Strategy& leaders outline five guidelines for service fee reform

16 August 2023 4 min. read

As governments have sought to fund a plethora of services over decades, fees for hotel stays, roads, medical licenses, and other things have proliferated into a tangle that does not serve governments, businesses, or residents well. Paolo Pigorini and Talal Salman from Strategy& outline five guidelines for driving effective and equitable service fee reform.

In many cases across the GCC, fees have unintentionally become a long-term tax on businesses and residents. Sometimes, the fees have undermined their intended purpose as a cost recovery tool for the provision of a service. For instance, toll roads have become a hidden tax as the tolls collected exceed the cost of the road’s construction and maintenance.

Moreover, different ministries and agencies impose and set fees – hampering attempts to rationalize them and avoid unintended consequences.

Strategy& leaders outline five guidelines for service fee reform

For example, imposing and raising fees on family members who accompany migrant workers to the GCC can raise revenues. Yet these fees can cause migrant workers to keep their families in their home countries, thereby depriving GCC economies of wages and consumption that instead leave the region as remittances.

GCC governments have become increasingly aware of the problems associated with service fees as part of fiscal reforms. Leaders noted when the IMF recommended phasing out burdensome and regressive fees, and exploring alternative revenue models more conducive to small and medium-sized enterprise development.

GCC governments have seen how Hong Kong, New Zealand, and Singapore are reviewing their fees constantly and systematically to ensure that they are business-friendly, not unduly burdensome, and connected to policy objectives. At least for the past decade, Singapore has been introducing initiatives to reform its fees in terms of types and levels, with mechanisms to set, review, and update them. The result: lower business costs, enhanced fee transparency, and a reduced administrative burden on the government.

Some GCC governments already are reforming service fees. The UAE’s Ministry of Finance announced a plan to restructure federal fees in tandem with introducing corporate income tax in 2023, and to create a more favorable business climate. The Saudi Authority for Intellectual Property reduced publication fees for trademarks in 2022. Qatar’s government approved a draft decision to establish a technical committee to review service fees.

Five guidelines

GCC governments should avoid piecemeal or ad hoc initiatives to ensure that service fee reform is effective, fair, and aligned with larger policy objectives. There are five guidelines for fee reforms.

First, coordinate fee revisions centrally. In Dubai, for example, there are almost 9,000 different fees, tariffs, charges, and fines that many government agencies have established over decades. The Department of Finance is the natural fiscal custodian for reform at this scale and should be the central reviewer of existing fees and approver of new fees.

Second, align all fee revisions with overall policy objectives. Frame reform holistically within the larger context of economic and competitive advantage and not just fiscal considerations. That can help governments avoid unintended consequences.

Third, evaluate fees using a sectoral approach that understands the complexity and burden of fees on different users and their user journeys. Additionally, consider the operational impact on the government’s provision of services, and its fiscal and macroeconomic implications.

Fourth, make fees equitable. Assess the financial impact on individuals and businesses needs to ensure fairness and equity. Ideally, design fees proportionately to the use of the service rather than imposing a blanket charge regardless of service use.

Fee reform could leave the treasury with less revenues, which governments can mitigate through other taxes. Alternatively, governments can make revenues from fees neutral, equitable, and less complex, thereby making payers more receptive and accepting.

Fifth, service fee reform should result in a clear, continuous, and centrally-coordinated process to evaluate existing and new fees.

For existing fees, governments should periodically ask: Is this fee necessary, can we replace it by increasing a different fee? Can we eliminate a few fees through one new fee? For new fees, they should ask: Will the new fee unnecessarily complicate the regulatory environment? How will it affect business and resident behaviors, and the direction of economic and social policy? What will be the impact on revenues?

Service fees reform in the GCC is an essential initiative as part of the overall fiscal reforms and sustainability initiatives by governments in the region, and an important driver for improving the business environment and the livability of residents.

About the authors: Paolo Pigorini is a senior partner with Strategy&, where Talal Salman is a principal.