BOLSTERING PRODUCTIVITY

In his book, “The Age of Diminishing Expectations”, Nobel Economics Prize laureate Paul Krugman wrote, “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

An agency under the Ministry of International Trade and Industry (MITI), the Malaysia Productivity Corporation (MPC) works with both public and private sector organisations to help enhance productivity, and thus the nation’s economic output. International Business Review speaks to Director-General Datuk Abdul Latif Abu Seman on how the organisation is doing so through the application of Behavioural Insights.

The adoption of Behavioural Insights in the formulation of regulations can help public agencies improve their bureaucratic procedures and productivity.

What is Behavioural Insights?

In the 12th Malaysia Plan 2021 – 2025, Malaysia aims to create a conducive environment for businesses and investments. As Datuk Abdul Latif points out, while the country has been successful in attracting investors to Malaysia, the real challenge starts once they come here.

This is because of burdensome regulations which lead to excessive red tape that results in a slowdown in productivity. MPC has striven to help public agencies in the country slim down their bureaucratic procedures. One way it is doing so is through advocating the use of Behavioural Insights (BI) in the formulation of regulations.

According to the Organisation for Economic Cooperation and Development’s (OECD) website on regulatory policy, BI is “an inductive approach to policy making that combines insights from psychology, cognitive science, and social science with empirically-tested results to discover how humans actually make choices.”

Since 2013, it has been employed by a number of OECD countries, whose members collectively make up more than 62 percent of global nominal GDP. These include Australia, Canada, Colombia, Germany, the United Kingdom and the United States. While outside the OECD, countries like Singapore and India have also adopted BI when it comes to setting regulatory standards.

 

Convince, Not Cajole

What makes BI different from the traditional way of setting regulations is that it eschews the top down approach for a less authoritarian approach. In other words, rather than create rules and then use the strong arm of the law to enforce them, BI uses a softer approach that encourages compliance.

This is done by looking at regulations as well as enforcement, and then working out how to best convince people to adhere to them. One example that Datuk Abdul Latif mentioned was that of a locality in the UK where many people did not pay their taxes.

Rather than using the law on them, the authorities adopted BI and put up posters which highlighted the various public and social services that the tax money would be used to fund. The upshot of this was that people realised just how important tax money is to ensuring that they have a decent standard of living, And the result was that taxes collected increased by 30 percent to 40 percent.

For Datuk Abdul Latif, BI is an important tool to help increase productivity as it reduces the need for enforcement to cajole people to comply with regulations. This in turn frees up resources that can be put to better use elsewhere. He highlights the case of Japan as an example, where the people there have an in-built sense of discipline to follow regulations.

As the Japanese model came about as a result of generations of conditioning, one should not expect such a massive change to occur in Malaysia overnight. Nevertheless, the use of BI is a way of setting the ball rolling towards creating a society where complying with regulations is second nature.

 

Addressing the Red Tape

Aside from being used to convince people to comply with regulations, BI is also employed to help enforcement and regulatory agencies develop regulations. This, Datuk Abdul Latif explains, is part of MPC’s mandate to ensure that all regulations developed in Malaysia adhere to the principles of Good Regulatory Practice (GRP). These include ensuring that all regulations are designed with clear objectives in mind and that they are effective in achieving those objectives.

GRP plays a major role in addressing the problem of excessive regulations that affect the ease of doing business in the country. One example which Datuk Abdul Latif highlights is the export of cut flowers from Malaysia, where the flowers have to be tested and inspected in Malaysia and then subjected to another round of similar tests and inspections by the importing country.

Having two sets of tests and inspections are burdensome on the flower exporters, and could even affect the products given their limited lifespan. By using BI, the goal is to better understand the rationale for these inspections and work towards streamlining them with the importing country so that the cut flowers only need to go through one round of tests and inspections.

BI Success Stories

While MPC has only started to roll out BI last year, already it has had some successes with it. One of the more noteworthy ones was how it used BI to convince public agencies in Kedah to reduce red tape in order to expedite the establishment of a glove factory by Aspen in Kulim in September this year.

As Datuk Abdul Latif reveals, previously the time taken to set up a factory was 24 months – an extraordinarily long time, caused mainly by excessive bureaucracy. By working with relevant agencies such as the Kulim Municipal Council (MPKK) and through the use of BI, MPC was able to cut down the regulations, so much so that the factory was up and running within 10 months.

This has resulted in the creation of 2,500 jobs in Kulim, while the productivity of Aspen Glove has gone up by 140 percent. In addition, MITI Senior Minister Datuk Seri Azmin Ali has even mentioned the project in Parliament as an example of MPC’s successes.

Moving forward, Datuk Abdul Latif is pleased to reveal that BI has been included as part of the 12th Malaysia Plan’s agenda. As such, MPC has designed a five-year roadmap for the rollout of BI in public policy making, and that it is working closely with the National Institute of Public Administration (INTAN) to develop guidelines and training on BI, with the goal of having BI units and experts in all Ministries and agencies by 2023.

BI IN ACTION:

The Express Construction Permit

No doubt the best testimony to the effectiveness of Behavioural Insights (BI) would be a project which demonstrates its practical aspect. And this can be found in the state of Kedah, at Kulim Hi-Tech Park to be exact, where MPC played a crucial role in facilitating the setting up of Aspen Glove’s factory.

The construction of this manufacturing facility in Kulim Hi-Tech Park was a mega project worth RM280 million. The factory, which also serves as the company’s headquarters, covers 29-acres of land and has created over 2,500 job opportunities. While the average time to set up such a factory would have taken 18 to 24 months, this particular factory took only 10 months.

This was made possible through the Express Construction Permit (E10) initiative implemented by the Kulim Municipal Council (MPKK). “E10 facilitates the construction of industrial projects and issuance of the Certificate of Completion and Compliance (CCC) and business licence within 10 months,” MPKK President, Dr. Nadzman Mustaffa explains. The initiative aims to reduce excessive red tape involved in construction permit applications.

Through E10, provisional approvals can be issued within 24 hours upon submission of all relevant documents. This allows preliminary construction works to be carried out immediately. The relevant approvals from MPKK and other technical agencies would be received, upon full compliance, within the 10 months’ period. When the project is completed, the business licence will be granted within a day of the CCC issuance.

“Investors will be able to enjoy cost savings and increase in productivity. It will also foster a more conducive and business-friendly environment in Kedah, in line with the Kedah Productive Kedah Digital initiative,” Dr. Nadzman Mustaffa highlights.

A New Approach

MPC played an important role in facilitating the E10 initiative. By promoting the adoption of BI, MPC encouraged MPKK and other local government agencies in Kulim to iron out unnecessary regulatory processes that are burdensome to businesses and investors. E10 was the result of those efforts.

E10 was also framed based on the agile regulation approach introduced by MPC which aims to promote regulations that are responsive to current and future trends such as digitalisation. “Through this approach, we focus on understanding customer needs and improving existing processes and regulations in line with their expectations,” Dr. Nadzman Mustaffa explains.  

To achieve this, MPKK emphasises on three main components namely consultation, customisation and facilitation. This stresses on expediting processes and decision-making as well as increasing engagement with stakeholders.

MPKK will actively assist investors resolve any issues or hiccups faced along the way to ensure project completion within the stipulated timeline.

“The biggest challenge was in addressing all the requirements of different parties and agencies. But MPKK will actively assist investors resolve any issues or hiccups faced along the way to ensure project completion within the stipulated timeline.” Dr Nadzman Mustaffa highlights.

Various engagement sessions were held between MPKK, industry players and technical agencies throughout the pilot project. With cooperation from all parties, the Aspen Glove factory was up and running within record time.

The success of the pilot project has set a benchmark for future construction of industrial projects, proving that a more focused approach to policy making and regulation will increase its effectiveness and optimise outcome.

MAKING TAX COLLECTION, LESS TAXING

Collecting taxes can be laborious for the authorities, as in some instances, they are at the mercy of the taxpayers should the latter choose not to pay their dues. This is the case for the Sungai Petani Municipal Council (MPSP) which has been experiencing high assessment tax arrears – the highest relative to the number of premises and to other Municipal Councils in Kedah.

“MPSP recorded tax arrears worth RM26.05 million in 2018 alone. The Malaysia Productivity Corporation (MPC) stepped in to help us deal with this issue – to identify why this is happening and what can be done to overcome it through the adoption of Behavioural Insights (BI),” says Syed Khairol Anuar Syed Abidin, President of MPSP.

“MPSP’s enforcement efforts in the form of issuing notice and foreclosures have arguably been effective. However, it is clear that we need a different approach to deal with this issue,” he affirms. “By understanding why some people or entities choose to pay their taxes and why some choose not to, effective steps can be taken to raise awareness, as well as change taxpayers’ behaviours and perceptions to imbue a culture of taxpaying.”

 

What Can and Needs to Be Done

Research conducted by MPC found that residential landowners account for 71 percent of tax arrears in Sungai Petani. In relation to this, MPC proposed a three-pronged strategy targeted to taxpayers in this category.

MPC highlights that there is a linear correlation between the two attributes, namely behaviour and subjective norms, with the “intention to comply” with tax obligations. Therefore, interventions should be focused on these factors.

The first is to establish a Nudge Unit. This entails expanding the functions of the Bailiff Unit in the Revenue Department of MPSP to engage and extend reminders to property owners. “Nudging here means to encourage taxpayers to pay their taxes on time,” Syed Khairol Anuar explains.

Secondly, MPC proposes that any intervention should be focused on two behavioural attributes, namely tax morale (an individual’s personal opinion and beliefs on paying taxes) and the powers of the authorities. This can be achieved through briefing sessions explaining the responsibilities of property owners, the importance of paying taxes and how taxes are used for infrastructure development and the betterment of the community in Sungai Petani.

Relaying the message that ’the majority of taxpayers in your area have already paid their taxes’ is another form of nudging which, according to MPC, has proven to be effective in countries like the United Kingdom. It has to do with the subjective norm concept (coined by social physiologist Icek Ajzen) which refers to how perceived external pressures influence an individual’s behaviour. Basically, when an individual finds out that their neighbours have already paid their taxes, they will be compelled to do the same.

And last but not least, the key is consistency. Awareness campaigns that revolve around these concepts should also be implemented in areas where tax arrears are the highest. MPC emphasises the importance of leveraging social media or popular messaging applications, particularly Whatsapp and Telegram in getting the message across effectively.

“MPSP managed to persuade a sewerage company to pay RM1.86 million in arrears recently through the nudging approach introduced by MPC,” Syed Khairol Anuar reveals. “We are confident that a holistic adoption of MPC’s recommendations will lead to more favourable results in the future, especially with the implementation of the Jom Bayar Cukai Pintu @ MPSPK (Let’s Pay Assessment Tax @ MPSPK) campaign which will kick-off soon,” he affirms. 

While these proposals are specific to the behaviours and context of Sungai Petani, MPC believes that BI can play a major role in helping other Municipal Councils and public sector agencies in Malaysia address their issues by identifying their stakeholders’ behaviours and formulating precise and effective policies or action plans.

At the end of the day, while regulations are necessary to ensure that proper processes and safeguards are followed, excessive regulations hinder the growth of business and innovation. With Malaysia aiming to become a high-income economy, it cannot afford to allow bureaucracy to hold it back. And that is why the role that MPC plays is such an important one, as it is helping to cut down red tape and increase efficiency and productivity of the country.

READ THIS NEXT