Comparing Business Regulations Across Cities Commerce Essay


The number of procedures required to start a business, and deal with construction permits shows wide variation across the 25 cities included in this study. This is not surprising in a country of over 7,000 islands, where the Local Government Code of 1991 granted significant powers to the 80 provincial, 122 city, and 1,497 municipal governments- while retaining other powers within the central national government. While the power of local governments to regulate commercial activities is

subject to certain limitations prescribed under the Local Government Code and other national laws, the national government can only supervise local governments to ensure that they do not exceed their powers, according to the constitution.8 As a result, national government initiatives to institute uniform standards and best practices in cities cannot simply be imposed top-down. National initiatives must be implemented with buy-in from the local governments, which requires considerable time and effort. The multi-level regulatory and legal framework is further complicated by the fact that local governments must strike a balance between their mandate to promote local economic development, on the one hand, and their mandate to promote public welfare, health, and safety, on the other. Local governments often resort to raising taxes and fees, which may act as economic disincentives for local firms. In addition, national agencies retain responsibility over their local branches' procedures and, thus, are crucial to the process of reducing the burden on local entrepreneurs. Decentralization is not without problems in any large and complex economy. A recent review in Indonesia found that most local regulations were inconsistent with national laws and incomplete or distorting to economic activity.9 Local governments and national government agencies must work together to create an environment where businesses can flourish.

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Starting a business In Manila and Cebu City, 15 procedures are necessary to start a business-compared to 22 in Pasig. It takes entrepreneurs 22 days to start a business in General Santos, while it takes more than double in Iloilo City (56 days). The cost to entrepreneurs ranges from 15% of income per capita in General Santos to 36% in Makati. The variation in the number of procedures, time, and costs among the 25 cities are due to local business registration requirements as well as differences in the efficiency of local branches of national agencies. Completing business registration is faster where local business start-up requirements are consolidated at one-stop shops. It is also faster in those cities where certain requirements, such as inspections, can be fulfilled after the city has issued the business permit based on a low-risk or high-risk assessment. Cost differences are driven mainly by business taxes and garbage fees levied by local governments, which local firms pay when applying for a business permit. Dealing with construction permits Taguig requires only 25 procedures for a permit to build a warehouse. To compare, Cebu City and Pasig require 36 procedures. The differences are due to additional requirements imposed by certain cities on top of National Building Code's standard requirements. The time needed varies from 46 days in Zamboanga City to 169 days in Manila. The longest delays in Manila are the 63 days needed to get a building permit and the 56 days it takes to connect to electricity. Wide variations also exist in terms of cost. Davao City is the least expensive city to obtain construction permits at 94.2% of income per capita. In Iloilo City, the cost is more than 10 times higher: 1,035.3% of income per capita. The difference is driven mostly by the high cost of an electricity connection in Iloilo City. Registering property Registering property involves 8 standard procedures. Nine out of the 25 cities add a locally required inspection for a total of 9 procedures. In terms of time, Mandaluyong offers the fastest property registration in 22 days. Meanwhile, Cagayan de Oro and Lapu-Lapu offer the slowest, at 81 days and 64 days, respectively. The time differences can be attributed mainly to the performance of the Register of Deeds and the regional district offices of the Bureau of Internal Revenue. Cities also vary on property registration costs. Zamboanga City, General Santos, and Cagayan de Oro charge the most-with registrations costing 5.8%, 5.6%, and 5.3% of the property value, respectively. The cities with the lowest costs are Mandaue, Navotas, and Valenzuela-with registrations costing 3.3%, 3.5%, and 3.5% of the property value, respectively. Variations in the property transfer tax and notarization

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fees, both of which are assessed as a percentage of the property value, drive the differences in costs across cities. Learning from each other Benchmarking exercises like Doing Business inspire governments to improve business regulations. They uncover potential challenges and identify where pol- icy makers can look for good practices. Subnational comparisons between cities within the same country can be stronger drivers of reform than international comparisons, because local governments

have a hard time explaining why doing business in their city may be harder than in neighboring locations. The good news is that sharing a national legal framework facilitates the implementation of existing good local practices within a country. National governments can also use Doing Business data to monitor how efficiently the local branches of their agencies implement national regulations. Local governments can compare their regulations with those of their neighbors. The example of Colombia is telling. Doing Business in Colombia 2008 identified good practices in 13 cities, pointed out bottlenecks, and provided recommendations for business reform. Two years later, a new report tracked progress over time. The results were impressive. All 13 cities showed improvements in at least 1 of the areas measured, thanks to local-level reforms. Similarly, Doing Business in India 2009 showed that 9 out of 10 Indian states benchmarked for the second time had introduced business reforms. As a result of these reforms, the average time to start up a company dropped from 45 to 35 days and the time to obtain a building permit was reduced by 25 days, on average. The conclusion: what gets measured gets reformed. Reform-minded local governments can use Doing Business indicators to motivate and sustain business reform efforts. There is no need to reinvent the wheel: it is sufficient to start by introducing the business reforms that have been successfully implemented in other cities. In fact, cities in the Philippines have a lot to gain from adopting the best regulations and practices that already exist in the country (table 1.3). A good example is the one-stop shop in Manila, established through the Standard Business Registration and Permit Processes. Another is the one-time assessment of fees that Davao City and Valenzuela have introduced. Yet another good practice is found in Pasay, where separate applications for zoning clearance and fire and mechanical permits are no longer necessary in cases where the building in which a new business plans to operate has them already. Concrete results can be obtained by replicating the best local practices. In business start-up, if a hypothetical Philippine city followed the example of General Santos-where the Certificate Authorizing Registration10 is processed by the Bureau of Internal Revenue in 1 day, registration with the Social Security System takes 1 day, and the print shop prints the receipts-in only 3 days-starting a business could take just 22 days, similar to Chile. Start-up costs would come

15.3% of income per capita, comparable to Spain or Colombia. Regarding construction permits, following the procedures in Zamboanga City, where it takes 46 days, would speed up the building of

a warehouse in this hypothetical Philippine city so that it's faster than in Hong Kong SAR (China) where it takes 67 days. Adopting the property registration practices found in Mandaluyong would allow our hypothetical city to register property in 22 days-thus ranking 49th in registration speediness worldwide, ahead of Indonesia and Malaysia. If registration costs were cut to just 3.35% of the property value, as seen in Mandaue, our hypothetical city could rank 24th globally for property-registration costs, alongside Peru. In terms of the number of procedures required for the 3 Doing Business indicators measured here, even the best-performing cities in the Philippines lag behind their peers abroad. Cutting procedures remains the number one challenge for future business reforms.The ayoffs of business reforms can be large. Higher rankings on the ease of doing business are associated with more growth, more jobs, and a smaller informal sector.11 Business reforms expand the reach of regulation by bringing firms and employees into the formal sector. There, workers can have health insurance and pension benefits. Businesses pay taxes. Products are subject to quality standards. In addition, formal firms have greater access to bank credit to fund expansions and courts to resolve disputes. Business reforms that reduce informality and enforce property rights benefit women especially, because they make up a large share of the informal sector. For the first time in 8 ears, Doing Business 2011 finds that economies in East Asia and the Pacific were among the most active in making it easier for local firms to do business. Eighteen of 24 economies in the region reformed business regulations and institutions-more than in any other year. These business reforms include the introduction of a one-stop shop in Manila and improvements in its electronic customs systems. The Philippines can look internally and to neighbors to learn from positive reform experiences. Studies from other countries suggest that 85% of business reforms occur in the first 15 months of a new administration. 12 With the national presidential elections having just taken place in May 2010, this may be the best time for the Philippines to increase the pace of business reforms.

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There, workers can have health insurance and pension benefits. Businesses pay taxes. Products are subject to quality standards. In addition, formal firms have greater access to bank credit to fund expansions and courts to resolve disputes. Business reforms that reduce informality and enforce property rights benefit women especially, because they make up large share of the informal sector.

For the first time in 8 years, Doing Business 2011 finds that economies in East Asia and the Pacific were among the most active in making it easier for local firms to do business. Eighteen of 24 economies in the region reformed business regulations and institutions-more than in any other year. These business reforms include the introduction of a one-stop shop in Manila and improvements in its electronic customs systems. The Philippines can look internally and to neighbors to learn from positive reform experiences. Studies from other countries suggest that 85% of business reforms occur

in the first 15 months of a new administration. 12 With the national presidential elections having just taken place in May 2010, this may be the best time for the Philippines to increase the pace of business reforms.

The creation of new firms is closely linked to economic development. New businesses are an indicator of entrepreneurial activity:1 they offer new jobs,2 provide added value, and introduce innovations3 consequently stimulating economic growth. It is, therefore, imperative to engender an environment favorable to the creation of new firms. In the Philippines, this is particularly critical among small and medium-size enterprises which represented 99.6% of all businesses registered in the country and employed 69.9% of the total labor force in 2006. They contributed 32% of the country's gross domestic product that year.4 New firms are created and job opportunities multiply when starting a business is made easier. Research shows that when registration becomes faster and costs are cut, more firms enter the market.5 For example, after Malaysia reduced its company registration fees as part of the government's economic stimulus package, 320,000 new businesses were registered in 2009.6 In Mexico, the number of new firms increased by 5% and employment grew by 2.8% following

the introduction of a one-stop shop for business registration.7 Starting a business in a Philippine city takes an average of 18 procedures and 33 days, and it costs 24.4% of income per capita. In 2008, it took on average 2 days longer and cost 2.6% more to do the same. The average number of procedures measured in the 2008 and 2011 reports has not changed; it remains more than double the regional average of 8 procedures. To compare globally, Equatorial Guinea, the country that requires the highest number of procedures for starting a business among all 183 economies measured by Doing Business 2011-requires just 2 procedures more. In terms of business start-up time, the Philippine average of 33 days is below East Asia and the Pacific's regional average of 39 days but more than 10 times that of worldleader Singapore (3 days). The average cost is higher than Indonesia's 22% of income per capita (figure 2.1). Among Philippine cities studied, starting a business

is easier in General Santos, Davao City, and Taguig and more difficult in Las Piñas and San Juan (table 2.1). The minimum paid-in capital requirement to start a business in the Philippines is PHP 5,000 (USD 107), equivalent to 6% of income per capita. While a minimum paid-in capital requirement

is intended to discourage shell and fraudulent firms, companies can simply withdraw it once the Securities and Exchange Commission has issued the certificate of registration, defeating the purpose of protecting investors in the event of insolvency. International experience shows that minimum capital

requirements can be a barrier to entry and can discourage companies from registering. Economies uch as Australia, Canada, France, Germany, Hong Kong SAR (China), Singapore, Thailand, the United Kingdom, and the United States do not mandate any minimum capital. Business registration can be grouped into 5 major phases: (1) incorporating and registering with the Securities and Exchange Commission; (2) obtaining the local business permit or mayor's permit to operate and other local government offices; (3) obtaining clearances from the Bureau of Fire Protection; (4) registering to pay taxes with the Bureau of Internal Revenue; and (5) registering with the Social Security System and Philippine Health Insurance Corporation (PhilHealth). Differences in the procedures across the 25 cities derive mainly from local requirements and practices (figure 2.2). Manila and Cebu City require the fewest number of procedures: 15. Las Piñas, Navotas, and San Juan each require 21 procedures to start a business, while Pasig requires 22-the most of any Philippine city measured. Local requirements specific to some cities only include notarization of the business permit application, sanitary and environmental permits, temporary Fire Safety Inspection Certificate, and locational clearance. Cagayan de Oro, Lapu-Lapu and Mandaue require verification of real property tax payment. Muntinlupa requires a stamp of approval for the Certificate of Occupancy and Zamboanga requires police clearance. These additional procedures add to the time it takes to start a business. In addition to local requirements, firms have to complete national level requirements. The Philippine national Internal Revenue Code and Bureau of Internal Revenue policies require entrepreneurs to buy pecialized accounting books, obtain authorization to print receipts, and have the printed receipts stamped by the Bureau of Internal Revenue. It has been argued that having books and receipts registered and stamped minimizes tax evasion. However, this is not necessarily the case as companies can find alternative means of accounting to hide revenue from the Bureau of Internal revenue. Across all 25 cities, General Santos is fastest with 22 days, while Iloilo City is slowest with 56 ays. Obtaining a business permit and having necessary receipts and invoices printed are the main

causes of delays (figure 2.3). Starting a business is less costly outside Metro Manila. General Santos,

Zamboanga City, and Davao City in Mindanao are the cheapest cities while Cagayan de Oro is the most expensive city outside Metro Manila (27.8% of income per capita). This city has higher sanitary

inspection fees than other cities outside Metro Manila and requires an occupation permit, an oath fee, and a health certificate. Firms within Metro Manila pay more, because of higher business permit fees, but are also burdened with higher business taxes and garbage fees. Comparing internationally, however, average costs of starting a business in 20 out of the 25 Philippine cities are lower than the East Asia and Pacific average of 27.1% of income per capita. Since publication of Doing Business in the Philippines 2008, individual cities have taken steps to ease the business start-up burden on local firms (table 2.2). One major initiative is the introduction of the Standard Business Registration and Permit Process, a joint initiative of the League of Cities of the Philippines, the Department of the Interior and Local Government, and the Department of Trade and Industry. The Standard Business

Registration and Permit Process was launched in February 2009 to simplify and standardize business registration and permit processes in Philippine cities. To achieve this, 5 major reforms were implemented: (1) the unified and single business registration application form, (2) the strengthening of the Business Permits and Licensing Office to coordinate the Standard Business Registration and Permit Process, (3) the one-time assessment for all business registrationrelated fees and charges, (4) the one-time payment at the City Treasurer's Office, and (5) the creation of a joint inspection coordination team to be composed of the Business Permits Licensing Office, the Planning and Development Office, the Health/Sanitary Office, the Office of the Building Official/City Engineer's Office, the Waste Management Office/Environment Protection and Waste Management Office, and the Bureau of Fire Protection. The fifth and final reform is to be implemented as soon as issues surrounding the new Fire Code are resolved. The first 4 of these reforms were piloted in Mandaluyong, Manila, Marikina8, and Quezon City. Manila set up a physical one-stop shop, called the Business One-Stop Shop (BOSS), where one-time assessments are conducted and one-time fees are paid. The Business Permits and Licensing Office and the City Treasurer's Office deputize staff to the Business One-Stop Shop so that the entrepreneur does not have to leave the one-stop shop to complete these transactions. Manila also did away with an inspection from the Licensing Section of the mayor's office. As a result of this reform Manila cut business start-up time by 15 days (figure 2.4). Mandaluyong, the other city with a one-stop shop, cut the time needed to obtain a business permit at the Business Permits and Licensing Office from 3 days to 1 day. Quezon City also initiated significant

reforms by way of the Standard Business Registration and Permit Processes which were implemented after the cutoff date for the study. However, within the period of the study, Quezon City eliminated 2 requirements-notarization of the application form for business registration and the Fire Safety Inspection Certificate. The efforts in the 4 pilot cities are consistent with the Philippine Business Registry, which aims to become an online single-access point to start a business. In December 2006, the President directed the Department of Trade and Industry to establish and administer the Philippine Business Registry.9 This business portal is intended to allow for online business applications with all national government agencies involved-such as the Securities and Exchange Commission, the Bureau of Internal Revenue, the Social Security System, and PhilHealth. As of November 2009, only 19 of 28 targeted agencies had signed the memorandum of agreement with the Department of Trade and Industry formalizing their commitment to the project. Many of the agencies have yet to complete the interface between their respective registration systems and the Philippine Business Registry.10 Other cities have independently introduced introduced reforms inspired by the Standard Business Registration and Permit Process, Caloocan eliminated the requirement for notarization of forms. It is generally believed that requiring applicants to make statements under oath serves as a disincentive to lying on their business permit applications lest they be found liable for perjury. However, only Navotas and General Santos have actually filedany cases against applicants who were found to have lied on their application forms.11 Davao City cut 7 procedures and 16 days in the issuance of the business permit, allowing inspections and certain requirements to take place after the business is up and running, but before renewal of the business permit the following year. Similarly, in Cagayan de Oro, Ca- loocan, Lapu-Lapu, Mandaue, Valenzuela, Las Piñas, Malabon, and Taguig, inspections are conducted after the issuance of the business permit, but before the renewal of the permit the following year. Cebu City further streamlined

business start-ups by integrating previously separate steps into a single procedure. Cebu City uses the Department of Trade and Industry's National Economic Research and Business Action Center (NERBAC), which has been operational in the city since May 2008. Notarized application forms are now submitted to a city hall representative at NERBAC Region 7 for verification, assessment, and payment of the business permit fees and taxes. Cebu City inspections are conducted by a joint team, consisting of representatives from the Zoning Department, Office of the Building Official, City Health Department, Bureau of Fire Protection, and the mayor's office. The Local Government Code requires

Philippine entrepreneurs to obtain a clearance from their barangay (the smallest political unit) before they can do business in the area.12 The barangay clearance has generally been a prerequisite to getting a business permit, although the regulatory purpose for this requirement is not entirely clear.13 Because of the differences in barangay and community set-ups coupled with the autonomy granted by the Local Government Code, barangays within the same city may have different procedures and fees for issuing barangay clearances, which may encourage firms to apply in those barangays where conditions are more favorable. A number of cities recognize the potential delays created by the barangay clearance and have taken measures to address this.14 Cebu City allows entrepreneurs to

secure the barangay clearance after the issuance of the Business Tax Payment Certificate, while Taguig imposes limits on the fees that barangays can charge. Pasay eliminated 2 procedures and saved entrepreneurs PHP 956 (USD 21) by no longer requiring firms to obtain a zoning clearance and electrical and mechanical permits, if the new business operates in a building whose owner already obtained these clearances and permits. A photocopy suffices. Since 2008, 7 out of the 21 cities measured used application forms for the business permit that could be downloaded from the city government website. This study finds that 3 more cities introduced this service. In Davao City, however, applicants must submit the completed application form to the city's Business Bureau for encoding and wait for the print-out of the encoded application form, before they can proceed with the rest of the business permit application process. This thus cancels out the potential time saved from having the business application form available online. Local governments offer good practices that their peers could emulate. The following recommended reforms could facilitate business start-ups across the Philippines. What to reform

Simplify local business permit requirements

Local governments could follow the examples of Cebu City, Davao City, Manila, and Valenzuela, which significantly streamlined their business registration processes by eliminating unnecessary certificates, permits, and clearances previously required of low-risk businesses especially. Another way to make registration more efficient is to eliminate the inspections before a low-risk firm commences business operations. Cebu City has a joint team of inspectors visiting businesses after they receive their permit. The joint team classifies businesses by risk levels and, instead of inspecting all businesses, focuses the inspections on those of higher risk to the public.

Create a one-stop shop for local- and national-level registration requirements

One-stop shops can reduce the number of procedures, time, and cost to start a business. In 2005, it took 11 procedures and 78 days to start a business in Portugal. After the one-stop shop was set up, Portugal became one of the easiest places in the world to start a business. It now requires only required 6 procedures and costs 6.5% of income per capita.15 Egypt introduced a one-stop shop for business start-up that brings together 30 government agencies. In Indonesia, the introduction of one-stop shops helped save time: the process that used to require 12 procedures and 105 days in 007/08

requires just 9 procedures and 47 days in 2010.16 In the Philippines, corporate registration (with the Securities and Exchange Commission) could be integrated with tax registration (with the Bureau of Internal Revenue) and with social services registration (with the Social Security System and PhilHealth). Further reform could also integrate local business permits with national procedures. While one-stop shop is one of the goals of the Philippine Business Registry, it will take some time for it to become operational. Many of the agencies- most notably, the Security and Exchange Commission-are still in the process of developing or improving their respective systems. The Department of Trade and Industry's NERBAC offices also have a long way to go to interface with all regional and local permit/license issuing agencies. For the Philippine Business Registry to succeed, it is critical that the concerned agencies commit to this initiative. Existing efforts of the various national agencies to modernize their information and communication technology systems should be aligned with the Philippine Business Registry system, starting with the full implementation for the single registration process for the Social Security System and PhilHealth. In the meantime, local governments can start consolidating procedures to obtain business permits at their local level. Cities can follow the Standard Business Registration and Permit Process standards now being adopted in Manila, Mandaluyong and Quezon City, and Cebu City (through NERBAC) in taking steps toward unifying the procedures into one-stop shops.

Eliminate the registration of books and receipts at the Bureau of Internal Revenue

The legalization of books and receipts is an outdated practice as firms increasingly use electronic means of accounting. Among 183 economies measured by Doing Business, only 25 (less than 14%) require newly created limited liability firms to obtain certified books or legalize books.17 The other 86% no longer require this procedure. While the Philippines' Bureau of Internal Revenue gives companies the option to register their computerized accounting system, this procedure actually takes longer. Thus, even if an entrepreneur intends to use a computerized accounting system from the very

beginning, a new business in the Philippines has to purchase the special books of accounts and have these registered with the Bureau of Internal Revenue, just to get up and running.