Why does construction permitting matter?
Good construction regulation matters for public safety, but also for the health of the building sector and the economy as a whole. According to a recent study, in OECD economies the construction industry accounts for 6.5% of GDP on average (1). The building sector is Europe’s largest industrial employer, accounting for about 7% of employment. In the European Union, Japan and the United States combined, more than 40 million people work in construction. It is estimated that for every 10 jobs directly related to a construction project, another eight jobs may be created in the local economy. Small domestic firms account for most of the sector’s output and most of its jobs (2).
PUBLIC SAFETY AND EFFICIENCY
Sound regulation of construction helps protect the public from faulty building practices. Besides enhancing public safety, well-functioning building permitting and inspection systems can also strengthen property rights and contribute to the process of capital formation (3). However, if procedures are too complicated or costly, builders tend to proceed without a permit (4). By some estimates, 60–80% of building projects in developing economies are undertaken without the proper permits and approvals (5). And because the construction permitting process generally involves licensing requirements from several different agencies, those seeking permits are exposed to different bureaucracies, which creates opportunities for rent-seeking.
Overly complicated construction rules also can increase opportunities for corruption. Analysis of World Bank Enterprise Survey data shows that the share of firms expecting to give gifts in exchange for construction approvals is correlated with the level of complexity and cost of dealing with construction permits (6).
REVENUE AND COMPETITIVENESS
Economies that score well on the ease of dealing with construction permits tend to have rigorous yet expeditious and transparent permitting processes. Speed matters. A study in the United States shows that accelerating permit approvals by three months in a 22-month project cycle could increase construction spending by 5.7% and property tax revenue by 16% (7).
In a 2009 survey of 218 companies in 19 Asia-Pacific Economic Cooperation (APEC) member economies, respondents identified the time and procedures in construction permitting as the most significant “regulatory impediment” to doing business (8). For many entrepreneurs, construction regulations are a critical factor when deciding where to establish their businesses. A recent competitiveness report by KPMG indicated that construction costs and the permitting process were among the top 20 factors in determining the location of a start-up in the United States (9).
1. OECD 2010. “Construction Industry.” OECD Journal: Competition Law and Policy 10 (1): 156–57.
2. PricewaterhouseCoopers. 2005. “Economic Impact of Accelerating Permit Processes on Local Development and Government Revenues.” Report prepared for the American Institute of Architects, Washington, DC.
3. World Bank Group. 2013. “Good Practices for Construction Regulation and Enforcement Reform: Guidelines for Reformers.” Investment Climate, World Bank, Washington, DC.
4. Moullier, Thomas. 2009. “Reforming Building Permits: Why Is It Important and What Can IFC Really Do?” International Finance Corporation, Washington, DC.
5. de Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.
6. World Bank. 2009. Doing Business 2010: Reforming through Difficult Times. Washington, DC: World Bank Group.
7. PricewaterhouseCoopers. 2005. “Economic Impact of Accelerating Permit Processes on Local Development and Government Revenues.” Report prepared for the American Institute of Architects, Washington, DC.
8. Singapore Business Federation. 2009. “Key Findings from ABAC ‘Ease of Doing Business’ (EoDB) Survey.” Presentation at Singapore Business Federation “Removing Barriers for Business Growth in APEC” dialogue session, Singapore, July.
9. KPMG. 2009. Competitive Alternatives: KPMG’s Guide to International Business Location. Available at http://competitivealternatives.com.