No. 89 - May 2007
Burdensome Business
Improving the Investment Climate

By Michael B. Mundo , MBC Senior Research Associate

The advent of globalization has exposed nations and economies to the scrutiny of global citizens, especially multinational companies, now referred to as global companies. Global companies constantly review their investment options, choosing the best location to suit their business objectives. The competition for foreign investments gets tougher as technological advances in all fronts and availability of extensive information about countries facilitate decision-making for these global companies.

A number of studies that rank countries according to different factors – livability, economic performance, ease of doing business, corruption — are now available. One of these studies is the World Bank’s Doing Business reports. The latest edition, Doing Business 2007: How to Reform, is the fourth in a series of annual reports investigating regulations that enhance business activity and those that constrain it. The report presents quantitative indicators on business regulations and the protection of property rights that can be compared across 175 economies – from Afghanistan to Zimbabwe – over time.

In doing the annual reports, the World Bank studies regulations affecting ten areas of everyday business. These areas are used to analyze economic outcomes and identify what reforms have worked, where, and why. These areas are:

1. Starting a business
2. Dealing with licenses
3. Employing workers
4. Registering property
5. Getting credit
6. Protecting investors
7. Paying taxes
8. Trading across borders
9. Enforcing contracts
10. Closing a business

However, the World Bank’s Doing Business reports do not include other areas important to business like a country’s proximity to large markets, quality of infrastructure services (other than services related to trading across borders), the security of property from theft and looting, the transparency of government procurement, and macroeconomic conditions or the underlying strength of institutions. Other studies, especially those by the World Economic Forum or the United Nations system, on the other hand, specialize on these factors.

IMPROVING THE BUSINESS CLIMATE

For the past two years, the World Bank’s Doing Business reports have shown that the Philippines has deteriorated in terms of the regulatory cost of doing business across 175 economies. Based on the latest release of Doing Business, the Philippines dropped to rank 126 in 2007 from rank 121 in 2006.

Likewise, in none of the ten areas of doing business has the Philippines shown any improvement at all from the previous year.

STARTING A BUSINESS

Countries with fewer procedures, least time, least cost, and lowest capital in starting a business attract more private investment. These factors, obviously, also discourage bribery and corruption.

It takes 11 steps to launch a business in the Philippines, longer than in Thailand, and Malaysia, but at par with Vietnam and a step shorter than Indonesia. Moreover, it takes 48 days to start an enterprise in the country, longer when compared to Malaysia and Thailand, but shorter when one sets up a business in Vietnam and Indonesia.

In terms of cost of doing business, it takes 18.7% of income per capita to be able to get a new business running in the country, costlier than Thailand, but less expensive when compared to Malaysia, Vietnam, and Indonesia. Costs include official fees but exclude bribes.

To start a business, a minimum capital equivalent to 1.8% of income per capita is required in the Philippines, but none at all in Malaysia, Thailand, and Vietnam. The paid-in minimum capital is the amount the entrepreneur needs to deposit in a bank before registration.

DEALING WITH LICENSES

Rules in constructing a warehouse should be straightforward as well as easily complied with. The costs of obtaining permits and utility connections should be inexpensive to ensure adherence to building safety for construction workers, tenants, and passers-by.

It takes 23 steps to obtain a building license in the Philippines, which is longer than in Thailand, Vietnam, and Malaysia, but shorter when compared to Indonesia. Furthermore, it also takes 197 days to obtain a building license in the country, also longer than in Thailand and Vietnam, but shorter when compared to Indonesia and Malaysia. In terms of cost of securing a license to build, it takes an equivalent spending of 113.4% of income per capita in the Philippines, more expensive when compared to Thailand, Vietnam, and Malaysia, but cheaper when compared to Indonesia.

EMPLOYING WORKERS

In the area of human resources, employers have to contend with minimum wage regulations, nonwage labor costs, mandated days of annual leave with pay, restrictions on nighttime work, working time and workweek requirements, workers’ legal protections against dismissal, severance payments, and a host of other labor issues.

In the Philippines, an equivalent of 8.5% of a worker’s salary form part of nonwage labor cost for the employer, which is more expensive than in Thailand but less costly than in Indonesia, Malaysia, and Vietnam. In terms of the rigidity of employment index, where the Philippines has a score of 39, the country’s conditions are more rigid than in Malaysia, Thailand, and Vietnam, but less rigid when compared to Indonesia. On the other hand, the cost of firing in terms of weekly wages is more expensive in the Philippines at 91% when compared to Thailand, Vietnam, and Indonesia, but less costly when compared to Indonesia.

REGISTERING PROPERTY

Efficient property registration cuts transaction costs. Simple procedures to register property are important to secure property rights and are associated with less corruption in a country.

In the Philippines, there are eight steps in property registration, longer than in Thailand, Vietnam, Malaysia, and Indonesia. In terms of days to register a property, it takes 33 days in the Philippines, longer than in Thailand, but shorter when compared to Indonesia, Vietnam, and Malaysia. On the other hand, the cost to register property in the Philippines is equivalent to 5.7% in terms of property value, more expensive than in Vietnam and Malaysia, but cheaper when compared to Thailand and Indonesia.

GETTING CREDIT

Access to quality credit information from registries as well as effective regulations on secured lending through collateral and bankruptcy laws indicate well-functioning credit markets.

In the Philippines, 4.8% among adult borrowers are covered by private credit information bureaus. The Philippines scores three out of six in the credit information index, making it the least covered compared to Malaysia, Indonesia, Vietnam, and Thailand. Likewise, the country has the least protection for borrowers and creditors, scoring three out of ten in the legal rights index.

PROTECTING INVESTORS

How does a country regulate the use of corporate assets for personal gain? Up to what extent can investors hold directors liable for self-dealing? Are proposed transactions disclosed to shareholders by filing periodic reports? Are relevant documents available to shareholders for the purpose of lawsuits?

The Philippines scores 3.3 in terms of the investor protection index, just a bit better off than Vietnam, but stands the worst when compared to Malaysia, Thailand, and Indonesia.

PAYING TAXES

The World Bank believes that simple, moderate taxes, as well as fast and inexpensive administration mean fewer hassles for business. Correspondingly, these arrangements also translate to more revenues and better public services. Burdensome taxes, without question, discourage compliance and encourage evasion.

In the Philippines, a business entity has the most number of tax payments each year, at 59, when compared to Vietnam, Malaysia, Thailand, and Indonesia. These types of taxes with frequency of payments include value added tax (once a year), corporate income tax (once a year), local business tax (once a year), social security contributions (twelve times a year), property tax (once a year), health insurance contributions (twelve times a year), housing development fund (twelve times a year), fuel tax (once a year), interest tax (once a year), advertising tax (once a year), community tax (once a year), vehicle tax (once a year), check transaction tax (twelve times a year), insurance contracts tax (once a year), and stamp duty (once a year).

However, a business spends the shortest time to pay taxes, only 94 hours per year, when compared to those in Thailand, Indonesia, Malaysia, and Vietnam.

TRADING ACROSS BORDERS

Countries with efficient customs and trade transport systems export more, which spells faster growth and more jobs. Efficiency in these areas present fewer opportunities for bribery, corruption, and smuggling.

The Philippines requires the least number of documents in order to import any product from abroad. There are only seven documents needed compared to more documents required by its neighbors. It is also at par with Malaysia with the least number of documents to export, with eight documents. It takes only 20 days to import and 18 days to export from the Philippines, the shortest length of time to trade among its neighbors. But the country falls at the bottom of the pile in terms of the cost to import and export, both at US$1,336 per container.

ENFORCING CONTRACTS

The more procedures it takes to enforce commercial contracts through the courts, the longer are the delays and the higher are the costs. In situations like these, less wealth is created.

Surprisingly, it only takes 25 steps to enforce a commercial contract through the courts in the Philippines, shorter than in Thailand, Malaysia, Indonesia, and Vietnam. But it takes the longest period – 600 days — in terms of the length of time to enforce a commercial contract through the courts in the country. On the other hand, it costs the least to go through the courts to enforce a contract in the Philippines since it will only take 16.0% of the claim.

CLOSING A BUSINESS

According to Doing Business 2007: How to Reform, in countries where bankruptcy proceedings are inefficient, unviable businesses remain active for years, not allowing assets and human capital to be allocated to more productive uses. Investments are discouraged where creditors cannot recover overdue loans. On the other hand, bankruptcy laws that are easy and fast to implement encourage entrepreneurs.

In the Philippines, it takes 5.7 years to go through the process of insolvency, the worst when compared to Malaysia, Thailand, Vietnam, and Indonesia. The same is true with respect to the cost of insolvency, which reaches up to 38.0% of the value of the estate. The country likewise fares poorly with respect to recovery rate, at 4.0 cents on the dollar.

NEW RED TAPE LAW

One of the recent positive developments to speed up transactions with government agencies in the country has been the passage in February 2007 of Senate Bill 2589 and House Bill 3776, known as the Anti-Red Tape Act of 2007.

The anti-red tape law requires government offices to publicly post the procedures and length of time in rendering a particular service. It also mandates them to process any application for any privilege, right, permit, reward, license, concession, modification, renewal, or extension within five working days for simple transactions and ten working days in complex cases. Work schedules should also ensure the delivery of frontline services for clients within the office premises even during lunch hours and after regular working hours.

Licenses, permits, or authority shall be automatically extended upon government’s failure to act on any renewal application within the prescribed period, except when they cover activities endangering public health, public safety, public morals, or public policy, including extraction of natural resources.

Another encouraging feature is the provision that limits the number of signatories to a document to a maximum of five signatures, coming from supervisors of the office. Grounds for denial on any application shall be explained in writing within five working days from the time the request was made. Furthermore, fixing or collusion with fixers shall merit dismissal and perpetual disqualification from government service.

The Civil Service Commission shall conduct a Report Card Survey among government offices providing frontline services so that estimates can be made on the hidden costs to clients in accessing government services.

RAISING COMPETITIVENESS

The high cost of doing business in the Philippines has been a major deterrent to foreign investors. Further policy reforms are needed to improve the business environment. The creation of the public-private sector National Competitiveness Council is a positive step towards efforts to reduce business transaction costs and flows with government agencies.

The World Bank’s International Finance Corporation is also supporting local governments in lowering the costs of business registration and licensing. A Doing Business Sub national Report will initially cover 20 cities in the country, including the following: Caloocan, Las Piñas, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Parañaque, Pasay, Pasig, Quezon City, Taguig, Valenzuela, Cebu, Lapu lapu, Mandaue, and Davao. This will establish benchmarks by examining the procedures, time, and cost in three regulatory areas: starting a business, dealing with licenses, and registering property.