insurance (HZMO), and the Croatian Institute for Health Insurance (HZZO) is done as additional steps as a follow-up to the court registration. Given that about 10% of applications for business registration, and 30% for name reservations are currently being rejected (see Annex), trying to register online under the current policies and level of judicial discretion will require much back-and-forth that will make for a very frustrating experience for investors. Having an effective online registration process requires a set of objective business rules to allow the applicant to complete the procedures in one online session, particularly if one is combining name reservation with the actual registration. The Diagnostic and the ICT Assessment show that the modernization of the business registration system in Croatia can be done using an evolutionary approach. The options for reform can be viewed as phases from the digital transformation perspective, for the implementation to align with the identified reform principles. The Government can decide to implement the first phase, first two phases, or all three phases. The proposed technology approach for the modernization of the business registration system in Croatia includes the following three phases: (i) In the first phase, the process of registration (and changes) of Limited Liability Companies (LLCs) and simple LLCs will be integrated and moved on-line, including the simultaneous registration in the Court Registry, Tax, Statistics, and institutes for pension and health insurance, using a single point of contact and a single application form. Given that the process of registration of Joint Stock Companies (JSC) is identical to the process of registration of LLC from the point of submission of the application to the Court, JSC can also be included into the scope of the first phase from that point in the process. To enable efficient automation, all adjudicative/discretionary aspects of registration should be eliminated, including the discretionary power of judges to evaluate the “appropriateness” of business name reservation. The single point of contact for online services could either be the Point of Single Contacts portal (psc.hr, according to the Action Plan e-Croatia 2020), or the Central State Portal (gov.hr). The Central State Portal is already used as the services’ access point for citizens, with an initiative started by e-Croatia to introduce the online services for businesses (e-Business and PKP – Business User Mailbox, e-Croatia 2020 Action Plan, Project No. 2). (ii) In the second phase, a state interoperability platform will be piloted to support the business registration process (and changes), and would include business entities registered at the Court as well as the associations and foreign associations, registries maintained by the Ministry of Public Administration. This phase would also involve a certain consolidation of registries (for instance, digitization of the court archive, integration with the address registry implemented by the State Geodetic Administration) and improvement of the Meta-Register. The government portal gov.hr, with an initiative already started by e-Croatia to introduce the online services for businesses (e-Business 4 and PKP – Business User Mailbox), could be used as a single point of access, employing single-sign-on using the National Identification and Authentication System (NIAS), and an e-Payment system which is also planned for introduction. The interoperability platform would allow for a single interface to all business registries as mandated under the EU Directive, and enable orchestration of business registration processes. According to the e-Croatia 2020 Action Plan, implementation of the interoperability system is planned as part of the establishment of the Shared Services Center project (Project No. 3, between 4Q/2017 and 4Q/2020), and Project No. 101 “eCourtRegister (phase 2)”, to make technological and functional upgrades of the Court Register and establish the Court Register interconnection system. (iii) The third phase would integrate the remaining registries (e.g. craft registry, agricultural establishments - OPG). In parallel to improvements to the business registration processes, it may be decided at some point to have most of the crafts be transferred to the sole trader business type (while re-assessing the need to retain vocational licensing for the remaining 32 activities). According to the Strategy e-Croatia 2020 and the Action Plan, a main objective is to ensure interoperability of the systems operated by public bodies in order to enable integrated e-services. The first project in the Action Plan is “Development of electronic procedures for registering an establishment and obtaining approval for taking up a service activity via a Point of Single Contact”, and the project owner is the MoEEC. Referenced as a sub-project, by the end of 2017, starting a company (simple LLC and LLC) will be simpler and will be done electronically via the Internet under Project No. 100 in the Action Plan, under the responsibility of the Ministry of Justice, with the automatic delivery of necessary information on the establishment to the Croatian Bureau of Statistics, Tax Directorate, Pension and Health Fund and commercial banks, without notarization of the incorporation act. Recommended Roadmap Based on the analysis, and taking into account the on-going initiatives, the recommended implementation roadmap for the modernization of business registration regime is as follows: (i) Ministry of Economy should select from among the reform options presented. Regardless of selection of the institutional and legislative option, the principles of reform and business registration regime should be adopted. According to the decision of the Government (e.g. Government Conclusion), the MoEEC should develop the Action Plan for Modernization of the Business Registration Regime. (ii) Currently, the World Bank team sees an opportunity to begin implementing Phase 1 before the end of 2017 in parallel to the ongoing initiative of the Ministry of Justice. Along with the online registration at courts, the initiative can be extended to involve integrated and rule-based registration process of LLCs and simple LLCs with a single point of contact and participation of all involved agencies (Statistics, Tax, Pension and Health Fund). As all involved agencies already manage interoperable ICT solutions, with existing data exchange interfaces, no additional investments are needed to expand the current software project managed by the Ministry of Justice, except establishing the data exchange interfaces with the information systems of the other involved agencies. (iii) Regarding the legislative framework needed to initiate the Reform, as the current draft Law on Distance Registration does not support implementation of Phase 1, the World Bank team has recognized two possible options: 5 a. To upgrade the existing draft Law on Distant Registration to a Law on Integrated Business Registration, to streamline the business registration process for LLCs and simple LLCs with all involved agencies, and possibly JSCs from the point of submission of the application, to address discretionary powers preventing an effective online application process, and to introduce a single point of contact; or b. In parallel to the adoption of the “Distance Registration” Law (suboptimal solution) issue a Government Decree on Integrated Business Registration to allow implementation of the Law and integration of technology platforms of all participating agencies (e.g., Statistics, Tax, Pension and Health Fund). In this option, at a minimum, the current draft “Distance Registration” Law should be revised to introduce provisions that will curb the current discretionary powers and enable an automated and rule-based business registration process. In order to enable the roll-out of the Phase I reforms from the beginning of 2018, the initial legislation should be adopted by the end of the 2017. (iv) The implementation of Phase 2 coincides with the planned project of “Establishment of the Shared Service Centre”, Project No. 3 according to the e-Government Action Plan, owned by the Ministry of Public Administration, and Project No. 101 “eCourtRegister (phase 2)”, owned by the Ministry of Justice. This e-Government initiative is also referenced in the Project No. 1 managed by the MoEEC, to introduce interoperability of business registers and single application form, with the capability of attaching documents and paying fees electronically, and the implementation of the once-only principle. Phase 2 will integrate the registries of business entities at the Commercial Court with registries of associations and foreign associations maintained by the Ministry of Public Administration. This phase would also have to involve a certain consolidation of registries (for instance, digitization of the archive records, integration with the address registry) and improvement of the Meta-Register. The interoperability platform would enable a single interface to all business registry data, and enable orchestration of business registration processes. The Phase 2 can be implemented as part of the piloting of the Project No. 3 and Project No. 101, with no additional funds needed, except those already calculated in the e-Government Action plan and funds needed for the digitization of the archive records. According to the ICT Assessment, Project No. 3 and Project No. 101 are about to start, and it is feasible to expect that the Phase 2, as a pilot of this broader initiative, be operational in September, no later than the end of the next year (2018). (v) The third phase that would integrate the remaining registries (e.g. craft registry, agricultural establishments - OPG), in this way establishing a single integrated registry of all business types using the state interoperability platform. Unlike Phases 1 and 2, the implementation of the Phase 3, in case of certain institutional changes and changes in nature of the business registration process, may require additional funds (see Diagnostic Analysis report). The following figure depicts the suggested business registration reform roadmap. 6 Selection of the Adoption of Initial Implementation of Implementation of Implementation of Reform Option Legislation Phase 1 Phase 2 Phase 3 Nov 2017 Nov - Dec 2017 Nov - Dec 2017 Jan - Sep 2018 Sep - June 2019 • Ministry of • Upgrade the • Online • Integration of • Integration of the Economy selects existing draft Law registration of registration of remaining the reform option on Distant LLCs and simple other business registries (e.g. and submits Registration to a LLCs types registered craft registry, information to the Law on Integrated • Registration of JSC at the Court, and agricultural Government Business from submission registration of establishments - • The Government Registration of the application associations and OPG) accepts the or for registration foreign • Decision to reform option and associations transfer most of • In parallel to the • Integrated reform principles adoption of the process and single • Consolidation of the crafts to the • Ministry of Distance application form the registries (e.g. sole trader Economy Registration digitization of business type • Integrated court archive, develops the (suboptimal Business Registry • Decision on Action Plan solution) to issue integration with institutional a Government • Eliminated the address changes and Decree on discretionary registry) changes in nature Integrated aspects of • Single view of all of the business Business registration business registries registration Registration process Figure 1.Busness Registration Reform – Implementation Roadmap Draft Law on Distance Registration The draft Law on Distance Registration, currently being discussed within the Government, does not currently ensure even a basic integration as envisaged in Phase 1 of the roadmap. It only provides for an online registration in the Court, and as such should be reconsidered. The version of the Law analyzed by the World Bank team) does not integrate the registration process to include Statistics, Tax, Pension and Health Funds, nor does it address the discretionary powers which would inhibit an effective online experience for applicants. The momentum for improving the business registration process in the country can be channeled more effectively and much more can be gained from a more integrated solution. The table below summarizes comparison of the current initiative with the draft Law on Distance Registration with a basic integration that was suggested as Phase 1 of the business registration reform in Croatia. Table 1. Comparison of the current initiative with the Law on Distant Registration with the Phase 1 suggested for the Business Registration Reform Current Initiative with the Law on Distant Recommended Phase 1 for the Registration Registration Reform Business It does not define business registration Introduces business registration principles and Registration principles. proposes a Law on Integrated Business Principles Registration Process. Business Defined as a court procedure, as a non- Defined as in integrated registration process, Registration contentious jurisdiction process, in which with all involved agencies. Business rules are Process Court decides on business registration with clear and the processes streamlined. high level of discretionary powers. Discretionary powers are eliminated. Single Point of Introduces partial automation of registration Introduces a single point of contact and a Contact processes in Court (just for LLC’s and SLLC’s single application form for registration at the and just for business entry, not changes) and Court and all other agencies. Information will possible simultaneous registration at be provided by business owners according to 7 Current Initiative with the Law on Distant Recommended Phase 1 for the Registration Registration Reform Statistics1. However, the registration for Tax the once-only principle2. Commercial banks (for VAT), and funds (Health and Pension) will can be allowed to access business registration remain separate processes with separate documentation for opening bank accounts. application forms and opportunities for data duplication. Business Name It does not define rules for business names and Defines clear rules for business name Reservation does not address discretionary powers in the reservation published online thus introducing name reservation process. high-level of transparency. Tracking It does not allow for the online tracking of Business owner receives updates on application status application status. Update of the application application status, and can submit additional (or additional information needed) can be information online, to enable finalization of provided only on a basis of a formal court the registration process. conclusion document. Unique Business It does not address parallel existence of other OIB is promoted to a unique business Identifier registration numbers, besides OIB (court identifier, and facilitator of the integration registration number and statistical number). process. Decision/Certificate The court issues a decision on business Only one decision/certificate on business on Business registration. The draft Law does not address a registration is issued. The registration Registration separate registration document issued by the document issued by the Statistics is abolished. State Statistics Office. Integrated Business The draft Law does not mandate an integrated The Integrated Business Registry is Registry business registry. The Statistics Office still introduced. registers businesses, issues the statistical number, and is the only entity that registers branch offices of companies; the Court registers their business units. Strategic Alignment The draft Law only supports implementation of Addresses the Project No. 1 from the e-Croatia Project No. 100 of the e-Croatia 2020 Action 2020 Action Plan. It is also aligned with the Plan. Public Administration Development Strategy 2015-2020, measure 17, and with the Regulation of the European Parliament and of the Council no. 910/2014 on Electronic Identification and Trust Services for Electronic Transactions in the Internal Market. Reform Roadmap The draft Law does not provide options for The integrated business process is defined future integrations and addressing other from the beginning and opens the way for business types. integrating other business types within the succeeding reform implementation phases. The directive 2012/17/EU of the European Parliament and of the Council of 13 June 2012, requires the establishment of an information system that interconnects the central, commercial and companies registers (also referred to as business registers) of all Member States, whereas the Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 details the technical specifications for the system. The Court Registry is connected to the BRIS platform, however lack of the integrated business registry prevents full implementation of this Directive3. Other relevant EU requirements are specified in the Diagnostic Report. 1 The version of draf Law on Distant Registration delivered for analysis to the WBG team does not defines simultaneous registration with the State Statistics Office. 2 The “Once-Only” Principle (TOOP) project was launched in January 2017 as a part of the EU eGovernment Action Plan 2016-2020 and will contribute towards increasing the efficiency of the Digital Single Market. The project will ensure that information is supplied to public administrations only once regardless of the company's country of origin (see Annex 1). 3 According to the directive 2012/17/EU, both data and the electronic copies of documents shall be made publicly available through the system of interconnection of registers. In accordance with the Article 2 of the 8 Conclusion Complete, transparent and accurate data on registered business is an important building block of a good business environment, because: (i) It gives the government the tools to produce business statistics and design policies, as well as implement regulatory policy; (ii) It gives market participants the information they need to assess their risks in lending, investing and trading or accessing a market. While the Government of Croatia has undertaken some initial steps in simplifying the business entry regime, there are still significant gaps that require systematic reforms. The proposed reform options and roadmap, as presented in this Note and in the Diagnostic Report, can be implemented using a phased approach which is aligned with existing and planned projects already approved under the Government’s various strategies and action plans. To secure high level political support and coordination, the reform principles should be formally endorsed by the Government. The principles clearly set minimum objectives of reforms that will be applied whichever institutional and legislative option is selected. Within the decision endorsing the principles, clear timelines and responsibilities should be defined for moving forward with selected reform option, indicating the lead ministry that will be responsible for coordinating the implementation of these reforms. List of Annexes ICT Assessment This technical note is the result of work of World Bank staff. Findings, analyses and conclusions expressed here do not necessarily represent positions of the Executive Directors of the World Bank or their Governments. This Technical Note does not constitute a legal advice. directive 2009/101/EC, the list of documents also includes the accounting documents for each financial year required to be published according to the Council Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC. Lack of the integrated business registry in Croatia, with all data and electronic documents required to be disclosed, prevents full implementation of the directive 2012/17/EU. 9