The Creation Of New Firms Construction Essay


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

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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

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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

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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.

Improve transparency and foster the publication of business procedures

One of the requirements of the Philippines' Anti-Red Tape Act of 2007 is for Citizen's Charters to be displayed prominently in all government offices showing among others, the services provided by that office and standards on quality and timeliness to be expected from the agency rendering these services. Pasay, Malabon, Quezon City, Lapu-Lapu, Caloocan, and Zamboanga City are among the cities that already prominently display their Charters in city halls. Requiring local governments to implement a comprehensive and strategic public awareness program-including the display of their Charters and work processes prominently at city hall and other government offices-reduces legal uncertainty, minimizes the need for fixers, and creates greater accountability. The Civil Service Commission-which is responsible for monitoring national and local government compliance with the

Anti-Red Tape Act-and the Department of the Interior and Local Government- which is responsible for supervising the conduct of local government units-will have to play a significant role in this initiative. A related recommendation is to improve and update the Web sites of local governments and national government agencies in the Philippines. It is particularly important that requirements, forms, and fees for specific services are accurate and accessible online, and that this information is consistent with actual practice

Finding the right balance between safety and efficiency is important in a sector like construction. Smart regulations ensure both public safety and revenues for the government, while making the process easier for entrepreneurs. A complex and confusing regulatory framework hurts businesses and can be a seedbed for corruption. Instead of promoting public safety, overly rigid rules and regulations may push construction into the informal economy, undermining the intent. According to a recent survey in countries that belong to the Asia Pacific Economic Cooperation, the time and procedures for dealing with construction permits is the "biggest regulatory impediment" to doing business.1 The World Bank Enterprise Surveys also found that firms perceive higher levels of corruption in countries where dealing with construction permits is more difficult (figure 3.1).2 In the Philippines, dealing with construction permits requires more procedures and is more expensive than in neighboring countries. Across the 25 cities included in Doing Business in the Philippines 2011, the process requires an average of 30 steps and costs 687.3% of income per capita. To compare, in the East Asia and the Pacific region, an average of 19 procedures and a cost that is just 169% of income per capita are required. For example, to obtain a locational clearance in 24 of the 25 cities measured in the Philippines, the builder needs to obtain approvals from the municipality as well as from the barangays. Adding to the high number of proce- dures are the inspections conducted by the Office of the Building Official and the City Assessor's Office. Also, multiple notarizations are required. Taguig has the fewest requirements at 25, comparable with Malaysia (figure 3.2). Meanwhile, the average time it takes to obtain a construction permit at 102 days is shorter in the Philippines than the regional average of 167.2 days. This is because many requirements can be completed relatively quickly. Zamboanga City, fastest among the 25 Philippine cities, requires just 46 days to deal with construction permits. The only economies measured by Doing Business that require fewer days are Singapore (25 days); the Republic of Korea (34 days); the United States (40 days) and Bahrain (43 days). There are 4 major stages: pre-construction, construction, post-construction, and utilities connections. The notable variations across cities required are due to varying local practices. Some cities impose additional requirements on top of the standard legal requirements prescribed by the National Building Code.3 In others, for example, in Taguig, where there is a concerted effort underway to share and coordinate information internally among a number of different offices: here, an entrepreneur has to complete just 25 procedures. In Pasig, the same entrepreneur has to complete During pre-construction, the entrepreneur has to obtain preparatory documents-such as the certified true copy of the land title and of the tax declaration of real property, the barangay clearance, the lot plan with the site map from the geodetic engineer, the locational clearance, the building permit and ancillary permits, and the fire safety evaluation clearance. All cities, except Taguig, Makati, Batangas City, Davao City, Iloilo City, and Quezon City have more procedural requirements during pre-construction than in any other phase (figure 3.3). In most cities, local firms have to obtain a certified true copy of the tax declaration of real property, as well as a tax clearance from the City Treasurer's Office. In Batangas City, Davao City, Iloilo City, Makati, Quezon City, and Taguig the process is simpler: a photocopy can be submitted instead. The notarization of the application form for the locational clearance, a practice common to most cities, is not required in Marikina, Muntinlupa, Navotas, Parañaque, Taguig, and Valenzuela. A few cities require additional approvals, adding to the burden borne by the entrepreneur. San Juan is the only Philippine city that requires project approval by the sangguniang panglungsod, or city council, which is the city government's legislative body. In Iloilo City, its Zoning Board has to approve the project, while in Mandaue and Cebu City the mayor's office has to give the clearance. In two cities, Pasay and Mandaluyong, local firms must secure an environmental compliance certificate from the Department of Environment and Natural Resources. Pasay requires it of all construction projects in view of the city's environmentally critical status close to Laguna Lake. Mandaluyong is strictly implementing the Department of Environment and Natural Resources' requirement to present an environmental compliance certificate or a "certificate of non-coverage" i.e., a document to certify that the building does not require an environmental approval-for

all construction projects within its jurisdiction, regardless of their scope and risk. Simple, low-risk buildings should have easier compliance rules than complex, high-risk projects in order to strike a balance between safety and efficiency. Some issues regarding building permit forms have yet to be clearly decided. Under the 2004 Revised Implementing Rules and Regulations of the National Building Code, a building permit applicationform must be notarized. However, because of a pending case in the Court of Appeals questioning the legality of the 2004 rules, the Department of Public Works and Highways issued a memorandum circular ordering the Office of the Building Official not to use the new forms until the matter is resolved by the high court. Nevertheless, 9 of the 25 cities use the new forms, and thus require notarization. These cities are Caloocan, General Santos, Malabon, Marikina, Muntinlupa, Navotas, Valenzuela, Zamboanga City, and Manila. The other cities continue with the old application forms, saving firms 1 procedure. During construction, random inspections are conducted by the Bureau of Fire Protection and by the Office of the Building Official. These may offer opportunities for bribes and waste resources. The authorities lose out, because they cannot systematically monitor the structural soundness of buildings, and businesses lose time and money every time they have to stop construction to deal with an inspector. Risk-based assessments and scheduled inspections at critical phases of the construction process make the process more efficient and transparent. Iloilo City stands out as the only city that does not require inspections during construction. After construction, the remaining steps are to obtain the fire safety inspection certificate, the certificate of occupancy, the certificate of final electrical inspection, and the new tax declaration from the City Assessor's Office. These requirements also vary across cities. In all cities except Caloocan, Malabon, Quezon City, and San Juan, the inspections for the certificate of occupancy and

certificate of final electrical inspection take place simultaneously. In these cities, the application for the certificate of occupancy includes a form for the certificate of final electrical inspection. The entrepreneur receives one joint inspection. However, in Caloocan, Malabon, Quezon City, and San Juan, a separate certificate of final electrical inspection is a prerequisite for the certificate of occupancy. The new Fire Code in the Philippines imposes additional compliance requirements-such as the Fire and Life Safety Assessment Report. Architects must now undergo 40 hours of training with the Bureau of Fire Protection in order to be certified. The report itself requires numerous documents: pre-construction plans/specifications; the design criteria and calculations; a compilation of all approved submittals, tests and acceptance forms of all fire protection and life safety features during construction; and a compilation of all maintenance and testing records kept by the building engineering and maintenance departments post-construction. The Fire and Life Safety Assessment Report could be helpful in improving safety standards of complex and high-risk buildings, but it may represent an additional burden for simple or low-risk structures-such as a small storage warehouse for nonhazardous goods. Cities also vary in terms of the number of days firms need to deal with construction permits. While it takes just 46 days to deal with construction permits for a warehouse in Zamboanga City, the same project in Manila takes 169 days. Zamboanga City has a relatively fast building permit and electricity connection process. Davao City, General Santos, and Mandaue take 57, 71, and 72 days, respectively. Meanwhile, firms in cities in Metro Manila may have to wait for more than 100 days. Time needed to secure water and electricity connections cause most of the local variations here. While construction permits are generally expensive in the average Philippine city, there are exceptions (figure 3.4). Davao City, where dealing with construction permits costs 94.2% of average income per capita, is less expensive, relative to income, than Taiwan (China), Canada, or Republic of Korea. Within the Philippines, the cost is driven by the locational clearances, building permits, fire safety evaluation clearances, certificates of occupancy, and utility connections. Of these, building permit fees and utility connections take up the biggest share. According to the National Building Code, the cost of a building permit is PHP 30 per square meter4-that is, PHP 39,018

(USD 837) for the case study analyzed by Doing Business. This explains why 21 of the 25 cities charge the same amount for the building permit. Batangas City, Caloocan, Cebu City, and Davao City

charge PHP 3,895 (USD 84) less because they use a different fee structure.5 The cost of the Fire Safety Inspection Certificate varies among cities. The new Fire Code6 and its 2009 Implementing

Rules and Regulations prescribe the fee for the Fire Safety Inspection Certificate to equal "10% of all fees charged by the Building Official, or by the Local Government, or by other Government agencies concerned with the granting of pertinent permits or licenses." This provision was taken word for word from the Implementing Rules and Regulations of the old Fire Code.7 It would appear that this provision has been left vague to give local government units some discretion. Thus, most cities except Cagayan de Oro, Davao City, Marikina, Parañaque, and Zamboanga City have taken the provision to mean 10% of building permit fees. Cagayan de Oro, Davao City, and Marikina have interpreted it as 10% of total fees paid for the certificate of occupancy. Parañaque's Fire Safety Inspection Certificate fee consists of 10% of the combined building permit and certificate of occupancy fees. Zamboanga City, which charges about PHP 10,000 (USD 215) more than the other cities, uses an entirely different formula based on square footage of the construction project, which does not have its basis either in the new or the old Fire Code. But the most significant cost is obtaining an electricity connection, which averages almost 90% of total construction permit costs and varies across cities.

The firm must pay upfront for the costs of the transformers and installation. It is most expensive in Lapu- Lapu (PHP 740,000/USD 15,883). It is cheapest in Cebu City, Davao City and Mandaue, as the electric utilities in these 3 locations have a policy of refunding the deposit within 1 year (figure 3.5).8 Electricity connection in Metro Manila cities is more expensive due to the amended Distribution Services Open Access Rules, which took effect in April 2010. Pursuant to this amendment, the Manila Electric Company (Meralco) has discontinued waiving payment. Applicants are now required to pay the project cost of PHP 420,100 (USD 9,017) and a service deposit of PHP 144,360 (USD 3,098). Because an electricity connection can account for up to almost 90% of total construction permit costs in some cities, the total cost of dealing with construction permits is lowest in locations with cheap electricity connections, like Davao City (equivalent to 94.2% of income per capita). This compares favorably to the 1,035.3% of income per capita firms in Iloilo City have to pay (figure 3.5). The high cost of electricity and of obtaining an electricity connection offers a major opportunity for business reforms. Since Doing Business in the Philippines 2008, 4 of the 20 cities reformed in at least 1 area concerning construction permits (table 3.2). Davao City stands out as the most improved. In Davao City, the barangay clearance and certified true copy of a land title are no longer required. The presentation of an original land title will suffice. City hall in Davao City asked the Bureau of Fire Protection to station officers at city hall to facilitate obtaining the fire safety evaluation clearances, thereby making it more convenient for firms to obtain construction permits.In addition, the Davao Light and Power Company changed its policy on reimbursing the cost of transformers to local firms. Previously, the cost was only reimbursed upon contract termination, but now the power company reimburses the amount after just 1 year. The Visayan Electric Company (VECO) in Cebu and Mandaue also lowered electricity connection costs. Parañaque also improved in terms of dealing with construction permits. The city no longer requires a separate visit to the mayor's office for the mayor's

clearance as a prerequisite for the locational clearance. This reform saves the entrepreneur 1 procedure. Electricity connections have become more expensive in Metro Manila since 2007. An amendment to the Distribution Services Open Access Rules issued by the Energy Regulatory Commission changed the cost structure. Before the new regulation was enforced, connection costs were waived or refunded within a year by Meralco. With the current rules, every connection needs to be fully paid

What to reform

Introduce risk-based approvals

Not every building project should be treated equally. Complex and risky structures- like airports, skyscrapers, chemical plants, or any large building-should have stricter standards for security and

control. Many inspections, clearances, and consultations should be in place to guarantee public safety. At the same time, authorities ought to take the time to assess the risk of different projects and develop risk-based rules to deal with clearances and approvals in a differentiated manner. An international good practice is to categorize buildings depending on their environmental impact and, according to these characteristics, environmental compliance requirements should vary. Simple low-risk buildings should have easier compliance rules. Smart regulations help ensure safety while encouraging efficiency. If cities have the same regulations for every type of building, they run the risk of of not meeting demand due to a lack of resources-number of inspectors, reviewers, general staff, and so forth-or jeopardizing safety in the long run because they cannot pay proper attention to complex buildings. Countries like Colombia have recently introduced reforms to classify buildings according to their risk. According to Colombian law, the building analyzed in the Doing Business case study is a "medium-low risk" structure. This classification allows builders of such a structure to enjoy a faster reviewing approval process, compared with riskier projects, and they can avoid the hiring of special consultants for environmental, fire safety, and traffic studies. Building authorities also save time reviewing studies or sending inspectors to verify them and can concentrate resources on more complex projects. Rules like the Fire and Life Safety Assessment Report or sanitary inspections should be revised in the Philippines in order to adjust to the risk factors and enforcement constraints of every city.

Improve the efficiency of inspections

Inspections can be more efficient by changing the current practice of conducting random inspections. One way of doing this is to perform risk-based assessments or schedule inspections at critical phases of the construction process. Countries with a system of riskbased inspections have fewer inspections,

on average, than countries with random inspections. Another way to improve efficiency is for different offices to conduct joint, simultaneous inspections for different requirements. Several Philippine cities are already engaged in this practice, when it comes to inspections for the certificate of occupancy and certificate of electrical inspection. Joint inspections require better coordination among the offices that conduct inspections-the City Planning and Development Office, the Office of the Building Official, and the Bureau of Fire Protection. Authorities in Hong Kong SAR (China), China, and Singapore already follow this practice. The other face of efficiency is, capacity. There must be an adequate number of building officials who are properly trained to enforce National Building Code standards, and whose supervision and reporting lines are clear. In most cities, the building official is also the city engineer. This poses a number of problems. The building official is responsible for enforcing the Building Code, reporting to the secretary of public works and highways. The city engineer, on the other hand, is also responsible for overseeing civil works on behalf of the local government and thus reports to the city mayor, posing a potential conflict of interest. The combined workload may also be a key reason for the delayed approval of building permits. The Local Government Code should be amended to create a separate permanent office for the local building official.

Increase transparency by publishing helpful information

Dealing with construction permits can be made easier with step-by-step guides to help builders better understand the process. The Citizen's Charter is a significant step toward this. Cities have made the effort to display flowcharts from the Charter in prominent places at their city halls, on their websites, or in brochures. They need, however, to make sure that the information is consistently accurate. A major driver of variations in time, cost, and number of procedures related to construction permits is the uncertainty surrounding the 2004 Revised Implementing Rules and Regulations of the National Building Code. While waiting for the resolution of the case pending in the Court of Appeals that questions the legality of the Implementing Rules and Regulations revisions, local governments have gone ahead and made decisions on unresolved issues. These decisions include the use of old versus new building permit application forms, computation of building permit fees, changes in fee structures, computation of occupancy fees, and required signatures in building plans. Clarity on the rules and fees to be paid saves time for firms and helps prevent irregularities. In the Indonesian city of Makassar, for example, local laws give a clear indication of how fees are calculated and which documents are required. A list with the formula to calculate the building permit fee and the documents

needed is prominently posted at the City Planning and Development Office.

Land is a fundamental economic asset in every society. Poorly administered property systems or not clearly defined property rights prevent land from being turned into productive capital. An efficient property registration system has real benefits. When there is a formal deed, entrepreneurs can use their immovable assets to obtain credit and grow their businesses. A study in Peru1 suggests that property titles are associated with a 10% increase in loan approval rates for construction materials. Indeed, banks in countries lacking adequate creditor information prefer land titles as collateral, because land is difficult to move or hide. In the Philippines, 70% of commercial bank loans to firms are secured by land.2 Property titling can also significantly increase land values and investment.3 Moreover, property registration benefits governments, because more properties registered translate into greater tax revenues. Across countries, firms of all sizes report that their property rights are better

protected in countries with more efficient property registration. But the relationship is stronger for small firms.4 Large businesses tend to have ample resources to protect their property rights. They can afford to invest in security systems and take other measures to defend their property. But small-scale entrepreneurs may not Making property registration easy allows entrepreneurs to focus on their

businesses. Worldwide, it is easiest to register property in Saudi Arabia, where the entire process can be completed with 2 procedures, in 2 days, at zero cost. Some countries within the East Asia and the Pacific region are not far behind. In Thailand, it also takes 2 procedures and 2 days, and in New Zealand, it costs just 0.1% of the property value to transfer a property from one domestic private company to another. Registering property in the Philippines is not quite as simple, efficient, and affordable as that. It takes 8 to 9 procedures and an average of 37 days to transfer an ownership title, while the average cost comes to 4.5% of the property value (figure 4.1). While the number of procedures varies only slightly between cities, the time and cost vary considerably. Registering property is easier in Valenzuela, where it requires 8 procedures that take 30 days and cost 3.5% of the property value. It is more difficult in General Santos, where it requires 9 pro- cedures that take 43 days and cost 5.6% of the property value (table 4.1). Registering property can be grouped into 3 major stages: (1) preparing the deed of sale and related documents; (2) completing tax-related prerequisites, which involve procedures at both the Bureau of Internal Revenue and city government

offices; and (3) registering with the Register of Deeds. Property registration is managed at the national level by the Land Registration Authority, which has regional offices around the Philippines. Five procedures are governed at the local level. Among Philippine cities with 9 procedures (instead of 8), the extra requirement is an inspection by the City Assessor's Office as a prerequisite to obtain a new property tax declaration in the name of the new owner (the buyer). Cities requiring this additional

procedure are: Cebu City, General Santos, Makati, Malabon, Mandaluyong, Muntinlupa, Pasay, Parañaque, San Juan, and Zamboanga City. The time needed to register property varies across the 25 cities included in this report (figure 4.2). In Mandaluyong, firms spend an average of 22 days to register property-the same as their competitors in Indonesia. In Cagayan de Oro, registration takes 81 days-about 2 months longer. The differences are due mainly to the efficiency of local offices

of national agencies-namely, the local Register of Deeds and regional district offices of the Bureau of Internal Revenue. Securing registration with the Register of Deeds is generally the longest procedure: it takes as long as 30 days in Lapu-Lapu and Mandaue and up to 60 days in Cagayan de Oro. Another delay is obtaining the Certificate Authorizing Registration from the Bureau of Internal Revenue. Although the Bureau has issued a memorandum saying that the Certificate Authorizing Registration is to be released within 5 days, this is not observed in practice, except in Parañaque. On average, it takes 14 days, while it takes 25 days in Lapu- Lapu and Mandaue and 21 days in Batangas City, General Santos, Iloilo City, and Quezon City. The best local practices are seen in Parañaque (as mentioned), Las Piñas, Mandaluyong, and Muntinlupa- the latter 3 release the certificate in 10 days. Registration costs differ considerably across cities due to variations in the property transfer tax and notarization fees, both of which are assessed as a percentage of the property value. The cities charge a transfer tax ranging from 0.33% in Mandaue to 0.83% in Iloilo City

and Caloocan. Las Piñas and Malabon charge a transfer tax of 0.5% of the property value and then levy an additional PHP 4,566 (USD 98) community tax on property sales. Under Philippine law, notarization is the official act to convert a private document that is binding only for the parties directly involved, into a public transaction that is binding for third parties. Notaries charge between 1% and 3% of the property value to notarize a deed of sale. Notaries in cities outside Metro Manila charge, on average, 1% while many of those within Metro Manila charge from 2% to 3% of the property value. Although there are guidelines on the rates that may be charged on legal fees, including notarization, issued by chapters of the Integrated Bar of the Philippines, these guidelines are no more than recommendations. Some positive business reforms improve the transfer of property in the Philippines. Six of the 20 cities benchmarked for the second time show an improvement in this area (table 4.2). Over the past 2 years, the Land Registration Authority has embarked on a nationwide land titling computerization project designed to consolidate land records into a single national database and facilitate registration and authentication of titles. This reform is necessary as land records are scattered among the local Register of Deeds offices of the Land Registration Authority, instead of being consolidated in a single national database. This makes it difficult and expensive for property buyers to track the authenticity of tax clearances on land titles. The manual handling of deeds-with its potential for missing files and typographical errors- is a key reason for delays in the registration of deeds. Eighteen out of the 25 cities covered by this study either initiated or completed their computerization efforts as of June 1, 2010. Among the first to make the transition is Cebu City, which

now has a fully operational system. As a result, Cebu City cut the time it takes to register with the Register of Deeds in half-from 10 to 5 days. A computerized land-titling system offers several benefits; foremost among them is greater efficiency in the registration and authentication of titles. However, in cities that began the transition process later (i.e., in late 2009 or early 2010), the transition has caused temporary delays recorded by this study. In Davao City, for example, the Register of Deeds now takes 4 more days to register property than before. In Lapu-Lapu, firms have to wait 30 days as the city is in the first phases of the computerization project, compared to 10 days before computerization began. Once the Register of Deeds in each city is fully computerized, processing title registrations is expected to be faster than before. The cost of registering property increased slightly with computerization. Computerization is supposed to reduce administration costs in the medium term, but in the short term, the Land Registration Authority is passing on the costs of modernization to the end users. The Land Registration Authority has imposed information technology fees of PHP 269 (USD 6) per document and PHP 158 (USD 3) per title (including value-added tax) to cover the costs of computerization. The net effect for this study is that the cost of registration with the Register of Deeds has increased by almost PHP 2,000 (USD 43). In four cities registering property became less expensive, as compared to 2008. Notaries in Caloocan, Malabon, Navotas, and Valenzuela, which charged, on average, 2% of property value for their services, arrived at an informal agreement to reduce their fees to 1%. This reduction reportedly comes in response to increasing competition from new notaries. As a result, the entrepreneur in these cities today pays PHP 41,700 (USD 895) less to register property. The im improvement in the ranking for the three out of the four cities reflects this significant reduction in costs. Pasay found another way to make registering property less cumbersome. While other cities require the tax clearance certificate of real property taxes as a prerequisite to the payment of transfer taxes, Pasay allows both procedures to be completed simultaneously at the City Treasurer's Office. Requirements, time, and cost to register property are all affected by the national land administration system. The Philippines' land administration system faces real challenges, well documented in a number of studies.5 One of these difficulties is an inadequate land information system-a shortcoming which the land-titling computerization project seeks to address. But because information about land ownership, location, boundaries, and land values are still not systematically available to many local governments, fraud abounds, which has also led to land ownership conflicts.6 All title disputes must go to the courts, and this has resulted in delays and abuse. Land records management has also been insufficient. War, theft, fire, and water damage have rendered a large proportion of records missing; while others are missing as a consequence of frequent transfers of records. Still others are in fragile condition or illegally altered. At the same time, duplications and/or overlaps in title records are not easily detected by the current system. This is because title records in the Register of Deeds-which is the ultimate repository of land titles in the country-cannot be matched with parcel or cadastral map numbers: original cadastral surveys and record maps are kept at the Land Management Bureau of the Department of Environment and Natural Resources, while copies of subsequent surveys on titled property and municipal index maps are kept at the Land Registration Authority. These maps do not show or match the cadastral information stored at the Land Management Bureau. Moreover, the absence of a national standard and method for real property valuation has resulted in inefficient allocations and utilizations of the land market and a lack of public confidence in the real property sector.7 The property valuation methodologies vary according to the purpose for which land is assessed.8 Pending Valuation Reform bills seek to establish standards to govern the valuation of real property, and to adopt market value as the single real property valuation base for the assessment of all real property-related taxes in the country. The high cost and complexity of registering property in the Philippines is especially striking when compared with the country's regional neighbors. In Thailand, for example, it takes only 2 procedures and 2 days to register property, which can then be used as collateral for a business loan. Both the Philippines and Thailand have title registration systems and a decentralized land administration with central control. But in the Philippines, the private survey sector is strong and their survey procedures are overly specified yet under-regulated. The result is a relatively high cost of surveying, which is passed on to the public. To contrast, Thailand's efficient land titling (first registration) procedures have

served as a model for systematic land titling in the region. The Philippines is piloting new land titling procedures, but with limited use of technology. Not surprisingly, Thailand enjoys high public confidence in its public administration system and, in particular, its land administration system. The Philippines faces a major challenge for its land administration system-and its public administration

system in general: to gain and maintain public confidence.9 Many developed countries and an increasing number of developing countries have simple, inexpensive, and fast property registration processes. The Philippines could make registering property easier with the following recommendations. What to reform

Convert the stamp, transfer taxes and notary fees into fixed fees

Percentage-based fees may lead firms to undervalue their property, or they may simply avoid registration altogether. The Philippines could replace its percentage based fees with fixed fees, following a schedule of payments to be applied to property transfer transactions. This could discourage tax evasion and reduce informal title transfers. The increase in revenue from new registrations could likely make up for any reduction in fees collected per property. The Indian state of Maharashtra and Egypt are examples of jurisdictions that reduced fees, yet saw total tax revenues stay steady or rise, mainly because of an increase in transactions.Maharashtra's stamp-duty revenues

jumped by 20% after the state reduced the stamp duty from 10% to 5%.10 Egypt's revenue from property registration increased nearly 39% due to the increase in the number of registrations when the national government lowered the total cost of property registration.11

Introduce fast-track procedures

The Bureau of Internal Revenue and Register of Deeds could offer clients a choice of expedited procedures: pay a slightly higher fee for faster completion of the registration process. Cases would

be prioritized in a transparent manner, and those who prefer not to wait would be given an official way to speed up the process. This type of scheme is offered in a number of countries around the world.

For example, entrepreneurs in Lithuania must obtain a certificate of execution for the real estate transaction, which takes 9days, on average. Then they apply for a title transfer at the registry, which takes another 10 days, on average. Now, if they don't want to wait, they can pay a higher fee which cuts the total time from 19 to 3 days. Fast-track procedures help prioritize the work of the registry and allow entrepreneurs to focus on their business.

Standardize requirements at the Register of Deeds and the Land Registration Authority

The Land Registration Authority's supervision over local Register of Deeds offices is not uniform-as seen in the varying descriptions of procedural requirements and computations of costs from city to city, included in the list of procedures of this report. To minimize the Register of Deeds' discretion regarding procedural requirements and costs, the Land Registration Authority must establish an official policy and ensure that it is strictly implemented.

Complete the Land Registration Authority computerization project and monitor performance under the new system

The transition from a manual land titling system to a computerized one has caused delays in some cities, as they begin the process. Newly retrained employees still face a learning curve while many records are out of their usual filing cabinets, being encoded. In this process, an entrepreneur wastes time waiting for Register of Deeds staff to look for records and navigate an unfamiliar system. The Register of Deeds needs to implement temporary steps, tailored to the needs of specific regional offices, to minimize near-term delays.

Review the Bureau of Internal Revenue's protocols with authorized agent banks to address delays in notifications of payments for Certificate Authorizing Registration

The Bureau of Internal Revenue begins processing an applicant's Certificate Authorizing Registration after it has been informed by the authorized agent bank that the payment was deposited. Ideally, the authorized agent bank would inform the Bureau of Internal Revenue of the payment immediately after such payment is made. However, delays in the posting of payment are known to occur- in fact, certain banks have acquired a reputation for delayed postings. The Bureau of Internal Revenue must look into the delays and may need to impose stricter protocols.



o Annexure

o Bibliography